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What is a psychological mechanism? Can we talk about the way the mind works in
terms of parts and interactions? The answer is clearly yes. In cognitive science, parts are
mental representations that stand for things in the world that interact with each other:
concepts, beliefs, analogies, visual images. These are both cognitive and emotional, so there
is not a sharp division in the mind between what is cognitive and what is emotional; there
are many interconnections in the brain.
It is legitimate also to talk about the social in terms of mechanisms. In social
mechanisms the parts are people, who interact with each other. The regular interactions
between people include verbal and non-verbal communication, exchanging not only ideas,
but also analogies, visual representations, and emotions.
Financier George Soros (1987) claims that the problem with explanations of
economics is that economists do not take into account reflexivity, which requires a different
way of approaching social science. This is a concept discussed by sociologists like Giddens,
Bourdieu, and Woolgar, and is similar to philosopher Ian Hacking’s (1995) ideas about what
he calls the looping effect of human kinds, by which he means that when you introduce a
new human category into thinking about the world, you can actually change the world – a
kind of reflexivity. Soros says that the role of intentions and future expectations in social
situations sets up a two-way connection between the participants’ thinking and the situation
in which they participate. If people think that the economy is going up and they can make
money, they are optimistic, but that feeling feeds back and creates the situation where
optimism turns into a bubble, and once the bubble bursts the situation is reversed. This kind
of reflexivity in economic change is difficult to handle within the conventional approach
assuming perfect rationality and perfect information.
Reflexivity can be explained at a deeper level in just the same way that Keynes’s
ideas about animal spirits can be fleshed out in terms of psychological and neural processes.
The central idea of cognitive science is mental representation: you can represent the world,
but you can also represent yourself in the world. You have various concepts of yourself and
the markets you are participating in, buying and selling, various things that you believe or
do not believe about stocks going up or stocks going down. You are happy when the stocks
you buy are going up, and you are fearful that they will stop going up or that they might go
down. These are all different kinds of mental representations: not only words, but various
kinds of images and emotions as well. The mental processes, the interactions between the
parts, include different kinds of inferences, calculations, and emotional feedbacks. All of
these make reflexivity happen, with effects on the economy that can be understood as
mental processes.
In the rest of this chapter I want to outline my theory of emotional coherence and
how emotions and cognitions operate in our minds, within the context of the mental
representations and processes that are most responsible for economic booms and busts.