Repellent; The Magical Law of Attraction

Smile or Die: How Positive Thinking Fooled America and the World by Barbara Ehrenreich

As most long-time readers would guess, I don’t have much truck with the concepts of positivity.  The appropriate and mindful attitude of most investors should be a constant expectation of something going wrong, because our mindless reptilian brains will automatically gravitate to the sunny upsides of over-optimism given the slightest reason.

Generally the advocates of positive thinking are in the ascendency – they tell people something they want to hear, namely that you can have what you want merely by wishing for it.  This is the magical law of attraction and not only can it impoverish investors directly it also does so indirectly, through its effects on managers and employees.  Exercised as mind-control it’s repellent, unnatural and destructive.  Get real, folks.

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PSB Latticework: On Demographics and Retirement

An updated, reorganized Latticework is now available, which in technical speak provides access to the deep structure of the blog and which, for us laymen, is a way of recycling old content. 

One of the more immediately relevant sections is On Demographics and Retirement, a ramble around the less than salubrious environs of our dangerously lax attitude to our later years.

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Birds, Bees and Decoy Effects

Fleeced

If there's one message I hope to get across here it's that we're our own worst enemy when it comes to making decisions if we're anywhere in the vicinity of money.  If there's a second one it's that if we don't damage ourselves with our behavioral biases then someone else will try and do it for us.  Nowhere is this more evident than with the fiendishly devilish decoy effect.

The decoy effect was made salient by Dan Airely in Predictably Irrational, presumably as a warning for us all about the dubious machinations of marketing departments.  In a world where no good deed goes unpunished it's promptly spawned a thousand websites excitedly describing how to fleece their customers.  You've got to love the entrepreneurial spirit even if the moral outlook is distinctly cloudy.

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PSB Latticework: On Investing Psychology and Emotion

An updated, reorganized Latticework is now available, which in technical speak provides access to the deep structure of the blog and which, for us laymen, is a way of recycling old content. 

The single largest theme is On Investing Psychology and Emotion, a varied grab-bag of articles loosely arrayed around how our psychology interacts with financial transactions and causes havoc all round.

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Risky Shifts

Female Underwear (Not)

No doubt some will be disappointed to learn that a risky shift is not a slightly daring article of female underwear, but an outcome of the counterintuitive process of group polarization. This says that if you take a group of roughly like-minded people they will gravitate to a more extreme position than that of the average team member. 

Mostly people would expect the opposite, that the average would hold sway, but the fact that this doesn’t seem to happen is a concern in many spheres, some of them more important than investing.  However, as financial markets often seem to be populated by like-minded groups of wildly overoptimistic people, they’re excellent breeding groups for risky shifts.

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Minding the Chastity Belts: Fiduciary Duties and 900 Pound Lemmings

 

"Today investors herd around short-term investment strategies adopted by other prudent experts who manage similar funds. This has unleashed a flock of 900-pound lemmings into the economy."

Back to the Future of Pension Fund Trust Fiduciary Duties, Keith Johnson

Crusading Fiduciaries

If you were a medieval knight embarking on the twelfth century equivalent of a Mediterranean cruise, aka going off on the Crusades, you would have needed someone at home to take care of the castle, the gold and the chastity belt keys.  That person was known as a fiduciary.

The fiduciary’s duties were those of loyalty and prudence; perfect qualities for today’s equivalent, the financial advisor.  Sadly most financial advisors don’t see themselves in this light.  Even sadder, those that do are usually to be found in that herd of 900-hundred pound lemmings that constitute the mass of behaviorally compromised investors. Time for a re-think, all round.

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Unrealistic Optimism and the Impoverished Investor

Hope is the thing with feathers that perches in my soul – Emily Dickinson

Eternal Optimists

Humanity is unrelentingly optimistic in the face of contradictory evidence.  Our ability to demonstrate unrealistic optimism bridges cultures, races, genders and societies.  We simply will not face up to the nasty reality of the real world, whatever that is.

This bias is so pervasive that it’s highly unlikely to be a social adaptation to culture and is probably an evolutionary trait, hard-wired into our brains.  No matter how it arises, it’s going to induce investors to take a positive view of the world: a view which cuts right across behavioral investing rule number one.

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Knight, Knight, Automated Trading Dreams

“The four most beautiful words in our common language: I told you so.” (Gore Vidal)

Glitch Driven Trading

The software glitch that pushed Knight Capital to the brink of extinction has simply reaffirmed two truths we’ve known for a long time (see: Rise of the Machines).  Firstly, the rise of machine driven trading is exposing markets to risks that aren’t manageable.  Secondly, the people regulating the markets don't understand, or don't want to acknowledge, what those risks actually are.

Behind this lies a fundamental issue: you can regulate to punish people retrospectively for their failures or you can limit innovation to reduce the probability of the issues happening in the first place.  It’s time to focus on the latter rather than the former because, if "this could happen to anyone" it could happen to you.

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Stand and Deliver, Cashtags and Highwaymen

Tweeted

In the olden days, when men were real men and deodorant was unknown, highwaymen roamed the roads, holding up coaches and relieving victims of their wealth.  In those days the felons had to take real risks in order to run off with their booty but today the process is generally a lot simpler and involves a lot less horse power.

Such is the experience of the StockTwits platform which has just seen its $ stocktag idea pinched by Twitter in the form of cashtags, as the ubiquitous social network seeks to find new ways of justifying its eyewatering investment funding.  Of course, many highwaymen ended up swinging from a roadside gibbet, although perhaps being hoist by their own petards might be a better, albeit mixed, metaphor.

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Screwed: Fictional Profits, False Accounting and Financialization

Double Entry: How The Merchants of Venice Created Modern Finance by Jane Gleeson-White

 

"So it has come to this. The global biodiversity crisis is so severe that brilliant scientists, political leaders, eco-warriors, and religious gurus can no longer save us from ourselves. The military are powerless. But there may be one last hope for life on earth: accountants."

Are Accountants the Last Hope for the World's Ecosystems?, Jonathan Watts

 

Back in the Thirteenth Century, when Venice ruled the waves, we can find the origins of modern capitalism.  Back then the portents were vague, but the invention of bookkeeping and the introduction of Arabic numerals foreshadowed a revolution based on the stunningly original idea of being able to figure out whether or not your business was making a profit.

Roll forward six hundred years and we find that those inventions, suitably adapted, have not just stood the test of time, but have insinuated themselves into every nook and cranny of modern life.  Welcome to the world of financialization where earnings per share is an imaginary number and money is the only objective measure of everything. Only it isn't.

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