This excerpt, written by Denise Shull, is from the prologue to her book Market Mind Games: A Radical Psychology of Investing, Trading and Risk, published by McGraw-Hill Companies Inc., 2012. Ms. Shull's book can be purchased from major book retail outlets including Indigo and Chapters, and can be ordered online through Amazon.ca. Ms. Shull will give a public talk based on the book at Rotman School of Management on March 5 at 5 p.m.
The Market’s Masquerade
What if the mystery of market crashes and trader or investor meltdowns stems from a simple but total misunderstanding of our own minds? Could everything we think we know about ourselves—intelligence and rationality versus emotion and irrationality—be missing the mark?
Simply put—yes.
Connecting the dots across the vast fields in neuroscience shows that we actually perceive, judge, and decide in ways that operate almost in diametric opposition to the reigning theories in psychology and economics. Somewhere between Socrates and the mid-20th century rise of the cognitive behavioral school of psychology, we promoted intellect to chairman of the board. In reality, the wide-ranging category of feelings, which includes both conscious and unconscious emotion, owns all the shares.
Now I am by far not the first to say that we misunderstand how we really think.
Nassim Taleb told us in his runaway bestseller, The Black Swan, that “it looks like we have the wrong user’s manual” and I could not agree more! The manual we need begins not with the assumed superiority of thought and reason but with the foundation of feeling and emotion, which contributes the meanings of anything and everything. For many decades now our attention has been focused almost exclusively on our thinking and our behavior. The more mysterious realm of feelings resided in the most relegated seat of all, that of being old, useless, and destructive. Ironically, linking together our failures to solve the mystery of meltdowns with the rapidly growing insights into how perceptions are formed proves that this dismissed realm belong front and center, first and foremost.
This overemphasis on our thinking (or cognition to use the academic term) underlies the second complaint of Taleb’s, which I also agree with: the great intellectual fraud, or GIF, of the bell curve. This bedrock of the field of probability (and by extension the endeavor of market predictions) stems from the misplaced emphasis on the seemingly unique human ability to discover and apply the numerical disciplines of algebra, calculus, and theoretical mathematics. In fact, one can argue that a zealous belief in an ostensibly omnipotent power of numbers has mislead us into our current reckoning with billion-dollar bonfires.
I do, however, part ways with Taleb when he says, “A small number of Black Swans explain almost everything in our world.” If we take the whole of what we now know about how we perceive anything imprecise or conflicting (like market data), it won’t be Black Swans that will do the explaining. It will be a totally new operating guide for a fully interactive psyche—fully reciprocal thinking, feeling, and emoting—that transforms his first identifier of “Black Swans”—“an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility”—into nicely bleached birds. Not only will many things that might escape expectation be expected, but they will easily fall into his lower standard of “the possible.”
Taleb would almost certainly say that I am proving his third assertion—“in spite of outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.” But I am not talking about explaining after the fact, although better explanations of events do lead to an increase in knowledge overall; I am talking about the missing link in predicting. I am talking about picking up where our agreed upon GIF leaves off.
In plain English, I am simply saying that if we come to understand how we truly perceive, think, and decide—how all human brains take in, process, and act on data—that neither the explanations of randomness nor Black Swans will be so frequently needed. In fact, if we focus on the first one—perception—we will gain much. If we begin to incorporate the new realities of the sources of our own behavior in the market or in any highrisk decision, we will much more easily understand why we so often do that which we wish we wouldn’t have.
