The Market Mind Hypothesis, page 20
Economic Note Déjà vu Day Traders
In the spirit of ‘market history rhymes’, the recent years offered plenty of déjà vu moments for (researchers of) internet-bubble day-traders. Let me give a few examples.
First, the internet’s discount brokers have now been superseded by commission-free brokers, like Robinhood, whose apps allow (too?) easy trading.
Second, today’s version of the trader bulletin and message boards of the internet bubble are the popular trading forums on social media. The most famous of which is Wallstreetbets on Reddit. It mobilises hordes of retail traders whose combined buying resulted in sudden price spikes in stocks of struggling companies like GameStop and Nokia in January 2021 and Bed Bath & Beyond in September 2022. These so-called short squeezes caused major problems for numerous hedge funds who had been anticipating that their prices would drop and thus found themselves on the wrong side of those trades. It eventually resulted, among others, in the dubious decision by the commission-free brokers to block most trading in some of these names, leading to outrage among its users and queries from regulators. (See also Clunie and Schotanus, 2022).
Earlier I shared my criticism on their HFT-connections which reveals where the incentives of these brokers lie. I am sceptical, in the broader scheme of things, that this sudden activism by retail investors will result in a true and beneficial counter movement. It unfortunately has many elements of the market manipulation (including that of its rules and regulations) MMH deplores. On the one hand the ‘smart money’ leaders of the retail mobs need to recruit new traders as useful ‘greater’ fools to pump up prices to achieve short squeezes. On the other hand, the institutional establishment and their lobbied politicians become suddenly and selectively worried about such third-party manipulation, preferring their own. Instead, to truly democratise investing we need to get individual investors actively involved via education to help bring about a renewal of the economic system that is sustainable.
A final déjà vu is from the similar easy money-making attitude of modern day-traders, albeit this time funded by the central bank-treasury tandems. A Wall Street Journal article quoted an unemployed 22-year-old woman who had put a portion of her stimulus check into her trading account at Robinhood. Her motivation? “It was basically free money, so, you know, I decided to play around with it … You might lose some, you might win some. It’s like a gambling game”. It further turned out that she had doubled her money trading stocks so she decided to graduate to options trading because “you can make a pretty good amount of money in one day” (Zuckerman, Frankl-Duval, 2020). Thank you, men-of-system.
2.4.1.4 Conclusion
The foregoing leads to the stylised fact that the market is conscious because its human participants are conscious. Their consciousness is not cut-off and does not suddenly disappear once they participate. On the contrary, using technology it extends in its full richness by way of their bottom-up exchanges, i.e. by trading. Trading results in prices through which, from the market’s perspective, information is not simply “communicated” (as per Hayek, 1945, p. 523), but rather “realised both physically and phenomenally” (following Chalmers, 1996, p. 284). It is this specific emerging dynamic of price discovery that leads to market consciousness, including its ‘complexity’ ability to self-organise, which reaches over and above and differs from any individual consciousness. Anyone denying this stylised fact not only denies the phenomenon of market mood and its influence. That person also needs to explain how consciousness somehow ceases, sometime, somewhere, at some boundary in the market.55
According to this proposition, prices are thus set “as if” investors are conscious,56 rather than (per the EMH) “as if” they are rational (e.g., Rubinstein, 2001, p. 15). This adjustment allows the MMH to escape the complications (raised by Lucas and others) when diluting rationality. The anomalies highlighted by behavioural economics become ‘normal’ or, stated differently again, a rational market is a special case, or state, of a conscious market. In terms of discounting for example, I’d like to freely interpret Jean Piaget’s view of a (developing) mind: the more we must adapt to new information, the more conscious of it we have to be. Such awareness also relates to the EMH’s requirement of complete knowledge and the “thinking slow” strategy of behavioural economics. In market terms, as more real-world news arrives, prices adjust more extensively, reflecting deeper conscious involvement by the market’s mind. In other words, ‘the market wakes up to the fact that …’.57 That realisation can, in turn, spawn emotional or rational responses. At the same time market information is signalled back to the broader economic system, e.g. regarding funding conditions. This reflexive loop between, roughly, internal (psycho) and external (physical) information results in their dual (psychophysical) realisation and basically establishes the overall awareness of the economic system as a whole.
The MMH submits that a ‘state of the market’ ultimately includes a collective mentality. In particular, prices are conduits for market states which are not static but have internal dynamics. Certain characteristics of a market state concern physical processes, like transfers, flows, and production, involving physical parts, like buildings, machines and products. Others concern cognitive processes like decision-making, discounting, and utility maximisation. Although these processes can be analysed, they do not describe the full market state. There is something in addition, namely the lived experience: what it is like to be in that state as (part of) a collectivity. In cognitive terms, we can distinguish between a global and a local state of market consciousness. A global state reflects a market’s overall awareness and responsiveness, often combined with a level of (physical) action via trading, i.e. liquidity. In general, during bubbles the market can be ‘drunk’ or be ‘dreaming’ and not aware of dangers, whereas it can become totally unresponsive at the depth of a crash. In comparison, local states concern particular conscious contents with distinct qualities, like emotions, perceptions, or thoughts. Often these are also ‘local’ partition wise, for example because they only affect part of the market crowd (bears or bulls) or because they are related to specific securities, companies or sectors. A recent specific example is the market in 10-year Japanese government bonds where no trading took place for a record three days (mainly due to the fact that there is only one dominant idd-mind, the BOJ, active).
As mentioned in Appendix 1-A, cognitive science makes a distinction between access consciousness and phenomenal consciousness. Market mood falls into the latter category: the sensation investors collectively experience in a qualitative sense, like despair in a market crash or exuberance in a bubble. Although a complete perception of the market’s state escapes them, a certain feeling for it seems to agree with how investors actually experience it. Knorr Cetina and Bruegger call it “intersubjectivity with the market”, and quote an anonymous trader:
All this (amounts to a) feeling (for the market) … When someone feels the market, then they can anticipate (it) and can act accordingly. When you are away from the market, and you lack this feeling (for it), then it’s incredibly difficult to find it again. (Knorr Cetina and Bruegger, 2000, p. 153).58
This is one level of complementarity which applies to the market. Its quantitative processes are accompanied by a qualitative experience, a feeling shared among participating investors, albeit at varying degrees of strength and uniformity. It means that information, embedded primarily in prices, feels like ‘something’ for participants in markets. Prices make an impression, over and above any rational signalling.
Earlier I mentioned the history of the idea of group minds and collective mentality. A group mind involves various socio-cognitive concepts, in particular active externalism, collective intentionality, distributed/extended/integrated cognition, mirror neurons, social ontology, and Theory of Mind. They point to the collective-social dimension of reciprocal exchanges between conscious subjects where human complexity emerges, supported by technological tools that connect and extend their minds. The most interesting aspect of that emerging complexity is the synergy which the exchanges spawn. It’s that famous whole which not only exceeds to sum of the individual parts but also exceeds the individual capacity of those individual parts to create it themselves. Moreover, it leads to self-organisation in the form of patterns which coordinate (e.g. via constraints, feedback) the individual components of those patterns (e.g. via connections, interrelationships). Again, researchers in the economic sciences have hinted at these phenomena (see Section 1.2), whereby it should be clear that the market’s main emerging complex property is price discovery with its self-organisation reflected in price patterns. It culminates in Sornette’s now familiar answer to McDougall, namely that this is reminiscent of the emergence of collective consciousness.
There are many aspects to this phenomenon. Bruguier, Quartz and Bossaerts. (2010) argue that Theory of Mind (ToM), interpreted as the ability to infer information from prices (while being involved in setting those themselves) can explain the increased awareness of traders to the presence of insiders. Specifically, ToM can identify malicious from benevolent intent. This leads to an important distinction between two awareness dimensions at the foundation of price discovery. They each produce an elusive aspect to any trade, which often occurs between strangers, emphasising the uncertainty in, and thus symbolism of, prices:
Time: a biased past is linked with an unknowable future via a fleeting present (see also comments on intrinsic time in Appendix 1-C2).
Trust: the disagreement on value is only resolved via the exchange of intrinsically worthless money, leaving an agreement on costs.
Separation plays up again. A trade combines cooperation (agreement) on the one hand and competition (disagreement) on the other. Similarly, it is the imbalance between demand (i.e. buyers) and supply (i.e. sellers) that ultimately make prices trend, reverse, or show other patterns which over time reflect the outcomes of capital allocation. Contrary to other group collaborations, this process is spontaneous, under normal circumstances, without the need for any explicit goal seek. Price discovery via trading (which, by definition, requires more than one individual) spawns the ‘intelligent behaviour’ as suggested in reflections by Smith, Hayek, V. Smith, Sornette, and many others.
In conclusion, the MMH describes and explains the mind~matter dynamics that underlie the economic system. It emphasises the conscious nature of discovery, mood, and other mentalities that perceive and shape economic reality. In contrast to physicalism’s causal closure, and beyond standard reflexivity, market consciousness is self-referential: A implies A, with prices as the consensus of the value in the “I’s” of the beholders. It makes the MMH’s interpretation of cognitive economics a form of second-order behavioural economics with emphasis on meta-level agency.59
2.4.2
The Market’s Body
Although the focus of this chapter, and in fact the book, is on the market’s mind, I would like to address the matter of the market’s body briefly here (accepting the risk that it may raise more questions than it answers). This is thus primarily about embodiment, the first E of the 4Es. Specifically, it concerns so-called constitutive conductors (i.e. the physical basis) of investors’ conscious experiences in the market mind. Besides their own bodies these can include—due to extension—external components that form part of, what I call, the market’s body and function as mediators to facilitate investing.
Apart from the role of securities as the market mind’s ‘neurons’, I also mentioned earlier the physical properties of a market state. They consist, first, of the institutions that facilitate and regulate trading. ‘Institutions’ is a term that refers both to the customs, laws, and rules themselves and to the agencies that design, implement, and enforce them. This includes, for example, physical and virtual exchanges as well as banks, mutual funds and other financial institutions. When we talk about a market seizing up, for example, it can include instances of so-called fund gating where open-ended mutual funds suspend redemptions when investors scramble for the exit. The embodiment of the market, within the larger environment of the overall economic system (including the real economy), also includes the gamut of electronic equipment, from computers to telephones, which form the networks of information and communication that facilitate trade in today’s markets. It further involves tangible processes like the aforementioned order routing, custody, clearing and settlement which have physical properties. And last, but not least, it consists of the human bodies which physically handle activities involved in trading, including pushing keys on a keyboard, shaking hands, signing contracts and so on.
Combining mind and body, it is not a stretch to suggest that the market can be perceived like an animated entity. Jim Grant, publisher of the eponymous Grant’s Interest Rate Observer, stated that “[The market is] a living economic organism with proven powers of monetary adaptation”. Many market participants have expressed this along similar lines (see earlier quotes in 1.2). Knorr Cetina concluded earlier that markets are “epistemic things”, adding that they are built around flow architecture with computer screens as the centrepieces:
the terminals deliver much more than just windows to physically distant counterparties. In fact, they deliver the reality of financial markets—the referential whole to which “being in the market” refers, the ground on which [participants] step as they make their moves, the world which they literally share through their shared technologies and systems … [They] visually “collect” and present the market to all participants … the screen is a building site on which a whole economic and epistemological world is erected. It is not simply a “medium” for the transmission of pre-reflexive interactions. (Knorr Cetina, 2003, pp. 11 and 13; emphasis added)
The chat and messaging functionalities of the terminals are important for such interactions. However, those screens display, first and foremost, prices. So screens form part of the physical scaffolding that facilitates prices to act as the psychophysical building blocks of the bridge that connects the real and imagined worlds: via their dual realisation as prices-as-information.
I have devised a framework (see below) to consider this from Capra’s work (1996).60 It lists key criteria for any complex “living” system and has been adjusted by me to apply specifically to the economic system. It should be viewed in conjunction with the 4E-framework of the market mind (2.4.1.1).
Purpose of existence: the principles which lead to the market’s self-organisation.
Survival under conditions of scarcity, while confronting uncertainty.61
Competition and cooperation lead to coordinated behaviour via: Allocation of scarce physical resources (quantitative): survival and growth via evaluation and exchange of assets etc. Transfers are facilitated monetarily. Uncertainty is quantified (as risk), i.e. expressed mechanically thereby aligning it with explicit, analytical knowledge, e.g. numerical models.
Allocation of scarce mental resources (qualitative): survival and growth via evaluation and exchange of emotions etc. Transfers are facilitated neuronally.62 Uncertainty is qualified, i.e. expressed symbolically thereby aligning it with implicate, experiential knowledge, e.g. numbers, narratives.
Principles of portfolio management can be applied to both (i.e. portfolioism). Prices fill the numerical space of discovery bridging these domains, where meaning in the market’s mind transcends individual consciousness, e.g. price ≠ value.
Pattern of organisation: the configuration of relationships that determines the market’s essential characteristics.
Organisational closure achieved through communications. Interpersonal or collective communication is embodied in post-social relationships (Knorr Cetina and Bruegger, 2000). Communication takes place via the exchange of external information (e.g. analyst reports, company announcements, government statistics, contracts), or the exchange of internal information via the security exchanges (e.g. quotes, volume, order flow).
Intra- or transpersonal communication is embodied in the relationship with oneself and with the market.63 Communication takes place via exchanges based on explicit knowledge (S2; analysis, quantitative research), tacit knowledge (S1; intuition, qualitative research64) and experiential knowledge (S3; skin-in-the-game participation).
Pattern emerges, among others, from (often simple) principles which frame the relationships.65
Structure: the physical embodiment of the market’s pattern of organisation.
Cohesion through a shared platform. The real economy of networks to produce and exchange physical goods and services which include, for example, transport links and pipelines. Tools to build, expand, and maintain the networks include buildings, trucks and pumps.
The marketplace of flow architecture to produce and exchange securities which include, for example, exchanges and trading floors. Tools to build, expand, and maintain the structure include telecommunication equipment, computers, and their screens.
The collective of human bodies, i.e. buyers and sellers, to compete and cooperate. Tools to build, expand, and maintain this collective include shared bodily and neuronal adaptations, for example mirror neurons and number sense,66 but also adaptations that support empathy and ToM.
Process: the activity involved in the continual embodiment of the market’s pattern of organisation.
Price discovery (mental activity) and trading (physical activity). The market’s ‘life’ process consists of price discovery and trading, a reflexive process that organises the market and gives rise to its cognition. In complex psychology terms, it is a ritual through which the collective investor community interprets—by way of stories—and interacts with the symbols of the market (i.e. prices), thereby reinforcing its values.
