The Market Mind Hypothesis, page 50
5. Responsibility: I refer to my iatrogenesis comments earlier. If the economic oath is to do no harm to the economic mind~body, the flip side for all market participants should be volenti non fit injuria. Freely translated, once you voluntarily decide to participate in markets you must accept full responsibility for your decisions and not ask for a bailout or submit a claim against another party (except in cases of criminal acts, like fraud).
6. Fair legal playing field: see legal frameworks in terms of fair exchanges. This largely means that no ‘risk-free’ legal/regulatory arbitrage is possible. In other words, prevent parties to abuse your legal/regulatory system by raising the penalties when they do. This particularly applies to parties whose own legal/regulatory system is less robust and transparent, for example because it is blatantly biased against foreign parties.
7. IP temps: view patents as temporary monopolies of knowledge that impair discovery. Regulate and tax them in exponential terms, i.e. the longer their duration and/or the more connected to other patents, the more the underlying products/services are taxed. (There are unfortunately too many examples of products/services that are completely fortified by ‘patent estates’).
8. HFT tax: any transaction tax should not be fixed but fairly and flexibly linked to the level of activity (= # trades/time). The more trades the higher the tax level, e.g. use tax rebates when liquidity is low.
9. Capital gains tax: link it to (relative) level of markets and distribution of beneficiaries in order to avoid/correct a concentrated wealth effect.
10. Economic transmission rule: assuming the main purpose of the financial economy is to support the real economy, set taxes and interest rates based on correlates between the real economy and the financial economy. For example, taxes on the financial economy could be increased if markets are booming while the real economy is struggling, and vice versa.
11. ESG: see my earlier comments in the Economic Note “The Spirit of ESG” in the Introduction.
The opening quotes of this closing chapter refer to truth. This gets us to Schopenhauer who identified three stages for it. To paraphrase him (and others with similar observations), a heterodox theory is first ignored, then criticised, and eventually considered self-evident (and known all along by former critics as their idea). Dragging many readers out of their comfort zones, this book is likely to receive criticism and opposition. We welcome this, as it would mean a promotion from the initial stage of being ignored and denied.
As far as critique is concerned, I realise some readers will disappointingly conclude that this book is further evidence that economics “limps along with one foot in untested hypotheses and the other in untestable slogans” (Robinson, 1962, p. 26). Others will criticise the MMH for its lack of falsifiability. In my defence I invoke the words of Hayek (who was a friend of Popper):
while it is certainly desirable to make our theories as falsifiable as possible, we must also push forward into fields where, as we advance, the degree of falsifiability necessarily decreases. This is the price we have to pay for an advance into the field of complex phenomena. (Hayek 1967, p. 29)
Zhuangzi tells us that those who realise their folly are not true fools. I am the first to admit, in that regard, that the MMH is not only heterodox but incomplete. You may not agree with everything I have written; in which case I hope you will constructively contribute to the debate. However, what you cannot do is continue your old way of thinking after what has happened and the resulting ongoing plight. Nevertheless some remain in denial. This may simply be due to their incentives. As Upton Sinclair pointed out, “it is difficult to get a man to understand something when his salary depends upon his not understanding it”. Others are blunter in their ignorance. I once gave an introductory MMH-presentation to a couple of senior colleagues who essentially told me that they didn’t care about any of it, and that investing was only about “making money”. I would call that attitude irresponsible investing. Punters. Don’t be like them.
I want to end on a positive note. Driven by cognitive research we are making significant progress in better understanding our mind~bodies. A key insight, also promoted by the MMH, is to recognise the benefits of bridging the (perceived) separation between mind and matter, rather than emphasising it. Remember how Clark and Chalmers beautifully answered their own profound question of “Where does the mind stop and the rest of the world begin?” Consciousness theories show that mind and matter are complementary, with blurry boundaries. They emphasise not only the need for, but also the reality of, connection, interdependence, and sharing. In the final analysis, this reaffirms the importance of free markets, trade, transparency and, ultimately, price discovery. That is also the guidance with which we will find solutions to our economic problems.
I hope you have enjoyed this book and have learned something new. You decide where you stand on the issues raised here. I particularly hope that if your (grand)children ask you in due time “When did you realise?” you will reply “When I read The Market Mind Hypothesis”. And when they follow up with “What did you do next?” you tell them “I did my bit to support the MMH and put it into practice”. Your legacy then becomes mine, so thank you.
Afterword: The Market Mind Hypothesis and 4E Cognitive Science: A Post-Cognitivist Approach to Cognitive Economics
Cognitive Economics is an emerging field of study that seeks to combine economics with cognitive science. The ambition of this field is for economics to learn from models of information processing in individuals, while cognitive science can learn from economic models of information processing in collective, distributed cognitive systems (see Chater, 2015; Johnson, 2019). The contribution of cognitive science to this research programme is standardly taken to be the modelling and explaining of computational processes taking place inside of the heads of individuals. Patrick Schotanus’s Market Mind Hypothesis (MMH) offers a fascinating alternative to what I will call this “cognitivist” understanding of the economic system. His MMH draws on a new paradigm in the cognitive sciences, that first began to take shape in the 1990s, which understands the human mind as embodied, embedded, extended and enacted. My aim in this Afterword is to briefly re-describe some of the themes Schotanus draws on from what has come to be referred to as “4E cognitive science” (Rowlands, 2010; Gallagher, 2017; Newen et al., 2018). I will argue that the attraction of the MMH lies in its offering a post-cognitivist perspective on what a synthesis of economics and cognitive science could look like.
4E cognitive science proposes that a science of cognition should start from principles of biological organisation, explaining cognition in terms of its embodiment in moving and sensing animals, situated in a world of meaningful affordances or action possibilities. 4E cognitive science is premised on what Clark (2001) has called a “biological incrementalism” according to which human thought and rationality are the result of small, incremental tweaks to more basic capacities for perception and action. In neurobiological terms these capacities for perception and action work through multiple coordinated neural systems that carry out fast pattern completion, along similar lines to the large language models currently taking the world by storm. 4E theorists claim that what sets human intelligence apart from other biological systems is the niche humans have constructed for themselves over the relatively short period of human history. Humans have created and maintained environments rich with symbolic, social and institutional structure. Our human minds develop cognitive structure that work in ways that delicately complement and coordinate with the social, cultural and technological environments we wrap around ourselves. Brain processes thus develop functional capacities that are tightly constrained by distributed webs of linguistic, social, cultural and technological scaffolding.
The MMH explores the implications of this paradigm shift in cognitive science for economics. 4E cognitive science predicts for instance that economic models should work best when choice is constrained and limited by the larger social and institutional structures within which an individual economic agent is embedded. For instance, businesses, as large-scale organisations, make decisions with the aim of maximising profit. It is this fact about businesses as complex social and cultural organisations that explains why the models of classical economics are somewhat successful at predicting the behaviour of economic agents, and not facts about the workings of the minds of individuals. Collective institutions behave somewhat as if they were rational economic agents. It is the behaviour of these institutions, and not of individuals, that classical economics sometimes succeeds in modelling.
The MMH further agrees with the enactive strand of 4E cognitive science in rejecting a dualistic distinction between the mind as object of scientific study and the mind as subjectively experienced (Varela et al., 1991). In cognitive economics, the human mind is often understood by analogy with the workings of digital computers that perform unconscious computations—rule-governed operations on internal mental representations. A computational conception of the human mind encounters the problem of how to make room for the fact that humans (and other animals) undergo first-person conscious, subjective experiences. This is also a problem for both behavioural and cognitive economics. Traditionally, cognitive economics, insofar as it has been premised on cognitivist assumptions, has taken over this computational understanding of economic agency. Economic agents are modelled as making decisions and choices through the mechanical, algorithmic like application of rules. Cognitive economics has ignored or deliberately left out that consumers, investors and other economic agents are subjects of conscious experience. There is something it is like for agents to live through economic cycles of boom and bust. MMH argues that what makes cognitivist models of economies of limited value is precisely that they fail to take into account consciousness in markets.
The MMH identifies a dualism inherent in economic systems that is often overlooked between the real material economy of goods and services and the psychological economy of financial markets. Here, I suggest, a comparison with the phenomenological distinction between the lived body (Leib) and the living body (Körper) may prove instructive. The real economy in the MMH can be compared to a living organic body that is more or less healthy. The health and vitality of the real economy depends on its interaction with financial markets. Perverse incentives, gross inequalities and lack of innovation can, for instance, make the economy as a living body unhealthy and diseased. Instead of a spontaneously ordered, resilient and adaptive system the economy may become vulnerable through for instance growing inequalities, excessive leveraging and so on.
Financial markets can be compared to lived bodies—it is through their embodiment that subjects experience the world. The MMH proposes to understand markets as collective entities with ‘minds of their own’ over and above the individual minds of the traders and investors that interact within particular markets. To restore consciousness to its rightful place MMH proposes to use a second core premise from 4E cognitive science—the thesis of the extended mind. The core idea behind this thesis is that minds extend beyond the boundary of skin and skull to include the many artefacts, tools, and technologies humans increasingly rely upon in their thinking and intelligent problem solving. The MMH claims that, through the mediation of the signalling system of prices, markets extend the minds of interacting investors and consumers.
I suggest that the price discovery system in markets can be conceived of as what Richard Menary (2007) has called a “cognitive practice”. Menary argues that through the integration of public symbolic systems of representation, neural circuits become enculturated: they come to acquire new culturally specified functions that are genuinely transformative of an individual’s cognitive capacities. The individual becomes able to solve problems and make inferences that would not be possible were it not for the functional integration of such public systems of representation. The MMH can be read as claiming that the pricing system can be thought of as an external symbol system, with prices operating as symbols for markets. Computers that allow for rapid transmission of information about fluctuations in prices, comes to be functionally integrated with the neural processes of traders.
The MMH makes an additional claim that goes beyond Menary’s idea of cognitive integration. It claims that the price discovery process physically realised in markets also forms the basis for a collective form of consciousness. Prices don’t only serve as a means of distributing knowledge of possible risks and rewards associated with particular assets or firms among investors. MMH claims that prices also serve to extend the consciousness of individual investors in such a way that participants in a market come to form a collective consciousness.
It is often supposed that consciousness must depend on brain processes internal to individuals. Proponents of the extended conscious mind argue that there is frequently no clear well-defined line separating internal from external processes in dynamical systems that are tightly coupled to their surrounding environment (Kirchhoff and Kiverstein, 2019). More specifically, it is not always obvious that one can treat the body and everything outside of it as ‘external’, and take ‘internal’ brain processes to be sufficient by themselves for consciousness. The nervous system, the rest of the body and the environment are coupled across numerous spatial and temporal scales in such a way as to form a single complex adaptive system. Consciousness is best understood as emergent from the self-organising dynamics of this complex adaptive system the brain and the rest of the body form with the surrounding environment. MMH claims that what is true of the conscious minds of individuals may also be true of consciousness in markets. The coupling between traders that is made possible by the technologies connecting them in real time extends the minds of individual traders in such a way that they combine to form a single collective consciousness.
Prices provide an information-based medium for markets to adapt to unexpected, surprising events in the real economy but crucially the MMH claims that prices also have an experiential aspect to them. There is something it is like for the market to feel squeezed, to trend upwards or to undergo a reversal. What connects consciousness in markets to the real economy is the information realised in prices. The MMH claims that the information that prices carry has dual aspects—it is both a physical quantity reflecting the market dynamics but information also has a phenomenal or subjective aspect. This phenomenal aspect is reflected in the phenomenon of market moods such as exuberance, depression, fear, despair, mania or euphoria that investors often report experiencing intersubjectively.
Does the MMH subscribe to a view of markets as distributed information processing systems with the qualification that information has dual aspects—at one and the same time physical, reflecting the dynamics in markets, and phenomenal, reflecting the mood of the market as a whole collective entity? Such a view of the market could be interpreted to be consistent with the cognitivist understanding of economic systems by analogy with computational systems. The important addition would be that economic systems should be understood as engaging in distributed computation as famously introduced in Hutchins (1995).
I will conclude my afterword by pointing to a different possibility, drawing upon the enactive strand of thinking in 4E cognitive science. Instead of thinking of economic systems as information processing systems I suggest we could read the MMH as claiming that economies are complex adaptive systems that are intrinsic sources of meaning. Markets can be productively compared to self-organising biological systems that are adaptable, spontaneous and, at least within certain bounds, robust to external perturbations. In complex adaptive systems, novel properties emerge out of the non-linear dynamical interactions between the elements that make up the system. These emergent properties are collective or macroscopic properties of the system as a whole that act as collective variables or order parameters that loop back down to reduce the degrees of freedom in the behaviour of the elements of the system.
Kelso defined order parameters as “functionally specific, context-sensitive informational variables” that are “intrinsically meaningful to system functioning”. Kelso claims that order parameters are “intrinsically meaningful” for a system because they specify the coordination dynamics among the parts of a system and its environment (Kelso, 1995, p. 145). I suggest that the MMH could be read as proposing to understand prices as collective variables that become meaningful for markets in their coupling with the real or physical economy. When seen from this enactive perspective, prices do not just carry information in the sense of representing risks and rewards. The systems of financial markets that embody meaning intrinsically are temporally extended patterns of activity that can criss-cross boundaries between individuals participating in a given market. Instead of representing an external environment, information can be understood here in terms of enacting or bringing forth of an environment—a market. Moreover, this process of enaction is inseparable from the embodiment of the order parameters in the complex adaptive systems that forms out of the interactions of participants in markets, which the MMH claims combine to form a collective consciousness.
Julian KiversteinAssistant Professor of Neurophilosophy at the University of Amsterdam,and co-author of Extended Consciousness and Predictive Processing
Abbreviations and Glossary
~ Squiggle or tilde, symbolising the dynamic paring synergy that emerges ‘over-and-above’ two seemingly contrarian aspects as a result of their exchanges. Important dualist examples are mind~matter and psychological~physical.
4E Embodied, embedded, enactive, and extended. Specifically, 4E cognition considers the mind to be embodied, embedded, enactive, and extended.
AI
Artificial Intelligence is intelligence attributed to software programs run on computers, machines, robots and other technology. It applies to tasks like decision-making, speech recognition, translation and visual perception. The discipline studying and applying it is also called AI.
