Guest Post: JAWS and Loss Aversion by "Pining4TheFjords"

201
Wed, Jun 26, 2013 - 12:17am

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.

About the Author

  201 Comments

DirkDirkler
Jun 26, 2013 - 1:05pm

Turd, a while longer ago, you

Turd, a while longer ago, you did recommend them. Don't take it personal, everyone did. As a metals commentator, you've changed a lot over the years, so what you recommend isn't necessarly what you recommended back then. For example, when you still ran your blogspot site, "physical metals only, avoid all paper trading" definitely wasn't your mantra :P

Dyna mo hum
Jun 26, 2013 - 1:09pm

Dirkdicklick

I got the first page of your homework fight here crybaby............DISCLAIMER: The charts and analysis provided here are not recommended for trading purposes. Trade at your own risk. The Turd provides knowledge not direction. Turd holds no liability for your trades and decisions but he's happy to take credit when credit is due, particularly through the "donate" button

Wizard
Jun 26, 2013 - 1:13pm

Fixation of When Events Will Happen

A Majority of the problem with what is going on in the markets now that people seem to be having a severe problem with is “When is it going to happen” When is the price going to go up. When is the corruption going to end? For some reason people are fixated on” WHEN” They want exact times and dates of events that have not happened yet. And bet the house on what others say are the time and date of when a certain event is going to take place.

It is Not Going To Happen That Way. Nobody Knows Time and Date of when future events are going to take place.

But You All Ready Knew That Didn’t You?

The things taking place right now are “Event Driven” Not Time and Date Driven.

One event can cause any number of other events.

The events taking place today are taking us down the road to a major change in the fiat currency. That is where the event road leads. On that road there is any number of little detours. Yet we are on that road none the less. Some events will speed that up and some will slow it down.

The same as if one gets on I-75 South heading to Florida. If you’re in a car doing 80 you will get there in short order. If you are walking you are still going to get there it will just take longer.

You will still end up in Florida regardless if you stay on that road.

Just the same as the financial road the planet Is on at the moment is leading to a major change in the currency system.

Watching events unfold will serve one much better in seeing where things are going, than trying the frustrating task of figuring a date and time an event is going to happen.

Just an observation

W

Frankenstein Government
Jun 26, 2013 - 1:13pm

Dirk Dirkler, A Classic Example

....of one of those little weasly guys that says things "Like I told you so" because he feels vindicated. It's all ego and BS.

My ex wife used to say shit like that. When she was wrong, which was often, I wouldn't hear a peep out of her.

I bought gold and silver because quite frankly, I don't think anybody knows how this is ultimately going to turn out. How are they going to pay off 17T in debt?

But the great question for me remains. Will Bernanke be able to stave off deflation entirely by printing? So far he has- and yet I still think a great deflationary event is waiting. Perhaps that will occur after he leaves. Once that happens, the path will be clear for the great inflationary event.

I didn't buy gold and silver to worry about highs and lows Dirk. I didn't buy it to sell it. It was insurance. So while today you can claim you are some genius- I see you as just another whiny ass troll- who will completely disappear a few years from now when the tables turn once again.

In the meantime, I am buying more. At these washout prices, producers quit producing.

opticsguy
Jun 26, 2013 - 1:19pm

remember back before the run-up to $1900 and Jim Willie

talked of the LBMA offering $200/oz over spot instead of actual metal on delivery day? Perhaps this explains the $200 beat-down in the last few weeks. $200 over spot is $1400 and change, and gets JPM out of a sticky situation.

ancientmoney
Jun 26, 2013 - 1:27pm

@Frankenstein . . . good response . . .

As someone famous said recently, there are no markets anymore, just manipulations. Only those holding the strings can determine the price we see when everything is controlled.

They control COMEX and the London Fix, from which all PM prices originate. It doesn't matter to them that there is less silver available on earth now than when price was $1/oz.

What matters to them is that they maintain control as long as they can. When they cannot, and the paper pricing mechanisms fail or terminate, they will attaempt to steal whatever phyzz is around by all means legal and illegal (but made to be legal to allow their theft).

In the interrim, it is our duty to protect ourselves and loved ones by taking their phyzz, and preparing for failure of the current system

We cannot live thinking the old system still exists, our mind must become inured to the new realities. Once this is internalized, it becomes much easier to ignore their folly, and use the time and fiat value to do what must be done.

Wizard ancientmoney
Jun 26, 2013 - 1:30pm

@Ancientmoney

"The only way to beat them is to take their phyzz. Pure and simple. All else is noise. Of course, not one in a thousand understand this in the general population. Many here do, but many do not as well . . ."

Boy did you say a mouthful. It is getting to the point where I am simply amazed anymore.

Way past being frustrated about it, Now it just Frickin Funny.

W

woofwoof
Jun 26, 2013 - 1:40pm

This is an order

The ten thousand readers of TF must buy at least 1 oz of silver today.

Twenty bucks is nothing but a 200K order is not bad.

Wizard
Jun 26, 2013 - 1:43pm

@woofwoof

Yes Sir, Captain Sir.

Edit: Think I'll take 2 they are cheap today

ChewYourOwnFaceOff
Jun 26, 2013 - 1:48pm

Ohhhh@

I dream of times past when silver was smashed for only two or three per-cent. Ah, those were the good old days.

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Exclusive discount for silver purchases, and a private iTunes feed for TF Metals Report podcasts!

Key Economic Events Week of 7/22

7/23 10:00 ET Existing home sales
7/23 10:00 ET Richmond Fed Manu Idx
7/24 9:45 ET flash Markit PMIs
7/25 8:00 ET Count Draghi/ECB policy meeting
7/25 8:30 ET Durable Goods
7/25 8:30 ET Wholesale Inventories
7/26 8:30 ET Q2 GDP first guess

Key Economic Events Week of 7/15

7/15 8:30 ET Empire State Fed Index
7/16 8:30 ET Retail Sales and Import Price Index
7/16 9:15 ET Cap Ute and Ind Prod
7/16 10:00 ET Business Inventories
7/17 8:30 ET Housing Starts and Building Permits
7/18 8:30 ET Philly Fed
7/19 10:00 ET Consumer Sentiment

Key Economic Events Week of 7/8

7/9 8:45 ET Fed Stress Conference, three Goon speeches
7/10 8:30 ET CGP Hump-Hawk prepared remarks
7/10 10:00 ET CGP Hump-Hawk House
7/10 10:00 ET Wholesale Inventories
7/10 2:00 ET June FOMC minutes
7/11 8:30 ET CPI
7/11 10:00 ET CGP Hump-Hawk Senate
7/11 12:30 ET Goon Williams
7/12 8:30 ET PPI

Key Economic Events Week of 7/1

7/1 9:45 ET Markit Manu PMI
7/1 10:00 ET ISM Manu PMI
7/1 10:00 ET Construction Spending
7/2 6:35 ET Goon Williams
7/3 8:15 ET ADP June employment
7/3 8:30 ET Trade Deficit
7/3 9:45 ET Markit Services PMI
7/3 10:00 ET ISM Services PMI
7/3 10:00 ET Factory Orders
7/4 US Market Holiday
7/5 8:30 ET BLSBS

Key Economic Events Week of 6/24

6/25 10:00 ET New Home Sales
6/25 1:00 pm ET Chief Goon Powell
6/25 5:30 pm ET Goon Bullard
6/26 8:30 ET Durable Goods
6/27 8:30 ET Q1 GDP final guess
6/28 8:30 ET Personal Income and Consumer Spending
6/28 8:30 ET Core Inflation
6/28 9:45 ET Chicago PMI

Key Economic Events Week of 6/17

6/18 8:30 ET Housing Starts and Building Permits
6/19 2:00 ET FOMC Fedlines
6/19 2:30 ET CGP presser
6/20 8:30 ET Philly Fed
6/21 9:45 ET Markit flash June PMIs

Key Economic Events Week of 6/10

6/11 8:30 ET Producer Price Index
6/12 8:30 ET Consumer Price Index
6/13 8:30 ET Import Price Index
6/14 8:30 ET Retail Sales
6/14 9:15 ET Cap Ute and Ind Prod
6/14 10:00 ET Business Inventories

Key Economic Events Week of 6/3

6/4 All day Fed conference in Chicago
6/4 10:00 ET Factory Order
6/5 9:45 ET Markit Services PMI
6/5 10:00 ET ISM Services PMI
6/6 8:30 ET US Trace Deficit
6/7 8:30 ET BLSBS
6/7 10:00 ET Wholesale Inventories

Key Economic Events Week of 5/28

5/28 10:00 ET Consumer Confidence
5/30 8:30 ET Q1 GDP 2nd guess
5/31 8:30 ET Personal Income and Consumer Spending
5/31 8:30 ET Core Inflation
5/31 9:45 ET Chicago PMI

Key Economic Events Week of 5/20

5/20 7:00 pm ET CGP speech
5/21 10:00 ET Existing Home Sales
5/22 2:00 ET FOMC minutes
5/23 9:45 ET Markit PMIs
5/24 8:30 ET Durable Goods

Recent Comments

by Maestro, 47 min 42 sec ago
by Ned Braden, 1 hour 12 min ago
by indiana rod, 1 hour 44 min ago
by DeaconBenjamin, 1 hour 45 min ago

Forum Discussion

by Scarecrow, 3 hours 2 min ago
by zman, 5 hours 49 min ago
by zman, 5 hours 56 min ago
by silver66, 8 hours 18 min ago
randomness