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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A Keynesian Theory of Mind

The Mental Cell of Autism

Autism is one the crueller tricks that nature plays on human beings, leaving sufferers isolated, incapable of making social connections and effectively trapped within their own heads. Although the causes aren’t fully understood some of the consequences are, and chief among these is the inability of sufferers to take on the perspective of others. This failure to develop a so-called theory of mind means they simply can’t understand the needs and motivations of other people.

According to John Maynard Keynes a proper theory of mind is just what an investor needs to keep one step ahead of the crowd, although others feel that Keynes’ approach to investing is tantamount to chasing returns all the way to poverty. It raises the question, though, as to how much a person’s genetic makeup determines the type of investor they are. Are effective value investors really just socially inept wallflowers or simply extremely focused individuals?

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