Metaphors We Invest By

Lost for Words

Metaphor is a powerful engine for driving thought. Or possibly it's a useful compass for guiding it. Or perhaps it's some other metaphor. The point is the we tend to think in metaphors, even about metaphor, and it seems that the metaphors we use to describe a situation  determine how we view it and what we do about it.

So companies may be in a tail-spin, or simply marking time. Or perhaps they're in terminal decline, or maybe it's merely a temporary setback. And maybe we're talking about the same thing, and how you hear it described determines your reactions to it … metaphor is powerful, acts on us unconsciously and is almost completely useless to an intelligent investor.

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F is for Framing

Framing is the idea that we make different decisions about the same thing when in a different mental state. The worrying thing about this being that other people – politicians, financial institutions and advertisers being prominent examples – can use this to influence our choices. Of course, such upstanding examples of modern society would never stoop so low, would they?

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Dirty Money: There IS Accounting For Taste

Unfungible People

The link between emotions and decision making, particularly financial decision making, has been recognized for years.  This is a tricky area because the connection between emotions and rationality is difficult to unpick, which is why making investment decisions while in an emotional state is usually not recommended.

To complicate matters, though, it now appears that we associate certain types of money with certain types of emotion, and will only spend such money on certain things.  Which is odd, because the last time I looked money doesn’t seem to be especially emotional: it rarely breaks down and starts sobbing when you try and spend it.  Money is fungible, but people aren’t.

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Salience is Golden

New Frames

As so often in the past Warren Buffett has stirred up a swarm of annoyed investors, this time by explaining why he thinks gold as an asset class isn’t so much overvalued as irrelevant. He’s done this in a way typical of the man, by changing our frame of reference, to give us an entirely new perspective on the issue.

This gives us an insight not just into gold's current status as an investment class but also into why Buffett is almost unique as an investment guru. He doesn’t rely on the old arguments about what’s important by drawing on existing ideas of what’s salient, but develops new ones, based on his own models. He changes what’s salient, and that’s real gold for investors.

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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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Financial Memory Syndrome

False Memory Syndrome

There continues to be serious debate over the concept of false memory syndrome, where allegedly innocent people have been accused of serious crimes on the basis of memories which may have little basis in reality. Whatever really lies behind these cases it seems that planting fake memories in people’s brains is rather too easy to make the truth easy to ascertain.

The problem is that our memories are rather more malleable than we’re brought up to believe and it’s easy to create imaginary ones if you know what you’re doing – and often if you don't. Even worse, we can plant fake memories in our own minds and these are implicated in many of the behavioural issues that dog investors. Financial memory syndrome is at the heart of many a financial crisis.

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Behavioral Portfolios

Beer Balancing Behavioralism

Perusing the literature on behavioural finance you might be inclined to the thought that although this stuff is all very interesting and even occasionally amusing it’s not much use when you come to actually investing. It’s a bit like posture – it’s easy enough to point out to someone that they slouch like a sloth with a dose of haemorrhoids, it’s entirely another to explain to them how to retrain their muscles to start balancing pitchers of beer on their head on the way back from the bar.

Digging deeper, though, what becomes apparent is not that we're especially bad at understanding investing but that the way we go about constructing our portfolios is radically different to what theorists expect. Whether it's the theorists who are wrong or the investors is entirely dependent on your perspective. Either way recognising what's going on is an important step on the way to getting a beer balancing musculature.

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When a Dollar’s Not Just a Dollar

Reciprocity Rules

If you have nothing and someone offers you a dollar you’d take it, right? But what if you’ve just seen your aunt give your cousin $100 and told to share it between the two of you? After all, a dollar is still a dollar more than you had a moment ago.

What studies of so-called reciprocity in humans show, time and again, that while we’ll accept the dollar in the first situation we’ll refuse it in the second. Our sense of fairness is offended and, it turns out, that given half a chance half the population will seek revenge on the perpetrators of this swizz and take pleasure in it. So, sometimes, a dollar is not just a dollar.

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Money Can’t Buy Happiness

Wish Carefully For You May Receive

Often the quest for the illusory bird of happiness is equated with the accumulation of ever increasing amounts of money. If only we had more wonga, moula, spondoolies we’d be so much more cheerful. Only when we get the extra dough our partners find that we’re still the same miserable gits that we were before and elope with the gardener, most of our money and the garden gnome collection.

Worse, not only does money not equal happiness, it seems that offering people money for doing things that they would otherwise do out of the goodness of their hearts can destroy their generosity. Money may not make you happy but it can sure as hell make you a miserable son of a bitch.

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Investors, You’ve Been Framed

Lakoff's Political Frames

Suddenly politicians are all excited about a psychological trick that’s been known about for years. This is in no small part due to George Lakoff who’s popularised the idea of ‘framing’ in political circles. In the simple terms that politicians will understand, framing is about using the right loaded phrases and words to position yourself.

So, for instance, the American Army engaged in a ‘surge’ in Iraq: a short-term, rapid build up and assault is what comes to mind, rather than a long-term commitment. Or consider the renaming of the aggressive British Ministry of War to the protective Ministry of Defence. Or the various euphemisms for firing people: “sorry we have to let you go”. Such phrases create frames and these cause underlying behavioural biases to trigger in certain ways. As usual with psychological tricks the effect of this on individuals’ investing habits is largely bad.

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