Every time there is a bank failure (or any other negative event) we look to the policy makers to stem the tide, expectation is to have accountability and bring order to the chaos of modern finance (or any other facet of life) and these are expectations worth having the problem is that it belies a curious fact of human existence, memory, and how memory is elusive, fleeting, and irrational. In 1950's Princeton psychologist George Miller published a paper, The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information. The paper postulated that human brains can hold seven pieces of information simultaneously, this was indeed a severe limit imposed on cognition. The amount of information we have to interact with is referred to as our cognitive load, information in any and every form adds to our cognitive load, text, images, sensory information, and surprises of surprised white noise of life, whatever that may be.
So the ability of our brains to process our working memory is an important marker of our decision making abilities. So when Gobet and Clarkson in a long line of cognitive scientists tried to estimate the magical number and wrote a fascinating if a damning epitaph of our working memory and estimated that perhaps the short term memory has capability of holding only 2 to 3 elements. When our cognitive load exceeds the capacity of our short term memory (working memory) our brains do a fugue and not of the Bach variety. Think of it if you will you are watching your favourite show on Netflix, and you remember to do something in your living room, you get there, and now can't remember what had to be done? This is the effect of limitation of working memory, and cognitive overload, it happens to all of us, and we just shrug them off as one of those days.
What does this have to do with bank failures, you might justifiably ask? The ability to absorb information, weave it into knowledge disintegrates with too much information, it increases distractedness and leads to a systemic rut. The neuroscientist Torkel Klinberg put it best, “We have to remember what it is we are to concentrate on”. The problem with bank runs or any other public issue is that there is always something else around the corner which needs our attention and therefore absorbs our fleeting attention, before we find what in India is labelled as jugaad, and in German as kludge. The information conveyed by the bank failure graphic is very important, bank failures often happen in waves. The creation of mechanisms to thwart bank runs starting with the creation of Federal Deposit Insurance Corporation (FDIC) in 1933 slowed the bank runs, but every time they have happened they come chunked together like working memory. You can pick up any bank that has failed and you will realise that the people running it made a series of assumptions, which turned out to be bad. How many of these bad assumptions because of the limitations of our cognition? As of now there are not many answers here but cognitive sciences the ultimate probers of human memory and the faultiness and gaps of our modular brains may have a few things to teach behavioural economists.
Human behaviour is driven by the instincts along with systems and history is a robust framework for exploring our sentient understanding of the world in order to uncover irrational, and inexplicable motivations for actions. This is where the work of cognitive neuroscientists fill the gaps of elusive psychology of past behaviours. The work of Colin Martindale in recognising the existence of several sub-selves in a person. Martindale argued that in order to exist our brains have created a hierarchy of information processing from state-dependent memory to selective attention, these various sub-selves often take the driving seat during various processes therefore alleviating cognitive overload that nature extends to our sensory organs. However, our modern decision making toolboxes rely on a rather binary approach to decision making, until and unless our every day policy making does not incorporate the functional modularity that exists in the natural world, we will continue to exist in a zero-sum game of exponential gap.
