Behavioral finance begins with the setting of a question. For the individual investor, the question might be put, “what is going on in the market that is out of synch with fundamentals of reality?”

For the market maker, wishing to influence market participants, the same question may be addressed— though acted upon to different ends. For example, viewing the defensive response of the consumer to the widely advertised greatest recession since the Great Depression, a government concerned about dramatically heightened savings rates— having the multiplicative effect of depressing consumption (and so, prolonging the pain)— might wish to intervene behaviorally to turn the situation around.

If I were “Government”, I’d probably begin by threading messages of recovery into the ongoing fabric of gloom and doom. I’d call them green shoots. And though my steps might falter in public discussion of the financial crisis ( my chosen fall-guy, but every melodrama needs a villain…), I’d begin to temper the gravity of the situation with hopeful messages— again woven into serious attempts to address the larger context.

For example, while demanding greater assets for banks (to maintain that low, low 12% leverage), why not switch preferred shares to common? It helps some banks free up a few billion, so that the public penance doesn’t appear so tough: and we, the public are comforted in this, too.

How do we show it? Our portfolios fatten up with a 20% gain from their bottom: and prices seem to be holding for the minute, above their 3 year averages (though admittedly, still down from their bubble-tops). It looks good on paper.

And in the restaurants too: the ones that have not closed.  Broadway was joyous last night, up here near Columbia. Café windows were open to the street, and diners outside enjoyed a break in the previously stormy weather.

My teenager asked me what I’d heard from my folks about the Great Depression as she observed the diners. I suggested that this was probably the moral equivalent of selling apples on the street, back then. Thanks to the persuasive efforts of behavioral finance. Happy days are here again.

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