David Brooks’ editorial in the October 28, 2008 New York Times predicted that the current financial crisis would "amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy."  Of the four steps of decision-making–1) perceiving a situation, 2) thinking of possible courses of action, 3) calculating the best course, and 4) taking action, Brooks notes that the third step–rationally calculating and maximizing what is in the best interests of those involved–has long been considered the most important.  But he suggests that comments by "experts" like Alan Greenspan in his testimony before Congress, that he was "shocked" at market conditions, may drive us to reevaluate the importance of step one:  perceiving the situation.

In Nassim Nicholas Taleb’s book "The Black Swan," published in 2007, he wrote that "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup."  Globalization, he noted, "creates interlocking fragility," and the growth of giant banks give the appearance of stability, while in reality, they raise the risk of a systemic collapse, for "when one fails, all fail."  But why didn’t the financial movers and shakers perceive that to be the case?  Or even one possible case?

Behavioral economists have explanations for why so many smart people could have been so wrong about the risks that they were unwittingly taking.  Biases in our perception that distort our thinking include a tendency to see data that confirm our prejudices, a tendency to overvalue recent events as predictors, assigning a single causal narrative to coincidentally succeeding facts and applauding what we suppose to be our skill rather than recognizing the role of dumb luck.  And we can also get caught in social contagions that reinforce each other’s (often poor) risk assessments. 

The solution that some propose for the financial arena is to have the government take on more of the job of assessing situations, and applying regulations.  Of course, government officials are probably going to be even worse perceivers of reality than private business types.  Their information feedback mechanism is more limited and, being deeply politicized, they’re even more likely to filter out inconvenient facts. 

Lawyers, being for the most part pessimists, would seem to have the exact skill necessary to root out and protect against just this sort of unintended economic consequence.  Lawyers should be able to think of all the possible ways these various financial scenarios could go wrong, and at least sound the alarm if not plug the hole.  But the critical word here may be "think."

Our data on emotional intelligence in lawyers tells us that, when it comes to emotion, perceiving–correctly identifying the emotional currents at play–is what lawyers are least good at, accounting for a large proportion of the drop in average lawyer scores compared to general US population scores.  A number of experiments verify that being unable to tap into one’s own and others emotions can mean a significant delay, or total failure, to identify risks or dangers that the emotional part of the brain is able to sense.  In a well-known card-playing experiment, recounted in Malcolm Gladwell’s book "Blink," participants are able to emotionally identify (measured by blood pressure and heart rate) the decks of cards that are stacked against them many, many cards before they can rationally do so.

Of course it is not just lawyers who can be out of touch with their emotional red flags, and it wasn’t just lawyers that got us into this imbroglio.  Plenty of non-lawyer MBAs, PhDs and other regular types clearly missed the perception boat this time.  Nonetheless, one step toward better perception in the world of finance and public policy would be for the legions of lawyers involved–at the SEC and other government entities, banks and financial institutions and law firms servicing them–to improve their connection with their and others’ emotions, so that they can feel as well as think about the dangers out there, and hopefully avert just such a catastrophe as this one.  And the good news is that perception in this area of expertise can be improved.