The Market Mind Hypothesis, page 45
Source: Connected Wealth (via Valuewalk)
Figure 10.1: Theoretical market (static equilibrium).
In this first instance, the majority of investors are then occupying the middle of the scale (holding ‘rational’ expectations). A few occupy the left side of the scale (holding ‘irrational’ pessimistic expectations), and a similar few occupy the right side of the scale (holding ‘irrational’ optimistic expectations). The EMH argues that this is the ‘normal’ situation, where the two ‘irrational’ camps at both ends cancel each other out exactly, while the majority occupies the middle. A further consequence of assuming the normal distribution is that the mean represents the ‘average investor’. Market practitioners know that, instead, all it takes to tip the balance and create disequilibrium is for a few irrationals to move places (Figure 10.2):
Source: Connected Wealth (via Valuewalk)
Figure 10.2: Real world market (continuous disequilibrium).
In terms of duration, borrowing the famous (paraphrased) words of Keynes, “the market can remain irrational longer than you can remain solvent”.
More broadly, it also ignores the convincing evidence that the market is a complex adaptive system (e.g. Johnson, Jeffries and Hui, 2003) that achieves targets, i.e. efficient allocation of society’s resources, that are unachievable by aggregated individual efforts. This, of course, follows the more general reflections by Smith, Hayek and others on the ‘composite method’ of markets whereby exchanges between individual intentions lead to social, collective outcomes that were not part of (the design of) those individual intentions.
Emergence concerns the synergistic mental state of the market. Critics, in particular those from an intentional stance (like Huebner, 2014, p. 72), argue that market mentality is simply the aggregation (or summation) of the mentality of its individual participants. In other words, these critics state that there is nothing over and above, nor different from, the aggregated mentality, where we also take into account the average of such aggregation (again, based on the assumed normal distribution). We can respond to this, first, by looking at decision making. If we focus on rationality, it can be violated by two types of decision errors: occasional random errors from mistakes and systematic errors from heuristics and biases. Even though the EMH admits that individual investors are not always rational, it emphasises that the market, viewed as a composite agent, nevertheless is rational (e.g. Rubinstein, 2001; again reflected in Figure 10.1). In technical terms this is called minimally rational. It means, for example, that although prices are not set as if all investors are rational, there still are no abnormal profit opportunities for the investors that are rational. In fact, most investors would agree that the market is more rational than the average investor (‘but not me’), with academics arguing that the market, over time, is more rational than any individual investor (thereby advocating passive investing). So, both investors and (the EMH) academics point to a mathematical conundrum in answer to the aforementioned critics: if the market results from aggregation, how can it be more rational than the aggregated level of rationality of its agents? In popular parlance: how can the market know more than the average investor?
For the sake of argument, suppose we agree with the critics that aggregation is indeed applicable to the first type of error, in the sense that market rationality results from random errors being aggregated away. But this does not apply to systematic errors. Something else occurs that may push market rationality ‘above the aggregated average’. A neat set of experiments from ecology makes this case. Sasaki and Pratt (2011) analysed the behaviour of ants and their colonies. Whereas previous studies showed that distributed decision making can filter out random errors from individual irrationality via aggregation, their results highlight that collectivities can also suppress systematic errors if allowed so:
This contrast between group and individual reverses a traditional view that collectivities are prone to amplification of individual irrationality. Our results instead suggest that an appropriately structured collective can prevent irrationality by avoiding the overburdening of individual cognitive abilities … Other cases of irrational choice involve systematic preference changes that cannot be cancelled out by summing the choices of many independent decision makers. Collective choice can only limit these choices. (Sasaki and Pratt, 2011, p. 279; emphasis added)
What seems to be happening is that in the right collective setting, which we assume a market generally is, systematic errors are suppressed (compared to individual usage) because of competition between heuristics. It is discussed as Evolutionary Rationality (see Appendix 1-B4), whereby only beneficial heuristics and biases survive. To some extent this is in the spirit of Lucas’s critique of behavioural economics, in the sense that it questions the sustainability of systematic errors. Overall, it is another example where the forces of competition and cooperation combine into coordination. In particular, whereas trading is competitive from the bottom up, it creates a top-down synergistic cooperation for the market as a whole.
The final element of a defence against the critics on this point consists of the reality of market mood. And mood cannot be addressed via the intentional stance (as others have also argued). I will return to mood shortly on another point. This leaves aside general criticism of the intentional stance in explaining intentionality by other cognitive scientists such as Seager.
A second oversimplification, often exhibited in papers on agency-modelling which pretend to realistically simulate markets, are the assumptions regarding the ability to learn rational expectations and the computability of current and forecasted equilibrium prices. Lewis (1987), Spear (1989), and others showed the non-computability of fixed-point mappings that represent equilibria in markets. Specifically, Spear invoked Gödel to argue that unless agents have perfect information about the state of the world rational expectations equilibria cannot be learned. Related research has also shown, for example, that such markets cannot be both complete and consistent.
A third, and related, oversimplification is the assumption that intrinsic value is (algorithmically) computable and that the outcome (i.e. price level) is competitively determined by predictive strategies. In particular, passive strategies (which mechanically follow past price levels) are not considered differently from active ones. According to these arguments there is, by extension, no difference between a market involving only human traders and one involving only computers. However, the biggest flaw in mindless (e.g. agency-type) assessments of markets is ignoring the reflexive nature of price discovery, in particular the influence from experiencing price moves. To repeat the earlier quote from Soros: “markets are not supposed to have moods. Yet they do” (Soros, 2010a). As I mentioned, moods are not representations nor representational. This makes it hard to maintain that whatever market mentality is, it can be reduced to the computations of its agents.
Instead, a market mind is highly complex (see Chapter 6). Physically speaking, and per Algorithmic Information Theory, if complexity increases by the bit size of the underlying information processing, then the market is more complex than the individual brain because it involves multiple interacting brains. On that note—as argued, ironically, by both the EMH and its Austrian critics—the market performs calculations that exceed the capacity of any individual agents. More generally, according to mainstream complexity theory complexity results from simple components that interact. New properties emerge from this interaction, whereas properties owned by the individual components can be affected by such complexity. Deniers of market mentality seem to reverse the argument: humans have consciousness, a highly evolved adaptation, but this is not manifesting itself in a more complex system, like the market. However, they do not explain how it somehow disappears.
10.2
Meeting Conditions of Collective Consciousness
The previous rebuttal may still not satisfy every reader, so I will strengthen my arguments further.
First, we can apply folk psychology. To judge whether we consider some entity to be conscious, it is often useful to reflect on how we feel when it will be destroyed. Even if you are a panpsychist I doubt you object principally to a perfectly running car being turned to shrapnel, or your colleague smashing his computer out of frustration. But you may start to feel uncomfortable about your company doing a hostile, asset-stripping take-over of another company, or your government’s decision to attack a ‘rogue nation’. Now, think how you feel when you see Mr Market being poisoned by toxic instruments (CDOs), manipulated by price fixing (Libor), and becoming an addict to cheap credit (ZIRP) while being pushed around by nudges, repression, and other interferences. It should be clear by now that such mistreatment has real impacts that affect us.3
More formally, we can apply the framework provided by philosopher Kay Mathiesen (2005) to clarify further why and to what extent financial markets manifest collective consciousness. She defined three reasonable conditions that any account of collective consciousness needs to meet. It allows me to promote the market as a strong contender.
– Plurality: a collective consciousness “must be composed of a number of separate centres of consciousness, which are not directly accessible to each other” (Mathiesen, 2005, p. 237; emphasis added). In the market the multiple conscious subjects consist of investors. At the macro level all investors together make up the market. At lower levels of aggregation, investors form groups (or crowds, or herds), often identified by colourful terms like ‘bulls’, ‘bears’, ‘hedgehogs’, ‘sheep’ and, more recently, ‘WallStreetBets’. In both instances they do not have direct access to each other’s consciousness. Investors form each other’s (“indeterminate”) “Other” (Heidegger, 1927, p. 164) whose presence is ultimately felt via price dynamics, which is particularly relevant in an existential sense.
– Awareness: a collectivity that manifests consciousness “must have collective awareness and genuine intentionality” (Mathiesen, 2005, p. 240). In terms of the specific philosophical meaning of intentionality, the power of the market’s mind—its ‘aboutness’— is to represent an (expected) economic state of affairs. Explicitly, by way of securities that are valued and expressed in prices, the market mind is continuously occupied with such a state, which the constellation of prices discloses. (Changes in) prices reflect (changes in) awareness about that state. Earlier, Subchapter 7.2 connected prices (as abstractions) to awareness by freely interpreting Soros: “Awareness of change is associated with … the use of abstractions; lack of awareness involves the lack of abstractions”. In terms of goal-directed behaviour, collectively investors have the same intention, namely to grow wealth. Or, to put it more bluntly, to make money, i.e. to trade profitably. However, since every trade has a buyer and a seller, not all will achieve this goal (at least not viewed on a per-trade-per-term basis). Goals or wishes can also differ between groups, e.g. bulls (bears) want to see the price going up (down). In addition, investors invest in a variety of securities within and across markets, as well as over time. Securities are the shared objects of attention, whereby their relative price dynamics reflect the relative extent of awareness across these, and this can consequently differ.4 Still, and importantly, price moves are suggestive for the growth and decline in overall wealth as well as the overall broader intentionality of markets in terms of resource allocation,5 for instance whether there is a preference for gold over silver. In markets collective awareness and intentionality is thus reflected in prices which investors observe together, both historically and in real time. In brief, although no individual investor is completely knowledgeable about the underlying drivers, they are all aware of the (intentional) state of the market as reflected in these prices, whereby their numerical symbolism is their market mind representation. Of course, one important feature of representations is that they can misrepresent, e.g. symbolism can lead to excesses. Financial history is full of examples of these. There is also an implicit acknowledgement of superior knowledge at the market level as far as intentions for the system as a whole is concerned: “You know it’s an invisible hand, the market is always right, it’s a lifeform that has being in its own right. You know, in a sort of Gestalt sort of way (…) it has form and meaning … a greater being”. (Knorr Cetina, 2003, p. 12). Combined with violent moves from (non-representational) mood shifts, this can be awe inspiring. In their classic paper on awe, Keltner and Haidt highlight its extraordinariness via two appraisals: “perceived vastness, and a need for accommodation, defined as an inability to assimilate an experience into current mental structures” (Keltner and Haidt, 2003, p. 297).
– Collectivity: “In order for collective consciousness to be genuinely collective, it must be something that persons share and that ties them together” (Mathiesen, 2005, p. 241). This relates back to intersubjectivity. Investors share the market state, its complete mentality (expectations, emotions, etc.), as reflected in the constellation of its prices. This state is a composite state, different and independent from the mental state of any individual investor, although they can correlate depending on (the holdings in) the portfolio of the individual investor. The uniformity of feelings is strongest in cases of extreme price moves. For example, in March 2009 all investors shared in the move towards the symbolic 666, the “Devil’s Low”, in the S&P500 index. It indicated, among others, a deteriorating outlook for the US economy. Although the subjective feelings varied across investors, again depending on how their portfolios were made up, the overarching mood was one of extreme worry because of the potential implications of a complete collapse of the global financial system. I refer to my earlier comments in the Introduction on what this felt like.
Interestingly, on this last feature of collective consciousness, i.e. collectivity, Mathiesen refers to Edmund Husserl and wonders:
While Husserl does say that these social subjectivities arise out of the ‘intercommerce’ between the individuals, he does not describe exactly how the attitudes and activities of individuals mesh to form such personal unities. How do the separate individual subjectivities coalescence to produce a shared social subjectivity? (Mathiesen, 2005, p. 243; emphasis added)
In answering this question she overlooks the hint she herself gives in the quote above which leads us to the MMH (especially its Market Mind Principle): Husserl’s “intercommerce” is very appropriate in general because, as I have argued, complementary market forces underlie general collective mentality. In the case of markets as collective consciousness intercommerce consists of price discovery (i.e. Mathiesen’s “attitudes”) and trading (i.e. “activities”). It leads to the composite expression of individual mentalities, the “mesh” that forms Mr Market, the moniker investors give to Mathiesen’s “collective subject” (Mathiesen, 2005, p. 235). The reflexive phenomenality of this intersubjectivity is nicely captured in the earlier words of an anonymous investor:
You are part of the market, you notice every small shift, you notice when the market becomes insecure, you notice when it becomes nervous … All this (amounts to) a feeling. (Knorr Cetina and Bruegger, 2000, p. 153; emphasis added)
Reflexivity (which has already been discussed extensively) should be added as another criterion to this list. What I would like to emphasise here for this condition is that discovery is an important aspect of reflexivity. I mentioned this previously in the section on “society’s chain of discovery” and in Subchapter 3.3 on Predictive Processing. In short, and ceteris paribus, an entity manifests collective consciousness if there is some similarity to the individual mind’s discovery process in order for reflexivity to transition as discovery through the whole system. This, for example, makes the accompanying phenomenality (via intersubjectivity) go beyond pure supervenience. On the other hand, it seems to me that the explanation of causal inference, i.e. how a collectivity handles information about the likely causes of sensory signals without direct access to their source, has to be comparable to that of the individual mind. Again, the market meets this criterion based on its price discovery, whereby prices handle information without direct access to their fundamental sources while reflexively affecting those (as well as other prices).
Finally, at first sight there seem to be other candidates for accounts of collective consciousness. Perhaps some will argue that the internet in general and social media in particular form more convincing cases. However, compared to markets they miss a clear and objective expression of the qualities which make the “psycho”-part complete in terms of phenomenology. Albeit in varying shades of uniformity, those qualities are properties of shared experiences. They should particularly convey a shared meaning in the context of (economic) survival of the collective subject; felt qualities in an existential sense. This is crucial and the reason why I emphasised the message from the reality checks as lived experiences. The expression should also be in a format that is uniformly understood, ideally reflecting values which allow scaling of the shared mentality concerning the overall state of the collective subject, for example, from exuberance to despair. As said previously, such an expression should also indicate intentions, particularly in terms of a commitment to (as in ‘valuing’) a resource in order to survive under circumstances which mostly are constrained. So, whereas ‘tweets’ on Twitter and ‘likes’ on Facebook remain largely individual expressions of emotionally charged events, (‘I am afraid’), we are instead looking for a collective expression which genuinely captures the intersubjective intensity of a feeling (‘we are afraid’). It should not be limited to a predefined group but potentially involve the human race while stripped of as much individual subjectivity as possible. I hope I have made clear that financial markets by way of pricing do meet these requirements which make them unique.
