Profit From Self Knowledge

Gnôthi seauton! and is this the prime
And heaven-sprung adage of the olden time!
Say, canst thou make thyself? Learn first that trade;
Haply thou mayst know what thyself had made.

(Samuel Coleridge – Self Knowledge)

Behavioral Moneymaking

It’s easy to talk about the fundamental errors people make in investment but, in truth, we rarely get to see this in action. To judge from the terabytes of trading derring-do published daily you’d be hard pressed to find anyone who actually loses money on the stockmarket. Most people seem to adopt the attitude that, if these behavioral biases make a difference, it’s to other people and never themselves. And often, they believe their own rhetoric.

We can’t usually look inside individuals’ trading histories to point out the mistakes they’ve made, most research is based on gross, anonymised data. However, occasionally some anomaly allows us shed some light on the actual practice of real investors and such an opportunity arose with the trial and conviction of Martha Stewart for obstructing justice in an insider dealing case. Stewart may be a fine host, but she’s no better – or worse – at investing than most of us.

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Exit the Walras, followed by Equilibrium

Blinkered

As we saw in Economics and Psychology: The Divorce, the two queenly social sciences long ago parted ways. What we haven’t yet seen is quite what the economists did next, when they abandoned the idea that people had any part to play in economic behaviour.

To do this they chose to follow a path predetermined for them by physicists, which would have been all very well were it not for the fact that the bit of physics they choose to use turned out to be incomplete. Unfortunately, by cloistering themselves away from new research for nearly a century, this new reality was missed and by the time they emerged from their bunkers economics wasn’t so much wrong as irrelevant.

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Black Swan Down

Uncertainty Up

The world is suddenly full of uncertainty: tsunamis, nuclear threats, civil wars, regime changes and sovereign debt default are all high on the agenda. Yet, despite this plethora of potential pitfalls, markets have remained remarkably sanguine, for the most part.

We should expect, surely, that sudden and frightening events such as these, some of which at least are genuine Taleb style Black Swans, should send investors and markets into a dramatic tail-spin. Yet it ain’t so, and there’s a lesson here, which is that markets aren’t moved by events in quite the way we think they are.

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Disposed to Lose Money

Quizzical Behaviour

Most people think that game show hosts are more knowledgeable and intelligent than the people they ply with their inane questions. Obviously they’re more knowledgeable: they have the answers in front of them, but are they smarter?

Despite the obvious fact that assuming someone is smart because they can read answers off a card without falling over is blatantly absurd, this fairly straightforward observation makes little difference to studies of this behaviour, the tendency to attribute to a person certain fundamental qualities based on nothing more than the situation we find them in. As usual, this is a one way ticket to losing money.

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