The Market Mind Hypothesis, page 5
Let’s reflect on this for a moment and explain how the MMH views this, starting with the distinction between the subjective internal world and the objective external world which can be bridged via intersubjective sharing of understanding. Beliefs, hypotheses, ideas, and thoughts are examples of mental constructs. Initially, they originate in the interior of an individual mind which makes them subjective. The external world consists mostly of items, including physical objects, that are actual, factual, or real, meaning that they exist regardless of any subjective mental consideration.10 In other words, you don’t need to think of Big Ben in London for it to exist and be real. On the other hand, we know of objects (like the Higgs boson particle) that were first revealed mentally, say in theories, before we could prove their existence empirically. As we will discuss, by way of creativity, discovery, and imagination you can gain an insight into these worlds. It is novel and (we assume) has never before been mentally constructed. Such insights or ideas are metaphysically causal in that they could offer future possibilities, suggesting changed states of the world. That means they have real (economic) utility.
For example, think of a formula that you discover purely from a thought experiment, like Einstein used to do. You can then communicate and share it with other minds, making it intersubjective, including the shared feeling of excitement for a potential breakthrough. Once confirmed or proven—which usually follows the interim sharing with others—your formula is acknowledged to be real and objective in the sense that it becomes an item no longer dependent of your subjective mental construction. It can subsequently lead, for example, to new knowledge and mentally cause “changes in the realm of tangible and material things” (see Mises’s earlier quote). Eventually such ideas can move into the economy, as innovations, and have an impact. Viewed then as—what I’ll call the weak form of—mental causation, economics is about “controlling nature and bending natural forces and materials to the will of man” (Knight, 1925a, p. 373).
Karl Popper, in his paper on the mind~body problem, explained mental causation more generally as follows:
There is no reason (except a mistaken physical determinism) why mental states and physical states should not interact … If we act through being influenced by the grasp of an abstract relationship, we initiate physical causal chains which have no sufficient physical causal antecedents. We are then ‘first movers’, or creators of a physical ‘causal chain’. (1953, para. 6.3–6.4; emphasis added)11
Here we get a bit into the nitty-gritty of cognitive science. It is acknowledged, for example, that will power contributes to reshaping the brain—thanks to its neuroplasticity—and that psychological stress can impact physical health (studied via psychoneuroimmunology). However, mental or downward causality remains a complex and contentious topic (e.g. Batthyány, 2009; Crane, 1991; Heil and Mele, 1993; Kim, 2005; Velmans, 2002). Specifically, the terms “causality” and “causation” are considered as slightly misleading. Some completely dismiss it by pointing to the principle of physical causal closure. Others prefer to think of it as efficacy, impact, or influence, thereby affecting conditions.12 In short, casually assuming or stating mental causation often underestimates the complications involved, like those concerning free will, which require cognitive explanations. In other words, if we take Akerlof and Shiller’s conclusion seriously—and I think we should—then we need the help of cognitive science to formalise this.
Besides the crises offering empirical inspirations, there are numerous more theoretically based inspirations for the MMH. Produced by brilliant minds across multiple disciplines they include books, experiments, lectures, papers, and other materials which are referenced throughout this book. Here I’ll give a few examples that stand out. I already mentioned Adam Smith and his TMS~WN tandem. The work of Willis Harman features prominently, particularly his book Global Mind Change. So does George Soros’s bestseller which he subtitled “Reading the Mind of the Market”. Frank Knight’s (largely forgotten) 1925 papers are outstanding in highlighting the relevance of consciousness and pinpointing it as economics’ blind spot, especially considering he wrote them four years after his famous work on the distinction between risk and uncertainty. As I’ll discuss, beyond our uncertainty due to the mind~body problem, uncertainty is a fundamental feature of the world that we should welcome.13 Knight also discusses metaphysics, as do Georg Simmel (in Philosophy of Money, 1907), Frederick Soddy (with his Cartesian Economics, 1921), and Deirdre McCloskey (The Rhetoric of Economics, 1983). They are among the few mavericks who dared to explore it for economics. Simmel also offers an early cue for how economics of the mind (i.e. mind-as-market) extends to markets:
This subjective process of [investment] and gain in the individual mind is in no way secondary to, or imitated from, exchange between individuals; on the contrary, the interchange between [investment] and [return] within the individual is the basic presupposition and, as it were, the essential substance of exchange between two people. (Simmel, 1907, p. 81; emphasis added)
The Sensory Order (1952), Hayek’s remarkable book on the human mind, is another important source for the MMH as it includes his interpretation of the mind~body problem. Throughout his career Hayek primarily focussed on some of the collective aspects associated with this problem: how minds relate to society and distribute its knowledge through markets. Combining his cognitive and economic knowledge Hayek would later specifically acknowledge the similarities between mind and market, particularly in terms of complexity. For example, in terms of mind-as-market Hayek compared neuronal dynamics to “a stock of capital being nourished by inputs and giving a continuous stream of outputs”. Neuroscientist Gerald Edelman favourably judged Hayek’s Sensory Order. Edelman’s own Theory of Neuronal Group Selection is about neurons competing and otherwise acting out as if in a market setting. Sympathy with this view of mind-as-market is also (implicitly) expressed in comments by researchers like George Ainslie, Jeremy Bentham, Andy Clark, Jerry Fodor, Paul Glimcher, Joseph LeDoux, Scott Kelso, and Edmund Rolls. For example, Clark states that a key task of the mind is “guessing the next states of its own neural economy”. This will be discussed in more detail and in various ways, including the mind~body as a portfolio (called the M~B Portfolio; see Appendix 1-A).
Talking about Clark, in 1998 he and David Chalmers published a seminal paper called “The Extended Mind”. It added the fourth E to what is now known as 4E cognition, the interdisciplinary field that considers the mind to be embodied, embedded, enactive, and extended (see Appendix 1-A). It offers the MMH scientific backing in general and useful insights in particular. For example, when Clark and Chalmers talk about a “coupled system” (1998, p. 34), the MMH translates this as the investor and his (Bloomberg, FactSet, or Refinitiv) terminal which “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” (Knorr Cetina, 2003, p. 11. For full quote, see Subchapter 2.4.2).
The MMH pushes beyond these reflections and makes the strikingly common dynamics between minds and markets explicit. Although this book, first and foremost, focusses on firming up investors’ parsimonious idea of “the market’s mind”, the underlying Market Mind Principle (and related premise) is more universal and makes it intuitive for both economic and cognitive experts. It also means that various economic concepts can be practically applied to minds, while cognitive concepts can be applied to markets.
Some investment readers may be thinking that these theories are too abstract. And, yes, I warn upfront that this book will not propose easily actionable ‘trading ideas’. Nevertheless, it does offer suggestions on how to complement existing investment research to better understand market dynamics in the long term. For that purpose, the MMH takes us deep into the rabbit hole of cognitive economics, a wonderland full of complex psychophysical issues offering an alternative—but more realistic—worldview. In particular we will explore the twilight zone of mind~matter interaction, at the edges of their supposed separation, which spawns that complexity. As the crises have shown, this sometimes leads to crashes as the imbalances between our material (real) and mental (imagined) domains become unsustainable.
There is some urgency in that regard. To borrow the words in a tweet (3 May 2021) from neuroscientist David Eagleman, “our brains can’t un-experience” these crises. In other words, they have lingering effects.14 And unless we start revising economics’ paradigm they will be repeated in much more serious forms. So, in honour of The Matrix’s Morpheus, here is my red pill (you’ll understand later).
Introduction: Opening a Can of Worms from Pandora’s Box
The task is not so much to see what no one has yet seen, but to think what nobody has yet thought, about that which everybody sees. Arthur Schopenhauer
So, let me lay out my stall by opening a can of worms from Pandora’s Box. To get straight to the point, the key issues were already grasped by Knight, almost a century ago:
Now the issue, as is plain, relates to the treatment of “consciousness” in human beings … The “existence” of consciousness would be left on one side as a metaphysical question, in the case of human beings as in that of the rest of nature. The pertinent fact for economics (and for applied psychology in general, of course) would be that it is useless and a source of confusion in study, destructive of the scientific point of view which is the only fruitful approach to the data. In opposition to this view I propose … that we cannot treat human beings as … mechanisms, and that we do not want to do so even if it were possible. We necessarily approach the phenomena of conduct from a different direction, and bring to them a different dominant interest, as compared with the phenomena of nature outside the human realm … (Knight, 1925b, p. 248). There is nothing to it but to come back to common sense, and the practical necessities of our situation. That is, we come back to dualism … (Knight, 1925b, p. 265).
Although at the time Knight was particularly criticising (pre-Skinner) behaviourism, his arguments remain relevant, especially regarding consciousness as the determining factor and (aspect) dualism as a practical metaphysical worldview.
What follows in this Introduction will be further explained and explored in the remainder of this book. Appendix 1 is extensive and requires two specific comments. First, it consists of three sub-appendices (A, B, and C) which cover and introduce, respectively, cognitive science, economics, and cognitive economics. As the book attempts not only to (initially) appeal to the cognitive and economic communities (including practitioners), but also subsequently to bring these communities together (for instance via collaborations), these sub-appendices are crucial. Specifically, they explain concepts and terminology in the various fields, as well as the particular interpretations made by the Market Mind Hypothesis (MMH). So, not including the sub-appendices would have made understanding the book harder for many readers, whereas integrating them in the main text would distract from the major points and make it less fluent. An unfortunate consequence is that there is some overlap between Appendix 1 and the main text. In addition, because of its heterodoxy, I expect this book to attract much criticism, and I’ll return to that in the final chapter.
The MMH is a standard-bearer for and specific ‘post-cognitivist’ interpretation of cognitive economics. Cognitive economics is an emerging heterodox theory that challenges mainstream economics (Schotanus, 2022). Consequently, there is not an agreed definition yet (just like there was no such definition for behavioural economics when it started to emerge). Instead, this is a good description of MMH’s interpretation: cognitive economics partners cognitive science with economics, each offering complementary explanations to the other. Cognitive science teaches economics about mentality (present in markets, e.g. herd mentality), whereas economics teaches cognitive science about market forces (present in minds, e.g. your unconscious “System 1” competing with your deliberate “System 2”). Combining these helps to understand the similarities between markets and minds. It culminates in the two-way Market Mind premise: market-as-mind (which roughly can be related to the macrofoundations of economics), and mind-as-market (which roughly can be related to the microfoundations of economics). Its shared underlying Market Mind Principle is intelligent (and sometimes conscious) self-organisation via ‘market’ dynamics, centred on exchange, which augment and support discovery (mainly of values) and invention (mainly of tools). To emphasise: such self-organisation occurs in both markets and minds. Let me explain some terminology.
Exchange is a flexible and widely applicable term that covers interaction, interchange, trade, transaction, and transfer. Importantly, it implies dynamism and duration. I prefer this term in most instances for various reasons which go beyond only economics:
Exchange is the purest and most developed kind of interaction, which shapes human life when it seeks to acquire substance and content. It is often overlooked how much what appears at first a one-sided activity is actually based upon reciprocity … Every interaction has to be regarded as an exchange. (Simmel, 1907, p. 79)
First, an exchange results in a ratio reflecting the respective amounts of the two items being exchanged. In modern markets this is called a price which reflects the amount of fiat currency paid in exchange for a good, service, or security. In financial markets in particular, the buyer and seller agree on price but they disagree on value. Second, while reciprocity applies in principle, an exchange can start one-way when the giver (initially) only receives ‘gratitude’ in return for a gift or when any reciprocal transfer is postponed ‘on credit’. In the extreme think, for example, of how we live on ‘borrowed time’ and eventually exchange Mother Nature’s gift of life with returning to dust after death. Third, exchange is at the origin of any human creation and connection, including relationships. The earliest connections among our ancestors—before any trade could take place, let alone any relationship could be built—was by way of the exchange of looks between two strangers to assess whether to approach or avoid. If a man and a woman liked what they saw, it was followed by exchanging fluids which created their baby. In turn, this baby’s first relationship started via (biochemical) exchanges with its mother. We can further enrich this view with related economic concepts and terms when we realise, for example, that while exchanges create (deep) values we always risk losing these in other exchanges. Furthermore, we may not be able to protect those we deeply value from such losses.
Exchanges subsequently increased across other domains, especially via growing trade taking place in markets, contributing to human evolution. It initially consisted simply of barter, but this too has a deeper origin that hints at a universal principle in nature, namely: “the direct exchange of services and resources for mutual advantage is intrinsic to the symbiotic relationships between plants, insects and animals, so that it should not be surprising that barter in some form or other is as old as man himself” (Davies, 1994, p. 9). This prominence of exchange, including its preconditions, is still valid in modern times. Specifically, while self-interest is considered a necessary motivation of an economic exchange it is not sufficient. To initiate, complete, and make exchange sustainable other mentalities are required, like confidence, fairness, honesty, and trust. To wit, trust is self-reinforcing (e.g. Falk and Kosfeld, 2006). Indeed, the naïve belief within its community that ‘trust is no longer relevant in crypto space’ got painfully shattered in recent cases. Finally, an exchange does not necessarily need to involve anything physical, like paying a coin for an ice-cream. Apart from looks people can exchange ideas, which is very important for a healthy economy, especially in terms of creativity and innovation. Something novel, in that regard, is often created via integration of exchanged (existing) elements (with, again, a baby as the ultimate example). In sum, it is in and through exchange that any ‘magic’ happens, especially when reciprocity morphs into reflexivity. This brings us to market dynamics.
Examples of market dynamics include notions like competition~cooperation,1 consumption~production, deflation~inflation, risk~reward, saving~spending, supply~demand, but also the associated exploration~exploitation, freedom~repression, growth~decline, input~output, invention~discovery, intervention~laissez-faire, possession~deprivation, rational~irrational, transparency~concealment, and even master~servant.2 Each of these pairs combines two, seemingly polar, economic concepts or principles, with their own (cyclical) ratio. Normally, no single aspect of a complementary pair is primary or dominant. Instead their influence fluctuates and its underlying dynamic is caused by the tension between the two aspects, due to their contrary nature. From now on it should be noted that I call these complementary market forces.
Overall, and more generally, these contraries are ubiquitous in our world. They are also complementary and dynamical (see Kelso and Engstrøm, 2006, who also offer organism~environment, genotype~phenotype, practice~theory, and many other examples). It extends to the cognitive sphere, for instance concerning metaphysical stances on the essence, existence, and reality of our world. They may even include reflections on negations. In existential terms, think for instance of Shakespeare’s to be~not to be, or Heidegger’s Sein~Nichtsein, which both concern life~death. More generally, the squiggle (tilde) between non-existence~existence symbolises emergence. Other important multidisciplinary pairs include 0~1, inner~outer, process~thing, quality~quantity, Purusha~Prakriti, Shiva~Shakti, and yin~yang.
