The Market Mind Hypothesis, page 11
Back to the human mind and Adam Smith, an appropriate and very important observation (especially regarding ‘emergence’) comes from evolutionary psychologists Tooby and Cosmides:
natural selection’s invisible hand created the structure of the human mind, and the interaction of these minds is what generates the invisible hand of economics. (1994, p. 328, emphasis added)
Both of these invisible hands are especially active via competition and cooperation which feature prominently in each field, whereby their balance is important.8 In economics, Knight emphasised “the essential fact” that “human beings have both conflicting and common interests” (Knight, 1943, p. 74). And Smith’s nuanced interpretation, which I discussed in the Economic Note in the Introduction, was later echoed by Alexis de Tocqueville when he spoke of “self-interest properly understood”. We can add synergy (a modern complexity argument) to it—particularly relevant in a market setting—through Coordination Dynamics, an influential cognitive theory for the MMH that will be introduced in Subchapter 3.2:
synergy refers to the combined effects that arise from interdependence among parts and processes in a given context that are not possible or achievable from those entities acting alone. A strong case can and has been made for functional synergies as the drivers for the evolution of cooperation in complex systems. (Kelso, 2022, p. 2)
In more popular terms, in all games there is dependency: you can’t compete if you don’t have a competitor, who is your “friendly enemy, the necessary adversary” in the words of Zen-master Alan Watts (delivered in a talk at the Esalen Institute in 1965). Think, for example, of martial arts (e.g. aikido) which teaches to ‘collaborate’ with your opponent’s action and force to enhance your own.
Regarding cooperation in markets, trade (frequently facilitated by providing credit) is an early form. It often preceded political alliances as it required and supported trust between strangers when managing scarce resources. Cooperation is not only embedded in norms and morals of groups, or broader cultures of nations, but also institutionalised in functions. Mises, by translating Ricardo’s law of comparative advantage into his law of association, argued that the division of labour turns initial economic competition into ultimate economic cooperation.
One way to think about the importance of balancing competition with cooperation9 is to consider their extremes in black-and-white terms. They have the same outcome but are achieved by different means. If there is only competition, as per Darwinian capitalism, the eventual outcome is a market monopoly through survival of the strongest. In contrast, if there is only cooperation, as per Marxist socialism, the eventual outcome is a state monopoly via central planning. Central banking is thereby a prominent feature, as stated in the fifth measure in the Communist Manifesto of 1848 by Marx and Engels: “Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly”. Both extremes are unsustainable and, as I’ll explain, they conflict with how mind~bodies work. The failure of mechanical economics shows that simply mixing some of the extremes, like new classical and Keynesian economics, does not result in the desired balance but, instead, produces incestuous market-state monopolies that become so powerful that they outgrow their home economy and expand abroad.
Echoing Tooby and Cosmides, it is in the cognitive domain that biology and economics connect. The self-organising nature of neurobiological systems10 has market dynamic characteristics. Like currencies, neurotransmitters signal values in their exchanges (‘exchange rates’) within the human body by binding to specific receptors on target cells and causing various effects, including activation or inhibition of the target cell, modulation of the signal strength, and adjustment of the sensitivity of the target cell to other stimuli. More broadly, competition and cooperation start in the human brain, be it between cortical regions, or between System 1 and System 2, or between intuition and logic.11 They and other market-like forces coordinate individual and collective human behaviour.12 Motivated by our curiosity, they drive the cultural, physiological, and psychological adaptations that lead to human progress. Even our sciences and their theories show market behaviour. Think of the many quantum physics theories that collaborate and compete, like the Copenhagen, Many-worlds, and Pilot-wave interpretations. We particularly value theories for their knowledge or epistemic utility (see Chapter 4).
In economic terms, progress more generally centres on value (e.g. wealth) creation which involves more than the hedonic principle of pleasure over pain. In terms of cultural adaptation, and to make sense of it beyond numbers, such economics is accompanied by ‘meaningful’ stories, for example concerning crops, harvests and seasons. When these are passed on from generation to generation these tales become myths. The metaphysical aspect of this, particularly the role of imagination, is nicely worded by Harari, which simultaneously points out its vulnerability:
We cooperate effectively with strangers because we believe in things like gods, nations, money and human rights. Yet none of these things exists outside the stories that people invent and tell one another. There are no gods in the universe, no nations, no money and no human rights—except in the common imagination of human beings. (Harari, 2014, p. 16)
Has the interaction between nature (our environment) and nurture (our development)13 intensified with any shift in balance? As part of our mind-over-matter drive there has been a strong tendency in human nature to control Mother Nature in order to increase wealth, albeit not always to the benefit of well-being. It is derived, for example, from the importance of environmental differences which enabled some civilisations to domesticate more efficiently.14 It is also apparent from current themes, like the impact of the economy on the environment or its impact on our climate. More relevant for the MMH, research by Ferguson (2008), Rubinstein (2006) and others plot specifically the history of money, finance and financial markets in supporting humanity’s explorations of our planet and its resources. Bernstein (1998), for example, describes an emerging financial world to manage the risks of real-world events in terms of their (potential) economic impact, culminating in the benefits of diversification and risk sharing.
For our purposes we can conclude that the psychophysical problem in economics originates in scarcity, desire and the accompanying uncertainty. I would further argue that, although nature determines the overall constraints, our survival in modern times primarily takes place in the economic ‘jungle’.15 It increasingly seems to revolve around economic themes with the perceived level of well-being closely correlated with the level of wealth. This was perhaps best captured by Bill Clinton’s famous 1992 campaign slogan: “It’s The Economy, Stupid”. Such economically driven survival—echoing Keynes—is ultimately played out in financial markets whose dominance has been growing. According to Bob Woodward in his 1994 book, The Agenda, at one point Clinton asked the rhetorical question: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of [expletive deleted] bond traders?” Later his campaign leader James Carville famously concluded that in case of reincarnation it is best “to come back as the bond market. You can intimidate everybody.”16
This trend was, at least until recently, fuelled by three forces: globalisation, marketisation, and financialisation. Globalisation is the integration process of a growing number of developing countries and their citizens into the global economy with financial markets providing the means to exchange capital. This trend not only takes place internationally but can also be observed within these countries via marketisation whereby public services like health care, education, and even the arts are being provided by private (competing) institutions and/or are managed according to market principles. Finally, financialisation refers to the creation—by way of securitisation and other financial engineering—of tradable securities linked to previously illiquid assets such as property (e.g. mortgage-backed securities), events (e.g. weather options), pollution (e.g. emission rights), art (e.g. Bowie-bonds) and cloud services (e.g. Performance Units). These instruments, including derivatives, allow buyers and sellers to hedge or gain exposure to such assets and thus subscribe to their risk~return profiles.17
To conclude, minds and markets co-evolved. This contributed to modern Western civilization in the form of elected government, individual freedom, enlightenment and religious tolerance, which allowed humanity to, often spontaneously, deal with many of nature’s challenges while better protecting itself from its own shortcomings. Key to that organisation is the financial system, which is now at the heart of modern society, whether we like it or not. In fact, it can make or break it. However, as Chapter 2 will discuss economics is not an impartial spectator to use Smith’s term. While the GFC brought us very close to financial Armageddon,18 the CVC has resulted in a different kind of economic dystopia. Quite simply, as R.E.M sang, we came close to “the end of the world as we know it” (Berry et al., 1987). More than anything, these events and their lingering consequences have highlighted gaps in our understanding of financial markets. The urge to search for new economic thinking and acting remains to this day.19 One area of that gap concerns the collective dimension of mentality, which I’ll discuss next.
1.2
Merging Minds and Markets: Group Minds, Collective Intentionality, and Intersubjectivity
So, the evolution of minds gradually involved markets. Those for interest rates have existed for thousands of years, whereas those for stocks are more recent. Founded in 1602 by the Dutch East India Company, the Amsterdam Stock Exchange (now known as Euronext Amsterdam) is the world’s oldest stock exchange. Figure 1.1 shows a graph combining Dutch interest rates and Dutch stock prices over the past five hundred years.
Source: De financiële canon van Nederland, Martien van Winden (2010; Founder Dutch Investment Fund Hoofbosch).
Figure 1.1: History of Dutch interest rates and stock prices.
Earlier I mentioned that investors and other market observers regularly, albeit casually or implicitly, refer to ‘the market’s mind’. Here I’ll offer and reiterate some examples:
It is mentioned by old-school ‘Roaring Twenties’ traders like Humphrey Neill (1931, p. 222), a contemporary of Jesse Livermore.
Other investors have echoed it since, including Howard Marks (2011, p. 76).
In the academic literature there are numerous papers: Bruguier, Quartz, & Bossaerts (2010), De Martino, et al. (2013), Thirkell-White (2007) which mention it in one form or another. Beinhocker (2007, p. 38) reminds us that “Arrow and Debreu showed that prices act like a nervous system, transmitting signals about supply and demand throughout the economy”.20
Michael Shermer (2008) titled his bestselling book The Mind of the Market, arguing that the market is “like a collective organism” with a “mind of its own”.
I already mentioned George Soros (1987) who subtitled his first book, The Alchemy of Finance, as “Reading the Mind of the Market”. What was not understood until recently, neither by Soros nor other commentators, is that reflexivity implicitly raises the issue of the market’s mind~body problem. We explained this crucial message, in the process reverse-engineering reflexivity, in a paper (Schotanus et al, 2020). In cognitive science terms, reflexivity can be compared to continuous reciprocal causation, whereby “some system S is both continuously affecting and simultaneously being affected by activity in some other system O” (Clark, 2008, p. 24).
Mark Douglas connects the market mind to mindfulness. He writes about “trading in the zone”, whereby: “your mind and the market are in sync. As a result, you sense what the market is about to do as if there is no separation between yourself and the collective consciousness of everyone else participating in the market. The zone is a mental space where you are doing more than just reading the collective mind, you are also in complete harmony with it” (Douglas, 2000, p. 90; emphasis added). As an aside, this echoes “flow” experiences of other peak performers, like artists and athletes. In 2020 Lewis Hamilton won the Spanish Grand Prix and described his experience: “It was like a clear zone. The clarity I had when I was driving, I am sure I’ve had it before but I don’t really know how really to get into that zone … I wouldn’t describe it the same way as Ayrton [Senna] would. It’s not an out-of-body experience. Just in my highest form, I would say”.
In similar vein, numerous articles (e.g. Knorr Cetina and Bruegger, 2000) and books (e.g. Koppel, 1998; Schwager, 1995; Zaloom, 2006) contain interviews with traders, describing their experiences with the market. These materials invite the reader “to see the market and trading as they really are—alive, dynamic, robust, and not to be dissected and analysed like a corpse lying on a slab … Trading has less to do with the science of computation and more to do with … consciousness” (Koppel, 1998, p. xiii; emphasis added).
Sornette then hammers it home: “The global behavior of the market … is reminiscent of … the emergence of consciousness” (2003, p. 241).
On the other hand, Charles Smith went out in search of the market mind, but “after a fairly lengthy journey we seem to have finally found this mind in what can only be called the ‘mindless’ quality of the market as a whole” (Smith, 1981, p. 142).
In addition, expositions on public psychology (e.g. Akerlof and Shiller, 2009), the wisdom of crowds (e.g. Surowiecki, 2004) as well as their madness (e.g. Mackay, 1841) highlight the collective mental forces that are intrinsic to the way market dynamics work. Apart from these references the premise of the market’s mind is implied in any discussion on whether the market is rational or not (e.g. Rubinstein, 2001), let alone whether Mr Market suffers from bipolar disorder (e.g. Cheung, 2010). However, none of them formalise the market mind, including its conscious quality, by way of 4E cognitive science. This is what sets the MMH and this book apart.
Conceptually, the market mind links to ideas like McDougall’s (1927) “group or hive mind”; Russell’s (1982) “global brain”; Muthukrishna and Henrich’s (2016) “collective brain” and Mulgan’s (2018) “crowd intelligence”. A popular example of those ideas suggests the internet, connecting human minds via applications, forms a global brain, with Wikipedia and social media reflecting collective knowledge. The general idea of a collective mind is thousands of years old. From ancient times it was told in both Eastern and Western traditions, sometimes in the form of myths and fairy tales. More formally, various theoreticians, including Locke, Hobbes, and Smith have argued (implicitly or explicitly) that cognition in general has a group or collective dimension. Among others, Bergson, Deleuze, Durkheim, Husserl, Latour, Merleau-Ponty, Nietzsche, Plato, and Teilhard de Chardin, while representing different viewpoints, discussed the collective aspect of mind and consciousness, like identity and intersubjectivity. Le Bon and Jung pointed to its unconscious origin.21 Groups in markets include ‘bulls, ‘bears’, ‘contrarians’, and ‘hedgies’, but also ‘asset owners’, ‘buy-siders’, ‘sell-siders’, ‘quants’, and ‘traders’. Investors generally identify with these groups which all mix and submerge in various markets. They, in turn, form groups themselves, like ‘bond markets’, ‘commodity markets’, and ‘equity markets’, all supported by the ‘foreign exchange (or FX) markets’ and overlayed by the ‘derivatives markets’. As we’ll see, group identity and mentality has also implications for the notion of ‘self’, especially when market moods overwhelm.
Contemporary cognitive scientists have followed up with similar and updated arguments. Among them are Bettencourt, (2009); Donald, (2001); Gilbert, (1989); Hut and Shepard, (1996); Manzotti, (2017); Mathiesen, (2005); Kirchhoff and Kiverstein, (2019); Overgaard and Salice, (2019); Pacherie, (2017); Pettit, (2018); Randrup, (1999); Robinson, (2013); Rupert, (2011); Schwitzgebel, (2015); Stuart, (2011); Valencia and Froese, (2020); and Vold, (2015).22 The argument that applies most to the MMH runs roughly as follows:
The position we defend here is that the mind has no fixed boundary. The locus of conscious experience can smoothly shift from on occasions being inside of the head of the individual to on other occasions forming out of a nexus of interactions between brain, body, and environment. (Kirchhoff and Kiverstein, 2019, p. 1)
When that environment includes other people, the resultant conscious experience depends on the states of more than one embodied agent, and in this sense becomes shared, that is intersubjective: “The intersubjective is something that exists within the communication network [e.g. the market] linking the subjective consciousness of many individuals” (Harari, 2014, p. 117; emphasis added). Knight believed that this reigned supreme: “communication between consciousnesses is the fundamental fact of knowledge and the nearest we can ever get to an “ultimate” in human experience” (1925a, p. 381). Specifically, neural synchronisation is involved, whereby:
