Instinct for hunting down money
• Big data analysts believe most of our investment decisions are made unconsciously
According to Harvard University professor Daniel Wegner, when we have thoughts that occur just before an action and these thoughts are consistent with the action, we believe we have willed our action.
If you think of reading today’s newspaper, pick it up and start reading it, there seems little doubt your consciousness is in charge and guiding your actions. But, in fact, picking up the newspaper is not a simple conscious act; many nonconscious aspects lie beneath.
In the words of columnist Biju Dominic, writing on livemint.com: “The fingers we used to pick the newspaper up, the delicate pressure exerted to hold the paper, the angle at which the newspaper was held, the awareness of the language of the newspaper — most of these were not consciously thought through.”
In the 1980s, Benjamin Libet showed that the nonconscious brain decides about 0.3 seconds before a person is conscious of his or her own decision/action.
Sport psychologists have discovered that the minimum time our conscious brain requires to react to a stimulus — to hear the sound of a starting gun and start sprinting, for example — is 0.1 seconds. The time a player takes in games such as cricket, baseball and tennis to decide which shot to play is less than 0.02 seconds; the huge difference between 0.1 and 0.02 seconds suggesting the latter decisions are taken nonconsciously.
As Dominic points out, our nonconscious processes seem to be five to 10 times faster in making decisions than our conscious processes. It is estimated that our sensory system can handle 11-million bits per second, whereas the most optimistic number our consciousness can process is 50 bits per second. Given the superior speed and capacity advantage, it’s a no-brainer that a vast majority of our decisions are taken by the nonconscious.
“The importance of the nonconscious in decision-making is by far the most significant discovery about human behaviour,” claims Wegner.
The scientific data that demonstrate the significance of the brain’s nonconscious processes are overwhelming. It won’t come as much of a surprise, therefore, that decisions made below the surface of our consciousness play a crucial but often overlooked role in investor and market behaviour.
The upshot is a new paradigm in the understanding of investment activity and prediction of asset prices and market behaviour. Called emotional finance, it differs from traditional finance theory, based on the idea that investors are “rational”, and behavioural finance, which although recognising that investors are prone to bias, implicitly assumes they can still learn to be rational.
As the team at Advanced Logic Analysis (ALA), developer of “next-generation” decision support systems, explains: “Emotional finance recognises that people are inherently irrational and largely driven by their emotions, both those of which they are consciously aware and, more importantly, those which are unconscious. The latter, however, are even more powerful because they are not directly accessible to the conscious mind.
“By directly acknowledging the vital role investors’ unconscious needs, fantasies and drives play in their investment judgments, emotional finance provides a very practical framework that can help explain and predict those aspects of investment decision-making and market activity not open to rational models and conventional perspectives.”
According to the theory, investment decisions are in effect the outcome of a struggle between unconscious feelings of excitement — the pleasurable idea of potential future gain — and anxiety, the pain of potential future loss. Associated with this is the denial of the difficulty of outperforming, and its associated unconscious ramifications.
In psychic reality, the investor enters into an idealised emotional relationship with a stock, other asset or even firm management, which can easily let him or her down. Markets take on their own unconscious mental life and are prone to act out the same emotions as individual investors, such as excitement, euphoria, panic, depression and mania.
“In summary,” say the folks at ALA, “emotional finance gives us a handle on what is truly important to investors and their conviction to invest despite outcomes being so unpredictable.
“The premise of emotional finance is that formal knowledge of the subtle and complex ways the unconscious mind works and associated unconscious group processes can help us understand better how asset valuations and investment judgments are made and how markets work and why, at times, they break down.”
This new understanding is predicted to lead the big data analysts and system developers to better investment decisions. But while that may be good news for them it’s anything but good news for those of us who still believe it is all about growth, valuations, market cap and momentum. So what now?
The first bit of good news is that big data may not be as infallible as we might imagine. To begin with, it has been hyped so heavily that we probably expect it to deliver more than it can.
Organisations are not going to magically develop marketbeating competencies simply because they’ve invested in high-end analytics. Turning insights into competitive advantage is not as easy as it sounds, especially since analyticsgenerated insights are relatively easy to replicate.
Hubert Dreyfus, for one, has long argued that our unconscious skills can never be captured in formal rules. But even if they could, it does not necessarily follow that they can be improved on.
It is hard to imagine, for example, how decoding the unconscious aspects of picking up a newspaper will result in more efficient ways of doing it.
The same applies to investing, which seems to rest on the premise that our unconscious decisions do more harm than good. This is despite the fact it is our unconscious that enables us to decide which shot to play in less than 0.02 seconds and makes us freeze in our tracks to avoid stepping on a snake before allowing the conscious process to step in to confirm it was a twig and not a snake.
Is a subconscious desire to “avoid the pain of potential future loss” really a bad thing? Although we might not be able to time the market accurately, that should not stop us from paying attention to a general “gut” feeling that the market is too high and relying solely on ratios and numbers.
The trick is to find the right balance between intuition and quantification, between hard and soft skills. Having said that, it is also important not to confuse intuition with prejudice and pure emotion.
And nowhere is unadulterated greed and fear more dangerous than in the stock market. On the other hand, if it were not for the “pleasurable idea of potential future gain”, what possible reasons would we have for taking the risks associated with the stock market?
ORGANISATIONS ARE NOT GOING TO MAGICALLY DEVELOP MARKET-BEATING COMPETENCIES SIMPLY BECAUSE THEY’VE INVESTED IN HIGH-END ANALYTICS