The mist of war: how to think about the banking crisis

It's crisis time. Again. Humans are pretty lousy at predicting future calamities; we're routinely surprised that we are yet again surprised. A simple chronology of impactful market events should be titled, "It's Always Something." Because it always is. 

The fact is that the good ol' days were rarely all that good. Even so, the stories we build in retrospect are usually very clean, with well-specified events (start and end dates), connected through a clear causal chain (this led to that) and an overall "this narrative makes sense" vibe. Welcome to what leading behavioral economist Daniel Kahneman calls your "remembering self."

And so here we are in 2023, around the Ides of March), with banks failing in both the U.S. and Europe. On 2023's list of things-people-worried-about, no one saw this coming.

This latest problem is nettlesome in no small part because it is a banking crisis, and those can be systemic. Financial institutions are the connective tissue of the economy; when that tears, other bad things can happen. Those other folks couldn't get their money out? Maybe mine is endangered, too.

It's legitimate to be concerned. Money is as emotional a topic as there is, and red lines on a computer monitor can trigger the same fear response as a red-in-tooth-and-claw threat in the wild. There's no jawboning our way out of this neural reality. Replace the word "irrational" with "normal," and you're on the right track for how to think about humans and risk.

The parameters of our concern now and always — and the grist of every recent call, email and Zoom between financial advisor and client — are defined through two basic questions: What is happening? What should I do about it?

As with every crisis, there can be a "fog of war" quality to what's taking place. Do we fully understand what's happening? No. Nor can we, probably for a long time. That's not how history works. The more important the event, the more resistant it is to a simple, single, widely-accepted explanation. Want a consensus view on the origins of the Pandemic, the 2007-08 financial crisis, the rise of the modern welfare state or the Civil War? Good luck.

In fact, as I write, the event itself is not over. So for this banking crisis, and nearly all others, the truthful answer to the first question is: We're not entirely sure. And to the second: We should probably do a lot less than feels comfortable right now. In fact, doing nothing might be the right call. It often is.

The fact that crises like this happen frequently ("It's Always Something") should make us feel better, not worse, about our current situation. The consistency with which we humans respond to these inevitable but unpredictable crises reveals that we are not actually in a deep fog of war, where overwhelmed advisors and clients are blinded to what's next, where advisory firms feel the urge to blast out an email or explanatory memo to answer the Two Big Questions.

No, we've been here before, we'll be here again, and the fog is more of a mist. Yes, disorienting, but not blinding. And more of a skirmish than a war. Perhaps upsetting, even damaging, but not devastating.

The mist — the impediments to answering, What's going on? — is actually a permanent feature of the terrain. Much of our day-to-day flow, crisis or not, is getting by despite our blinkered realities. We've cut through the mist before, we'll do it countless more times, and there is comfort in the permanence of the obstacle as it allows us to appreciate our consistent nature, to focus on what's always going on in our minds at times like this.

For starters, the long view becomes the short view, and the broad view becomes the narrow view. In times of stress or danger our time horizons shrink. For all the saccharine "invest for the long run" language we all indulge in, that's just not who we are, especially at critical moments. While humans have a powerful (and distinct to our species) capacity for mental time travel, via both memory and imagination (retrospection and prospection), when we sense danger, the value of the long view is eclipsed by the here-and-now. At that same moment, we also focus our attention. Absent danger, we can survey the savanna or our Bloomberg terminals, taking in enormous amounts of information. With perceived danger, we zero in on what we believe matters. We can't entirely resist that instinct.

Further, we're a species that does. Nearly 400 years ago, French mathematician Blaise Pascal quipped that humankind's unhappiness stems from an inability to sit in a quiet room alone. Things are a bit noisier now than the 1650s, so whatever this disposition is toward having what my grandmother called the shpilkes lands in an environment that makes things way, way harder. Behavioral scientists will sometimes refer to this "action bias" to articulate our endless cycle of stimulus and response. Resisting response to a pronounced stimulus can't merely be chalked up to mental discipline; it's accepting and processing the physical discomfort of doing nothing. To the extent that doing nothing is often the right course of (non)action, we can appreciate how hard this is.

We're also a species that feels. One of the biggest mistakes of modern (behavioral) finance is its claim that we need to take the emotion out of investing. Well, this is bollocks for the straightforward reason that from a neurological point of view, there is no such thing as deciding absent emotion. That's a longer story for a different day, but in seeing how advisor-client communication explodes at times like this, let's not just keep but embrace the emotions we might be feeling. When heard and articulated well, emotions are information that drive good conversation. Sure, it's a very different conversation than the nuances of Credit Suisse's balance sheet, but it's the one that needs to be had.