The Yoked Dog Argument for Regulation

Trying to figure out how consumers think is an inexact science, and as many an advertising failure shows – remember New Coke? – the experts often get it wrong. But at the L.A. Times, Dan Ariely, a Duke University professor of behavioral economics, takes a whack at this anyway. Ariely says that although the economy is clearly shaky, inflation and joblessness remain well under control – yet consumer confidence has plunged to nearly a 40-year low. Why are consumers so gloomy? Ariely chalks it up to a psychological condition called “learned helplessness,” which is caused by having to deal with unpredictable negative events. Like the meltdown of institutions too big to fail, such as Bear Stearns. Or the decline of Fannie Mae and Freddie Mac.

Ariely cites psychological experiments on dogs to prove his point. Let him explain this:

The basic experiments on learned helplessness use two dogs, each in a separate room. In the control dog’s room, after a bell rings the dog gets a mild electrical shock — just enough to annoy and surprise him. This dog has a switch to turn off the shocks and quickly learns to use it.The second dog is yoked to the first but has no bell and no switch. Every time the control dog gets a shock, it too gets a shock until the control dog flips its switch. So, objectively, both dogs get the exact same treatment, but the yoked dog has no ability to predict or control the shocks. Next comes the test. Both dogs are put in a “shuttlebox” — a large box divided into two compartments by a low fence. From time to time a warning light comes on, and a few seconds later the floor of the shuttlebox emits a mild electrical shock. If the dog jumps from one compartment to the other, the shock is immediately terminated. Even better, if the dog jumps over the fence upon seeing the warning light, there’s no shock at all. As you might expect, the control dog quickly learns to jump over the fence on cue; though understandably a bit anxious, he’s relatively happy.And the second, yoked dog? You might expect it would be just as motivated to escape the shocks in the shuttlebox. But this is where the results get very interesting, and somewhat depressing: The yoked dog just lies in the corner of its cage, whimpering.The yoked dog learned in the experiment’s first stage that shocks happen unpredictably and inescapably — and it carried that mind-set into the shuttlebox. This dog learned to be helpless in its general approach to life, exhibiting symptoms similar to suffering chronic clinical depression.

Ariely goes on to say that Americans are liked the yoked dog, exposed over and over again to all these market disasters, from the dot-com bust to the housing bubble to the credit crunch. Most people can recover from traumatic events by analyzing them, but Americans can’t easily do that because they are bombarded by the 24-hour news cycle. The only way to bring order to all this, he said, is for the federal government to come up with a “clear and substantive” plan to regulate the markets, instead of relying on what Ariely described as “patch-up jobs.”

Well. I’ve heard many arguments lately in favor of regulation of the financial system. But I’ve never come across one that uses the yoked dog argument. Maybe this is Ariely’s way of saying he thinks the markets should be on a short leash.