Guest Post: JAWS and Loss Aversion by "Pining4TheFjords"

Why the movie Jaws offers significant insight into preparing for the end of the Keynesian experiment. And no, I’m not kidding.

I have to admit the movie JAWS is a weakness of mine.  Whenever I am channel surfing, trying to find something not entirely odious to watch and I see those four magic letters I am – pun intended – hooked.  It never gets old watching the sleepy New England resort town of Amity be terrorized by a giant predatory shark! I still find the movie as compelling as I did when I saw it for the first time as a nine year old, whose parents accidentally took him to see his first “horror” movie.  Turns out, I’m not alone in loving this film.  JAWS became the first movie to record 100 million dollars at the box office, the first to take in 100 million in rentals, and was the highest grossing film of all time until it was supplanted by Star Wars.  Adjusted for inflation, Jaws has earned almost $2 billion worldwide.  All of which is truly incredible, given that the whole story was built around fear of a giant shark, and in this movie the shark itself was a rubbery, mechanical joke that looked entirely fake in almost every scene in which it appears. 

So why the popularity? Why has it stood the test of time and is still eminently re-watchable? Why is this unquestionably a great movie?  First and foremost, it is just plain good entertainment-  Spielberg strikes a perfect story-telling note by crafting moods, developing a plot, and pacing the action masterfully. But films that are truly great do far more than just entertain us; at their very best, they provide genuine insight into the human condition and allow us to glimpse, as if passing a mirror on a city street, a reflection of ourselves.  Jaws does this brilliantly.

The three major figures of the movie are well known, and all three roles were beautifully portrayed in the film.  The role of “decent man who faces his fears and redeems himself” Chief Brody was played in solid but genuine fashion by Roy Schieder.  The audience knows from the start that he is a good man and we believe that the chief will ultimately do the right thing, even when the aquaphobic Brody shrinks from his first encounter with the shark, retreating into the shelter of Quint’s cabin pleading “You’re gonna need a bigger boat”.  Brody, however, is pretty standard cinematic fare- Mr. Smith goes sharking.

Richard Dreyfus played Mr. Hooper, a young scientist and shark expert.  The Hooper character has been described as emblematic of “modern, technological man” in some reviews of the film, while others claim he is the younger half of a classic odd couple / buddy film relationship with ship captain Quint.  Regardless, his character development is also fairly typical, the “plucky youngster who earns the respect of the old veteran” found in everything from sports movies to war films.

Ship Captain and shark-hunter Quint was played in a tour de force performance by veteran actor Robert Shaw.  The character was such an overt reference to Melville’s Captain Ahab that Director Steven Spielberg wanted to include a scene of Quint sitting in a theater watching Moby Dick and laughing so raucously and inappropriately that patrons around him got up and left.  Unable to secure the rights from Gregory Peck to show even a short cut of Moby Dick, Spielberg was forced to give up on the scene, though the idea persisted and was eventually used in the movie Cape Fear.  Despite the power of Shaw’s portrayal and the intensity of the character, Quint is an archetypal figure dating back to the ancient Greeks- the driven hero whose intensity turns to obsession, and ultimately self-destruction.  Like Ahab, Quint is dragged beneath the waves by the thing he both hates and loves most. 

But of all the outstanding performances, taut suspense and gripping action of Jaws, do you know what haunts me the most about that film? It’s certainly not the rubber Carcharadon Carcharius. It’s not Brody having to shark-hunt from a small boat despite his fear of the water, nor Hooper climbing into an aluminum shark cage with a three ton monster just waiting to rip it to shreds.  It’s not even Quint slamming the throttle of his crippled engine full ahead in a maniacal act of self-destruction.  No, the most haunting and frankly disturbing aspect of this movie is the pitch-perfect performance of Murray Hamilton as Larry Vaughn, the Mayor of Amity.

Why, yes-  the blue “sea anchor” blazer is indeed frightening. Haunting, even. But examine this character more closely, scrutinize his actions and motivations, and you will see something truly worth realizing and internalizing; Mayor Vaughn is a perfect blueprint of how our leaders will act during the End of the Great Keynesian Experiment.  He provides us with a veritable roadmap demonstrating exactly what we can expect in the near future, and indeed how some of our leaders are reacting at this very moment, to the great unwinding of the debt-based economy and governmental structure. 

To understand Vaughn, and the politicians who are going to be making the decisions that will affect our wealth, safety, and freedom through possibly the biggest unwinding of bad debt and mal-investment in the history of economics, the crucial ideas to understand are the psychological principles of “Prospect Theory” and its constituent part, “Loss Aversion”.  Prospect theory is a behavioral economic theory that describes the way people choose between alternatives that involve risk. The theory states that people make decisions based on the potential value of losses and gains rather than the probability of final outcome, and that people evaluate these losses and gains using certain heuristics. Loss Aversion is the finding that people tend to be risk-averse for gains but simultaneously to be risk-acceptant for losses. To put it simply, gaining ten dollars gratifies us far less than losing ten dollars will upset us.  Additionally, people will risk far more in order not to lose ten dollars than we would to possibly gain ten dollars.  Rationally, it seems nuts, right?  But it is thoroughly well research and has been proven true in experiment after experiment.

What this means is that, when it comes to assessing risk in relation to potential gains, people tend to be fairly conservative and will generally take on only those risks that are commensurate, and make sense in light of, the potential gains.  But what is strange, and in the context of this discussion is actually quite frightening, is that people will engage in FAR riskier behavior in service of the goal of avoiding losses, often to a degree that seems to make no rational sense.

Let’s talk about some examples.  It is a well-known that the final race at any race track will be see the heaviest betting of the entire day.  This is not because people suddenly have an insight into the field, it is because by that point most people betting at the track that day have incurred substantial losses, and rather than simply accept their losses and go home, they are willing to bet an inordinately heavy amount on the final race in hopes of avoiding the finality of having to book their losses by going home. They are willing to wager (risk) more than they normally would to avoid losses, even if this rationally makes no sense at all!  Traders, at least beginning traders, often make the exact same mistake in the markets- rather than book losses and get out of a losing trade, they irrationally hold a deteriorating position (because if you don’t sell, the losses aren’t made “real”) or they even double down on what has been a poorly performing investment, making a riskier bet in the hopes of a big comeback to avoid their losses.

This is classic Loss-Aversion, and it is deeply hardwired into the human psyche. Studies have shown that when people are presented with two versions of the exact same problem, they are willing to take far greater risks when the problem is phrased as “avoiding losses” than when it is phrased in terms of” potential gains”. Keep this principle in mind, and let’s take a good, hard look at Mayor Larry Vaughn and see what we can learn.

For those who haven’t seen the movie but have somehow managed to crawl out from beneath their rock long enough to locate a computer and read this blog (a rather unlikely prospect, I’ll grant you) here’s the gist: a pretty young lass is skinny-dipping at night near the resort town of Amity, Mass. and gets torn to shreds by a huge shark.  A few bits and pieces wash up on shore and the horrifying prospect of this happening to someone else prompts the local Sheriff (Brody) to have a talk with the mayor about closing the beaches until something can be done, which seems a very reasonable course of action under the circumstances. The mayor, however, steadfastly refuses and in doing so gives us our first key insight: Leaders benefit most from the status quo, and will perceive that its preservation is of enormous importance, all out of proportion to its true value.  They therefore cannot rationally assess the real cost of maintaining the status quo. 

What could possibly be worse than a young girl being mutilated and dying a horrible death?  Well mayor Vaughn seems to think that closing the beaches and losing tourist dollars would be worse. Is he a monster?  Absolutely not- in fact, he sees himself as behaving in a manner entirely consistent with his duty as he sees it; protecting and defending the prosperity of Amity. “I'm only trying to say that Amity is a summer town. We need summer dollars. Now, if the people can't swim here, they'll be glad to swim at the beaches of Cape Cod, the Hamptons, Long Island...”. It’s not that the mayor wants anyone to be killed, it’s just that that threat doesn’t seem as ‘real’ to him as the economic costs (losses) of closing the beaches.  Loss aversion.

We have already seen numerous examples of this type of ‘Mayor Vaughn’ behavior in the maintenance of the public and private debt Ponzi. One could cite George W. Bush reacting to the financial crisis of 2008 by approving massive government bailouts of the banking sector, and defending what can only be described as the ushering in of a truly Fascist/Socialist monetary regime by saying “I had to abandon free-market principles in order to save the free-market”. One could argue that the entire TARP bailout, followed by QE1, QE2, QE lite, QE3, ZIRP, and QE infinity have all been examples of risky strategy and “doubling down” to preserve the status quo- i.e., to prevent incurring losses just as Prospect Theory predicts. Regardless, the bottom line is that the more an individual owes their status/position/wealth to the current system, the more irrational they will be about trying to save it, regardless of the costs involved. Think about who is and will be deciding what to do, what strategies to pursue, and what actions to take as the great debt Ponzi unwinds. Do you think they will be rational about costs/benefits of saving the current system?  Think again.

Additionally, back in 1975 Mayor Vaughn foreshadowed modern MOPE- Management Of Perception Economics.  To Vaughn, and countless politicians like him, public perception is reality.  Vaughn is an exemplar nonpareil of the ability to dissemble, to rationalize his actions, and to put an almost pathologically positive public spin on the situation.  Notice, for example, that when Chief Brody wants to shut down the beaches and prevent anyone else from becoming shark food, Vaughn manages to portray his own position (exposing the public to great danger) of keeping the beaches open as the rational, responsible thing to do.  He says “Martin, it's all psychological. You yell “Barracuda!” everybody says, "Huh? What?"  But you yell “Shark!”… and we've got a panic on our hands on the Fourth of July!”  It is easy to hear shades of Mayor Vaughn in the public pronouncements of numerous Fed lackeys post-2008 about the importance of “calming investors” (we wouldn’t want a panic on our hands) and “backstopping” the markets, “supporting asset prices”, the Bernanke Put guaranteeing stocks will never go down, etc.  Never mind that people might be entirely rational to avoid or want to wind-down risky investments.  Never mind that by managing perception you are both distorting the clearest signal of risk – the cost of borrowing – that exists, but you are also deliberately tricking people into risky behavior by encouraging them to deploy their hard-eared capital in ways they might not otherwise do if they understood the true dangers… but apparently the IMPORTANT thing is to reassure the public that everything is fine. Isn’t it?  Thus, lesson number two:  Count on being given distorted, incomplete, or deliberately misleading information at every turn, and when it comes to the true dangers and actual risks to you, count on being lied to.

In the movie, the shark kills a second victim whose mother then offers a bounty to anyone that can kill the shark.  This sets off a wild amateur fishing spree culminating in a shark (that is obviously not the killer) being caught. Mayor Vaughn, of course, pounces on this opportunity (and again is the pitch-perfect model for our current leaders) mixing truths, half-truths, and outright lies into the most comforting story he could possibly tell to the public:

 [to reporter] I'm pleased and happy to repeat the news that we have, in fact, caught and killed a large predator that supposedly injured some bathers. But, as you see, it's a beautiful day, the beaches are open and people are having a wonderful time. Amity, as you know, means "friendship".   Sounds strangely like a Janet Yellen interview on CNBC, doesn’t it?  Liquidity, as you know Maria, means prosperity.

And the parallels just keep coming!  How does the mayor deal with the multiple deaths and mounting evidence that he has a catastrophe on his hands? This is lesson number 3: As the crisis deepens, leaders will engage in ever riskier behaviors including the aggressive denial of the obvious danger of the situation, and will attack those pointing out the danger, accusing them of acting in bad faith.

Hooper: Mr. Vaughn, what we are dealing with here is a perfect engine, an eating machine. It's really a miracle of evolution. All this machine does is swim and eat and make little sharks, and that's all. Now, why don't you take a long, close look at this sign [refers to the graffitied billboard] Those proportions are correct.
Mayor Vaughn: Love to prove that, wouldn't ya? Get your name into the National Geographic?

For good measure, Vaughn steadfastly refuses to own the consequences of his choice to desperately clinging to the status quo, shifting the responsibility for making good on his dangerous gamble to others, declaring “You boys do what you need to do to keep people safe, but these beaches will remain open… it’s gonna be our best 4th of July ever!”  Sounds just like the glorious ‘Summer of Recovery’ of 2010!

In the film, the danger from the killer shark that Mayor Vaughn worked so assiduously to ignore finally hits home, of course.  Both Vaughn’s and Brody’s sons are in a small sailboat when the shark kills an adult boater within feet of them.  This, you expect, is the moment when Vaughn finally comes to terms with the true enormity of his misguided actions; the moment when he realizes that he has been risking people’s lives for a few extra tourist dollars and it nearly cost him his own son.  Yet even when the disaster and danger is obvious and touches his family directly, even when he is a shaken, mumbling idiot whose son was almost killed… he must be almost manhandled by Brody into signing the hunting order to close the beaches and kill the shark.

This is the final, and most important thing we can learn from the good mayor: The defenders of the status quo are psychologically incapable of changing their mindset even when the dangers of their course are undeniable- they will engage in riskier and riskier behavior regardess of the costs, until disaster leaves them no other choice.

*  *  *

We live in a world where misguided economists, venal politicians, and a culpable, grasping public have all conspired to construct an economy and indeed a society predicated on the status quo of unlimited debt creation.  The creation of value (goods, services, technologies) has been superseded and largely replaced by the creation of currency.  It is a simple fact of mathematics that this status quo cannot endure permanently, and prudent individuals are planning today for the inevitable changes that are coming tomorrow.  In formulating a strategy for surviving and possibly even thriving in such a situation, it will be crucial to understand exactly how our leaders will react during the inevitable crisis. Prospect Theory and Loss Aversion give us well-researched signposts and predictions, but on a more human level I think Mayor Vaughn shows us exactly how we can expect our leaders to react to the great unwinding of the public and private debt Ponzi- i.e., the status quo. It isn’t a pretty picture:

1. Leaders benefit most from the status quo, and will perceive that its preservation is of enormous importance, all out of proportion to its true value.  They therefore cannot rationally assess the real cost of maintaining the status quo. 

2. Count on being given distorted, incomplete, or deliberately misleading information at every turn, and when it comes to the true dangers and actual risks to you, count on being lied to.

3. As the crisis deepens, leaders will engage in ever riskier behaviors including aggressive denial of the obvious danger of the situation, and will attack those pointing out the danger, accusing them of acting in bad faith.

4. Leaders will shift the responsibility for making good on their dangerous gamble to others

5. The defenders of the status quo are psychologically incapable of changing their mindset even when the dangers of their course are undeniable- they will engage in riskier and riskier behavior regardless of the costs, until disaster leaves them no other choice.

As the man said: PREPARE ACCORDINGLY.

201 Comments

Turd Ferguson's picture

A couple of things

MODERATOR

1) You are watching an historic disconnect of paper futures market folly. Imagine spec momo short sellers taking corn down to 50¢/bushel. What would happen in the real world? Would farmers plant even more corn? Of course not. For the same reason, this current decline in the metals is unsustainable, too.

2) Today's GDP report is an absolute disaster for the econobulls who daydream about recovery and a return to "normal". $85B/month in QE gets you 1.8% GDP? That's it? And the 1.8% will likely be revised lower in the coming revisions. MOPE can only take you so far.

3) And this all gets back to Monday's post...Is The Fed losing control? Stocks are rallying today on the crappy GDP (signals "taper" is off the table?). Metals caught a bid but still have a long ways to go. 

Last night was a disgusting example of deliberate manipulation the metals. By my count, some 20,000 contracts were dumped onto the Globex in order to plunge price below support and gun the stops. The trading in the metals has absolutely zero connection to the realities of the physical market. If all of this is making you crazy, doubtful and fearful, I strongly suggest that you shut off your computer and walk away for a month or so. Your stack will remain as shiny as ever and you'll be much more happy in the meantime. For the rest of you, kick back and enjoy the show. As mentioned above, you are watching history in action. 

Stock_Canines's picture

Second

Less than excited

PeterLemonJello's picture

LCS

The LCS has some lovely pieces in stock, and will be having a visit from me today...

stubbornman's picture

Time to pull the trigger on a

Time to pull the trigger on a new 100 ouncer today!

Marblesonac's picture

Margaritatime!

Just wanted to say that Margaritatime's price call on silver was right on, although it wasn't very popular.

I'd love to see what she thinks now.

Anytime is Margaritatime!

achmachat's picture

I Love it

...that Turd got to play the traditional "first" game... and WON!

wouldyoubelieve...'s picture

I think Turd

got insider info to achieve his 1st, better call Bart, nothing he likes better than to investigate forever to find nothing

Dark Matter's picture

End of the Keynesian experiment?

"the end of the Keynesian experiment. And no, I’m not kidding"

Actually, I think you are. But that is just my humble opinion.

Why are Gold and Silver falling and falling?

1. Gold prices though were suffering, falling to three-year lows as the strength of the dollar continues to undermine the precious metal.

2. Strong U.S. economic data Tuesday helped Wall Street enjoy a solid session and that has fed through into Wednesday's trading in Europe and Asia.

3. A combination of dollar strength, economic progress and a rerating to the market's expectations of central bank asset purchases are crushing prices.

QE is finally fueling the economy. House prices are up.

I may add, that I am totally dumbfounded as I didn't expect ANYTHING to happen in that way. My fault. Buffett said back in 2009 that people should buy stocks. He was right. As always.

Green Lantern's picture

First?Submitted by Turd

Yes!

Now that is hilarious!

Pining-Excellent metaphor that demonstrates an innate sense of the human psyche.  And perfect timing as the MOPE thermometer reaches peak and American's ready to celebrate July 4th.    I'm going for a swim.

ivars's picture

From aesthetical point of

From aesthetical point of view silver resistance support picture is now perfect on weekly. That is all I can offer:)

achmachat's picture

why metals prices are falling.. my humble opinion

I've been saying this for around two years now, and most of my stacker friends thought it was a nice theory but just wouldn't believe it could happen.

Before the metals get to their real value, everybody who has paper vehicles for those metals will have to sell; it just doesn't work any other way.

As we know, paper is traded in the multiples of hundreds to the real asset being backed. From this point on, it's just pure mathematics: All the paper gets sold, all the physical gets bought up; as there's multiple of hundreds more paper being sold than metal being bought at the same time, "market" price HAS to decline while there's a run on the physical metal, as paradoxical as this may seem.

Behold what is happening right in front of our eyes!

silver66's picture

Read first and posted second

First for everythingsmiley

Outstanding article, I am sending the link to this page to several people I care about

Silver66

P.S. hopefully top ten

P.P.S.- going shopping at lunch, for what I am not sure but I would assume it is shiny

creekdweller's picture

Great post!

Thanks so much for writing this guest post! A great read, well written, and thought-provoking, too. Kudos, Pining!

DallasRichard's picture

Ugh

Serious world problems, financial problems, economic problems, political problems, ethical problems, legal problems, criminality. And some of you guys.....like children....post first or second or third. And you expect to be taken seriously? Fuck me Freddy, not just walk away for a month, walk away forever.

cpnscarlet's picture

Supreme Court/DOMA

Ah, the perfection of Post Modern Philosophy.

There is no absolute truth (end of Classical Philosophy). There is no truth in nature either (end of Modern Philosophy). Everything is a final absurdity, so any closely held belief must be deconstructed (Hello Post Modernism).

So the Supreme Court overturning DOMA was inevitable.

If there is Absolute Truth (and I tend to still believe there is), God will have to show up soon to defend it. The best philosophers and theologians can't anymore when society has stopped thinking and only "feels".

StevenBHorse's picture

Epic

+ lim e^x as x-> ∞ hat tips.

ag1969's picture

Thank you Pining

That was a compelling read and I appreciate your time and insight.

Achamat, great post as well.

Just in case anyone missed it in the last thread, this video is a must see!!!!!

Patrancus's picture

From the Bond Buyer and

in regard to fishing for sharks, according to Brody  "were going to need a bigger boat" I agree, this market is poised to swamp all of the little boats floating around with the "kingfish", keep on stacking!,  no amount of bailing will right this vessel. 

http://www.bondbuyer.com/issues/122_121/muni-market-close-price-plunge-shows-little-signs-of-slowing-1053056-1.html

beardeus's picture

Listen...

Debt increased signifcantly in the 80s yet metals dropped hard. We can't look at things linear. These things are multidimensional. It isn't as simple as we print money and metals increase. That is way too simple. Again, if you haven't please read from Martin Armstrong's blog.

The dollar rising exponentially will be what will destroy the economy.

QE will be ending.

Igiveup2's picture

What if........

What if fundamentals have changed?  As impossible as it seems, maybe this is the new normal.  What if TPTB can in fact conjure prosperity.  What if printing money around the world will in fact allow everyone to pay their bills.  What if working is in fact for suckers.  What if those with their heads up their asses are in fact correct.  I sit and shake my head on a daily basis.  It's like living in bizarre-o-world.  Maybe we are the ones who don't get it.   Maybe we're the ones engaging in far riskier behavior to avoid losses.  If that it the case, I hold true to form.  I just talked to my LCS.  As of this morning I am all in.  I await the shark.

Down Range's picture

Is That Me/US

That made me think that I was betting on the last horse race when I continually BTFD. Unfortunately I have had WAY TOO MANY opportunities to BTFD!

In my heart I know it is the thing to do, but my head sometimes thinks I am the Mayor of Amity!

Down Range's picture

Ugh

See Ya.......

tread_w_care's picture

Brilliant bit of writing there . . .

I am deeply introspective about my dollar cost averaging down - in PHYS and PSLV.  Am I expressing Loss Aversion?  Hard to know.  Some would call it throwing good money after bad.

Bought more today.  Wish I had more dry powder.  If/when the bail-ins come to take away my 401-K, by golly it will be mostly physical bullion trusts and a little bit of toilet paper.

It's my small way to fight back/spite the broken system, from within of course.  

And then there's the chance my ownership of these trust units holds up, and the dollar is replaced by, well, whatever, and the units are re-priced.  1 in a million I suppose, but, there's a chance ;).   

department of truth's picture

double down?

I think it is time to buy some more silver, because  . . .

rather than book losses and get out of a losing trade, I irrationally hold a deteriorating position (because if I don’t sell, the losses aren’t made “real”).  

In fact, I may even double down on what has been a poorly performing investment, making a riskier bet in the hopes of a big comeback to avoid my losses.

Ha ha, well, you know that is the take that many would have here.

But actually, I agree with Turd (and Paul Craig Roberts, and Jim Willey) on the nature of the fraudulent and utterly corrupt end game now in progress.  

Question for other readers . . . do you think it would be safer to own foreign gold or pre-1933 gold, in terms of possible moves to confiscate by the Federal government?  Or will they be that selective?  

achmachat's picture

US mint numbers... update!

Houston, we've already breached 25,000,000 American Silver eagles before the end of June!

Patrancus's picture

or will they be selective

gooberments are most always selective when picking the winners and losers, so make your selections wisely.

Mantis's picture

Enjoyed that post

Thanks pining

edit:

@department of truth -  the same thought occurred to me. I keep irrationally holding onto a losing investment too ! Ah well what can you do. Maybe its time for me to go long S&P and short gold..

Pining 4 the Fjords's picture

Knocking around in the comments section

@ Everyone-  First of all, thank you all for the kind words!  I sincerely hope that folks find this article worthwhile (not that you necessarily agree with me, but that it might stimulate your thinking a bit).  The whole thing was something that has been knocking around in my head for some time, basically revolving around the question "What exactly are we preparing for" and to me, part of that equation has to include taking into account the psychological response of those who are in charge- they will be making and breaking the rules that will govern our actions, after all.  What can we expect from these people, and how can we take this into account in our strategies?  I found the "Loss Aversion" stuff while looking for info on trading psychology- here is the article citation the information is based on, if anyone is interested:

Political Implications of Loss Aversion

Author(s): Robert Jervis

Source: Political Psychology, Vol. 13, No. 2,

Special Issue: Prospect Theory and Political Psychology (Jun., 1992), pp. 187-204

onealpha's picture

My Favorite Jaws Scene

Iceberg Slim's picture

Thanks Pining, great read.

Jaws is one of my favorites too, and parallels you presented here are astonishing. well done.

Syndicate contentComments for "Guest Post: JAWS and Loss Aversion by "Pining4TheFjords""