Self-destructive cycles Just as patience can self-generate, so too can impatience. And while patience generates self-improving cycles, its alter ego can create self-destructive cycles. Addiction is the classic self-destructive cycle. Drugs and alcohol chemically alter the balance of the double-self, increasing the value of instant gratification. This shortens time horizons, increasing further the value of instant gratification in a downward spiral. Unless arrested, this unfulfilling equilibrium becomes self-fulfilling. 15  For example, Guven (2008). 16  Charness and Gneezy (2009). 17  Christakis and Fowler (2009). 18  For example, Tuckett (2009). 19  For example, National Institute on Drug Abuse (2007). BIS Review 114/2010  5  Similar cycles have been found with a more commonly-prescribed drug – work. Workaholism arises from a spiralling imbalance between work and life. 20 Too much work lowers the value of life away from work. This encourages even greater work and an even greater work/life imbalance in a downward spiral. Obesity can likewise generate self-affirming negative behaviours, often operating through low self-esteem. As with self-improving cycles, these self-destructive spirals have a social dimension. Bad behaviours rub off just as much as good, with three degrees of influence. It is not just happiness, diet tips and gym membership cards which pass between friends’ (friends’ friends). So too do depression, chocolate cake recipes and membership of addiction clinics. 21 As patience is contagious, impatience is infectious. So self-destructive cycles in social systems are the result of a neurological seed nurtured by sociological forces. Self-destruction, like self-improvement, is part nature, part nurture.

The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise. But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction. 20  For example, McNamara (2004). 21  Christakis and Fowler (op.cit.). 6  BIS Review 114/2010  These self-destructive dynamics would have been familiar to economist, and some-time investor, John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”. In the sketch model, a Keynesian dynamic selection process is at work. Myopic finance bankrupts the long-sighted. This echoes an earlier evolutionary game in finance – Gresham’s Law. Named after English financier Sir Thomas Gresham in the 16th century, this refers to the tendency for bad money to drive out good. The first paper money example of Gresham’s Law pre-dated Gresham. It came from China during the Yuan (1271–1368) period. Then, paper money drove out silver coinage. 22 This bad money dynamic has since been replicated across many monetary economies. China also provided the world with its first example of the reverse phenomenon – a selfimproving cycle of good money driving out bad.