Pssst … Wanna Invest in a Conspiracy?

The Great Con

There is a great, massive, hideous conspiracy at the heart of modern financial system, designed to steal the ordinary person's money.  Like all of the best conspiracies, it's hidden in plain sight.

And the conspiracy is this: there is no system, no one knows what's going on and no one knows what's going to happen next. Fortunately we can now prove this, although perhaps not quite in the way intended.

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HARKing Back: Lessons in Investing from Science

Confirm Ye Not

Here's what ought to be a really boring idea – we need scientists in general and psychologists and economists in particular to stop hypothesising after results are known (HARKing, geddit?). Instead they need to state what they're looking for before they conduct their experiments because otherwise they cherrypick the results they find to confirm hypotheses they never previously had.

The underlying problem is our old foe, confirmation bias. And the solution for scientists and social scientists alike is known as pre-registration. It would be no bad thing for investors to demand a similar process for fund managers and financial experts. Or, for that matter, to apply some of the ideas to their own investing strategies.

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When Comfort Blankets Go Bad: Risk, Perception and Investing Theater

Investing as Performance Art

The security analyst Bruce Schneier describes many of the security measures on public display as  “security theater”: a meaningless set of rituals designed to provide a comfort blanket. He argues that these measures provide no useful protection and mainly serve to make our lives more difficult, increasing the risks we have to take while simultaneously restricting our freedoms.

I’d argue that much of the performance art we see around investing serves much the same purpose – and with much the same outcome. Box ticking regulations don't actually do much for investors other than make their lives more confusing and difficult; but with a lot of thought, and a bit of investing theater, we might be able to better align real risk and perception to everyone's benefit.

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Be Prepared, Be Resilient

Are You Ready?

So, markets are down, the oil price is seemingly in terminal decline, the (alleged) Ponzi scheme that is the Chinese economy is collapsing and interest rates are on the way up. A crisis? Well, for anyone who’s been around the markets for more than two minutes it’s déjà vu, all over again.

Of course, the wise investor is prepared for this; not merely in the sense of having a trading strategy in place, but in terms of psychological resilience. There’s no point being the best darned stockpicker in the known universe if you flee for the hills at the first sign of trouble – or, even worse, at the last.

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Uber Irrational

Wet and Irrational

A few weeks ago a group of French taxi drivers attacked the US singer Courtney Love's car as she tried to get to Charles de Gaulle airport in Paris. As it turned out this wasn't a Franco-American cultural argument over the relative merits of Ms Love's brand of alternative rock, but a side-effect of an industrial dispute that has its origins in the complexity of behavioral economics.

In fact, at root, it's about whether you'd like to be able to find a cab in the rain in New York. 

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Can You Forecast Better than a Dart Throwing Chimp?

The fox knows many little things, but the hedgehog knows one big thing - Archilochus

Cover Story

Philip Tetlock has spent many years studying the ability of experts to predict important events in their sphere of interest and come to the not entirely astonishing conclusion that they aren't much good at it. Soviet experts, for instance, missed the possibility that the Soviet Union might stop existing. On the other hand, they're exceptionally good at promoting themselves: being wrong is no impediment to fame, it seems.

Tetlock has discovered that people fall into two groups that he labels 'hedgehogs' and 'foxes', Hedgehogs have one big idea and tend to interpret the world in terms of it. Foxes have lots of ideas and are more flexible in the face of change. Unsurprisingly foxes are better at predicting stuff; but does that make them better investors?

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Bitcoin Bugs’ Belief

Bitcoin Bugs

From time to time something odd happens to the gold price – it goes down. This is usually a shock to the advocates of anti-fiat money who’ve been squirreling away the shiny stuff against the inevitable day when nation states collapse. They get quite cross when they discover that the said nation states may in fact be flogging their gold at historically high prices and driving the price down. Apparently the thought that countries might resist collapsing hadn’t occurred to the gold bugs.

In the meantime we’re seen the rise of Bitcoin, one of a number of cryptocurrencies that offer freedom from central regulation. Bitcoin and its ilk isn’t backed by anything, which makes it more than ordinarily a punt on the perverse willingness of people to believe in ephemera. And that, of course, is simply another case of history repeating itself. Have we learned the lesson?

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Lost In Your Own Memories: Age And The Room Effect

Remember …

Old people, you may have noticed, have a much better recollection of past events than they have of current ones. Memory is a very odd thing; what we remember and what we don’t isn’t always entirely rational, and the lessons we learn from our memories aren’t always the ones we ought to.

For investors, who all too often rely on their unsupported memories for insight into what they should be doing, this opens up a world of potential dangers. Although, as it turns out, simply wandering from one room to another can be enough to ruin your portfolio.

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Corporate Bias: When Projects Go Bad

Bypass Surgery

As I recently blogged in Mobile Bypass Surgery For Banks over on Tomorrow’s Transactions, where the more technical side of my financial blogging occurs these days, the recent system outages at Royal Bank of Scotland, where customers were once again unable to access their own money, are just the tip of an industry-wide problem.  But that’s only half the story, because technology failures are always mediated by psychological ones.

As we know well enough – the Big List of Behavioral Biases is testament to the issue - individuals suffer from a vast range of behavioral issues, with predictably depressing financial consequences. But similar problems also afflict corporations, because managers suffer from the same issues as investors, and the results can be catastrophic for investors.

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Gaia And The Ambivalent Investor

Delusional

We're very keen on people who are very definite about things – even if it subsequently turns out they're wrong or delusional (or both). We're less interested in people who are less certain about things. We don't value ambivalence in our gurus.

Unsurprisingly we're wrong about this. The ambivalent investor is sometimes that rare thing, a genuinely sensible expert in a field dominated by loud mouthed, impossibly certain charlatans. And mostly it doesn't matter which side of the fence you favour, you'll be better off sitting on it. 

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