Individual psychology != mass psychology

I haven’t been following the bail-out debate between Krugman and Delong, there are dissertations to write. Jonah Lehrer claims to summarize the disagreement. Krugman thinks toxic assets really aren’t worth that much and Delong thinks investors are risk averse en masse. Lehrer adds:

I think one way to evaluate these dueling positions is to look at how people generate perceptions of risk. Investors have concluded that these toxic assets are simply too risky to invest in, at least without large infusions of government money. How rational are these perceptions of risk? Are investors wary of buying toxic assets because they have good evidence that the toxic assets are virtually worthless? Or are they wary of these investments because they’re irrationally scared?

He then goes on to cite some evidence from psychology that people can mis-perceive risks.

The problem is “investors” aren’t a person. “Investors” don’t have a psychology, they have psychologies. There’s no telling how those psychologies aggregate. For example, all it takes is one big non-Delongian investor to fix the supposed high risk-aversion of “investors”. This big, risk loving investor would buy up all the toxic assets because he’d know they’re a steal.

The fact that no such investor has materialized is support for Krugman’s point of view. These are crappy assets.

Delong’s response is most likely something about the government (i.e. the U.S. federal government) being the only investor big enough to ride out the wave of pessimism. To which I say, really? There’s no big buy and hold institutional investors? There’s no sovereign wealth funds? All the PE funds have suddenly lost their long horizons? There’s no other big governments?

Is Delong going to invest in these assets? He has tenure and he’s far away from retirement.

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