Behavioral Resolutions for Behavioral Investors

Death or (um … ) Death

Apparently the ancient Babylonians would, at the start of each year, promise to pay off their debts and return stuff that they’d borrowed, like the lawnmower (or, as we would refer to it, the neighbor’s goat). As we saw in On Incentives, Agency and Aqueducts  they had good reason to be cautious as the punishment for theft was death. Although, to be fair, the punishment for everything in Ancient Babylonia was death. What they lacked in imagination they made up for in consistency.

These days we have less strict incentives to keep to our New Year Resolutions, but would probably find ourselves wealthier if we could stick to a few simple rules. The essence of being a psychologically aware investor is self-control, and what could be less modern and more ancient than that?

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Thatcherism: The Irony of Economics

Nuance-onomics

We’ve previously looked at some of the evidence that suggests Studying Economics Makes You Mean.  The general idea is that learning about the market economy and the benefits of natural selection tends to make us less generous and less empathetic towards the travails of others.

However, like so much research quoted here this only offers up part of the story. It’s possible that we’re looking at a false correlation – it may be that it’s not studying economics that makes you a nasty grasping son-of-a-bitch but that you study economics because you already are one.  And, as usual, the truth is, at best, nuanced.

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Where Two Strangers Never Meet: Self-Serving Bias

"If you can meet with Triumph and Disaster, and treat those two strangers just the same"

IF … Rudyard Kipling

Problematic Pronouns

We all probably know someone who believes that their successes are entirely down to their own levels of skill and whose failures are someone else’s fault.  To some extent most of us will meet them in the mirror each morning.  This is self-serving bias in action.  As Donelson Forsyth explains it:

“Those told they failed attribute performance to such external factors as bad luck, task difficulty, or the interference of others, and those told they succeeded point to the causal significance of such internal factors as ability and effort.”

Now, what do you think will happen to a corporation if you put someone with a bad case of self-serving bias in charge?  Beware the CEO with a bad case of the personal pronouns, that’s what I say. And let's not talk about global warming.

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Free Zeitgeist

As the Eurozone undergoes another trial by stupidity and markets edge ever higher in the face of uncertainty and confusion, my publisher has kindly put The Zeitgeist Investor on free offer for the weekend.  If any Kindle owners out there haven’t already picked up a copy now is the time to do so. Because, of course, there’s nothing new in the markets, it’s just that we don’t live long enough to remember.

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Curiouser and Curiouser: Incentives Through the Looking Glass

Demotivated by Design

The world is full of schemes aiming to incentivize us; we’re spurred on to achieve new targets and scale new heights by the carrot of lucre-based incentivization schemes designed to appeal to our selfish natures.  Which is not surprising because we live in a society characterised by a belief that we’re all out for what we can get, wheeling and dealing in our own self-interest, forever trying to get the maximum reward for the minimum effort.

Which is like determining that 5 is the square root of 17.  Anyone who truly believes that money is the main motivation for most of our behavior is someone whose belief system needs to be carefully inspected with one of those devices used for stirring septic tanks.  Worse still, financial incentive schemes may actually miss the point by undermining our most cherishable quality: curiosity makes the man, even if it flattens the feline.

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Sapir-Whorf Economics: Your Language Predicts Your Future

A Resumption

Apologies for the recent temporary hiatus, been rather busy with that strange thing called real life.  More regular updates from now on but, for a while, they'll be more limited than in the past due to the need to fulfil a book contract.  Still, it’ll be something to add to the Christmas wishlist.

So … let’s look at something really odd, and why, if you’re a useless procrastinator  you should really want to learn German.  It seems that cultural stereotyping may not be quite so irrational as we may have thought …

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Stories, Control, Fundamentals and Panic

Nerve, Lost

There’s an ongoing, long term argument about the nature of financial crises.  Many believe that they’re caused by the underlying fundamentals of the economy, imbalances of various kinds, leading to failure.  Others argue that the only fundamental is the inevitable hopelessness of human nature in the face of uncertainty: panic.

Of course, panic itself is a bit of a vague term, although it clearly refers to some kind of failure of collective nerve in the market.  For a panic based model of financial crises to have any validity we’d need to link it to some of the more pervasive failure modes of human rationality.  And, as it turns out, it's our need to feel in control and our urge to tell stories that leads us into the pit of financial damnation.

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Slavery, An Epicurean Business Model

Early Economics

The world is composed of atoms, which can combine and re-combine to form everything and anything, including the gods, but can never be destroyed. There is no afterlife and creation is simply trial and error carried out over infinitely long times. The only purpose to life is to seek pleasure and avoid pain.

These ideas should all sound familiar to people acquainted with the mores of modern society, all part of a belief system based on the scientific method, even leading to a conception of the pleasure-pain principle that sounds suspiciously like the basis of neo-economics: self-interest. However, these ideas are thousands of years old, championed by followers of the Greek philosopher Epicurus, and Epicureanism didn’t imply capitalism but the only other economic system that has ever had lasting success – slavery.

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