The Market Mind Hypothesis, page 78
7 See my earlier comments on the mind as a CAS (complex adaptive system). From a Predictive Processing Theory standpoint, see Clark (2018).
8 If “mystery is lacking” it leaves us with a “fundamental emptiness that bores us” (Heidegger, 1983, pp. 163–164).
9 “[I]f all changes … could be foreseen for an indefinite period in advance of their occurrence … profit or loss would not arise” (Knight 1921, p. 198).
10 See also Bueti and Walsh (2009).
11 In the sense of Bohr (1949, p. 210): “only the totality of the phenomena exhausts the possible information about the objects.” See full quote in Subchapter 9.3.4.
12 As discussed, ultimately prices are units of currencies and in our modern times of fiat money currencies have no intrinsic value. As Jung stated: “Money becomes paper and everybody convinces everybody else that the little scraps are worth something because the State says so”.
13 Not only in terms of safety in numbers, but also in terms of building trust.
14 E.g. I trade my idea in return for your feedback/enhancement/etc. Brainstorming and brainwriting are formal techniques to achieve this in groups.
15 This echoes the concept of entrepreneurial discovery of Austrian economics. See Kirzner (1997). It also relates to the work of Hidalgo and Hausmann (2009) on economic complexity and, re gaining knowledge, their concept of “personbytes” (see also Chapter 9). In broader terms it touches on the knowledge commons (Frischmann, Madison and Strandburg, eds, 2014).
16 It is generally assumed, for example, that equity returns show negative autocorrelation.
17 Clearly echoing Mises’s purposeful action. See also Madsbjerg (2017).
18 Again, mechanical (IF-THEN) rules are, by definition, predetermined in that regard.
19 See https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1901.en.pdf?ca0947cb7c6358aed9180ca2976160bf. The BBC recently reported on (Libor) interest rate rigging during the GFC, involving central banks (Verity, 2023).
20 Among these are so-called technical patterns which have repeated themselves over the history of capital markets. They have exotic names like ’head and shoulders’, ‘island reversal’, and ‘saucer bottom’, each with a story to tell. They also include cycles and waves, often scaled according to the Fibonacci ratio.
21 In case the reader has not recognised these already, additional examples of opposing (but complementary) forces in the market’s mind are sellers~buyers, bulls~bears, longs~shorts, but also regulators~speculators.
22 It became known as his “(internet) productivity miracle” speech. In it he also referred to a “productivity famine”. https://www.federalreserve.gov/boardDocs/Speeches/2002/20021023/default.htm.
23 https://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-information-technology-factor-productivity/.
24 However, it is also a contentious issue. A number of economists have argued that it requires adjustment, and that hourly compensation has actually tracked productivity over the past 65 years. As far as US consumption is concerned, the IMF has argued that it is the rich who are now the “marginal buyer” of goods and services and, via their savings rate, have contributed most to the recent consumption boom-busts. This also has implications for (stubborn) inflation. Available from https://www.imf.org/ external/pubs/ft/wp/2014/wp14225.pdf.
25 Available from https://www.imf.org/external/pubs/ft/sdn/2015/sdn1510.pdf.
26 There are many alternative views of the pricing system, including interpretations critical of classical physics and inspired, instead, by quantum physics (Bouchaud et al., 2018).
27 Again, others have made this point before (see Frydman and Goldberg, 2011).
28 The miserable failure of VaR and DSGE models exemplify these blind spots in that regard.
1 In the following I therefore assume that the reader is familiar with the basics of portfolio management. For those wishing to learn more, Burton Malkiel’s classic A Random Walk Down Wall Street is a useful introductory text in the tradition of mainstream finance, especially Modern Portfolio Theory. Again, portfolioism keeps some of its concepts, while dismissing the underlying mechanical worldview.
2 These conditional probabilities are implied, via their so-called Environment of Evolutionary Adaptiveness (EEA), by the selected psychurities in the EPs.
3 The original version of this note appeared as an article for Jackson Hole Economics on January 25, 2021. It has only slightly been updated.
1 For background and an introduction, see “A Famous Argument Against Free Will Has Been Debunked” in The Atlantic, September 10, 2019.
2 In the following, AVIR refers to the combination of method and the software tools used for this purpose. Earlier market sonification software tools have not made the connection to advanced visualisation.
3 Apart from those mentioned and the literature on data sonification and visualisation, they include Coates (2012), Cymbalista (2002), Gigerenzer (2007), Klein (2013), Kounios and Beeman (2015), Sacks (2007), and Schwager (1995). Moreover, in an earlier version I had peppered this book with many music lyrics as quotes. Like much of art generally, music reflects the Zeitgeist of society. It impresses or translates its meaning, whereby history rhymes. “Musica è” as Eros Ramazzotti so memorably wrote. It is inspiring and keeps you going (particularly important for writing a book, which is a labour of love). However, as a first-time author I was a bit naïve: my publishing advisors told me to remove all lyrics because it would be a nightmare—and an expensive one at that—to get permission. So, instead and in acknowledgement, I offer the following selection of complementary pairs, many of whom are still with us. Unfortunately, as you’ll notice, some have turned into truly contrarian pairs: Beethoven~Mozart, Lindsay Buckingham~Stevie Nicks (Fleetwood Mac), Jimmy Page~Robert Plant (Led Zeppelin), Miles Davis~John Coltrane/Herbie Hancock~Wayne Shorter (Miles Davis Quintet), James Hetfield~Lars Ulrich (Metallica), Philip Bailey~Maurice White (Earth, Wind and Fire), Kiri Te Kanawa~Luciano Pavarotti, Stone Gossard~Eddie Vedder (Pearl Jam), David Gilmour~Roger Waters (Pink Floyd), Andrew Lloyd Webber~ Tim Rice (Jesus Christ Superstar), and Rick Davies~Rodger Hodgson (Supertramp). Finally, Boudewijn de Groot and Bløf: for keeping the link to the home country alive.
4 Although his motivation was different, i.e. whether rats can replace human traders.
5 The great minds of physics became comfortable with Niels Bohr’s complementarity, originally inspired by William James’ mental concept of it. In light of physics-envy it is thus somewhat ironic that the consensus in behavioural finance is very rigid in separating S1 from S2.
6 For an overview of collective behaviour, see Goldstone and Gureckis (2009).
7 A term first introduced by Mandelbrot. A fractal pattern appears the same on multiple levels, i.e. it is scale free.
8 “Research has shown that so called responses to rhythm actually precede the external beat. We anticipate the beat, we get rhythmic patterns as soon as we hear them, and we establish internal models or templates of them. These internal templates are astonishingly precise and stable; as Daniel Levitin and Perry Cook have shown, humans have very accurate memories for tempo and rhythm.” (Sacks, 2007, p. 240). By the way, anticipation does not mean pre-determined, so music can still surprise.
9 Specifically, regarding tools for market sonification, see for example Ciardi (2004) and Van Ransbeeck and Guedes (2009).
10 Here is a website about market sonification: http://www.sonification.com.au/markets/.
11 In the broader context of data visualisation they are in the spirit of Edward Tufte’s work.
12 So, for clarity, we are not talking about recognising cats, for example.
13 For an overview, see Pauletto and Hunt, 2005. See also Wolfram, 2002, specifically https://tones.wolfram.com/about as far as sonification is concerned.
14 Alternatives include Audacity and Sonification Sandbox.
15 In fact, it even translates (EEG) brainwaves into music. This application may be of use to test separately the state of mind of investors while experiencing market data in audiovisual format, e.g. to look for any correlation, synchronised in the respective audio signals.
16 Alternatives include Pro Tools, Live (Ableton), Cubase, Logic, and Studio One.
17 Alternatives include Acrobat After Effects, ZGame Editor and Resolume. Less advanced visualizers include Aeon, Morphyre and Plane9.
18 An example of a potential extension to the basic set-up is to get an equal number of female and male participants who will be submitted to a Myers-Briggs test (see next section). A totally different set-up would be an online test with numerous anonymous testers but I haven’t given this much thought.
19 Long only portfolio, so no shorting.
20 Sufficient in the sense of a base history to allow both analysis and listening. Personally I would think 5 years of daily data as a starting history, e.g. related to the length of a business cycle, is enough.
21 A variation would be to use the same dataset, unbeknown to the subjects. This would help in contrasting the performance across the two phases as the same data is involved. The obvious risk is that subjects will discover this and thus distort their performance.
22 We would need to source the advanced trading-simulation software required for this variation.
1 This is the focus of our main “Spontaneous Volatility” research project.
2 Let alone, the market in the CAPM sense, i.e. Rolls’ second critique.
3 Again, for intuition pumps please see my earlier comments in the Introduction by way of describing scenes from the movie The Big Short.
4 This is why, at the beginning of this book, I stated that I consider securities to be the ‘neurons’ of the market mind. As an aside, shared attention extends to other aspects of social cognition like intentional attunement (Gallese, Eagle and Migone, 2007).
5 Again, supposedly efficiently but see Farmer, Nourry, and Venditti, 2012.
6 Also, see Knight (1921) for early critical comments ‘… all organic readjustments would become mechanistic, all organisms automata.’ (III.IX.7; p. 268). In a biology context, see Ho (1998).
7 Although I’m not convinced by quantum approaches to consciousness, I have sympathy with those who like to see it as a variation of Heisenberg’s uncertainty principle with, for example, position replaced by matter and momentum by mind.
8 Or mind and matter generally.
9 It will take time to turn them into laws.
1 Harlingen is the birthplace of my father which we used to visit regularly. It’s the key harbour for ferries to the Frisian Islands, for example.
2 Among the technical elements of our modern monetary waterworks are concepts like loan creation, the real bills doctrine, inside and outside money, and repo and securities lending. I will not discuss these here.
3 Apart from its metaphorical use here, climate change, of course, offers a real threat to the economic system.
4 They can also include social engineering and other policies that have an economic impact, like immigration controls or one-child birth restrictions.
5 Although painful, there remain misplaced fears for such an outcome. In an updated 2014 paper, Reinhart and Trebesch analysed the impact of debt relief achieved through default and restructuring. They concluded: “The economic landscape after a final debt reduction is characterized by higher income levels and growth, lower debt servicing burdens and lower government debt. Also ratings recover markedly, albeit only in the modern period”.
6 To extend the metaphor, it could, of course, turn out to be a wintery storm with record low temperatures that will freeze up the sea, rivers and canals. Even then, it will pressure and likely break the faulty designed waterworks.
1 Combined with Wallace’s earlier comment, some readers will recognise the similarity with Michel Foucault’s sentiment on the role of philosophy: “to make visible precisely what is visible, that is, to make evident what is so close, so immediate, so intimately linked to us, that because of that we do not perceive it. Whereas the role of science is to reveal what we do not see, the role of philosophy is to let us see what we see (Foucault, 1994, pp. 540–541). In turn, this reaches back to Heidegger.
2 This is a slight variation on the classic thought experiment of the falling tree that makes no sound when nobody is listening.
3 “If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and five minutes thinking about solutions”.
1 This goes as far as an “economy of the unconscious” (Dailey, 2000).
2 See, e.g., Heidegger (1929). In this work, as well as its supplement (Heidegger, 1943), Heidegger goes beyond traditional metaphysics.
3 John Coates (2012), for example, discusses the original mind~body problem and argues for an embodied view of cognition to replace dualism.
4 I will have more to say about this in Chapter 4.
5 To paraphrase Clark and Chalmers (1998). See Section A below.
6 All three form the headings of separate chapters. Confusing or mixing the first two amounts to a category mistake. I’ve tried to avoid it in this book. Although, arguably, the distinction between the physical and the psychological suggests I should also distinguish between metaphysics and metapsychology, I have not done so for practical purposes. In short, my metaphysics will also cover metapsychology.
7 Again, to keep things simple, this should be interpreted as including, respectively, ontic, epistemic, and methodical.
8 Largely due to underlying unconscious processes. Also, it reaches beyond future knowledge (e.g. Popper, 1957).
9 Some readers will recognise the similarity with today’s constrained state of the cognitive, humanities, and social studies, as well as the arts, in countries run by totalitarian regimes.
10 See Dretske (1997). For a critical overview, see Bishop (2014).
11 Descartes called these res cogitans (‘the thinking thing’), respectively res extensa (‘the extended thing’).
12 I speculate that it was largely this conviction that led Hayek to his criticism of central planning in economics. However, I could not find any reference in the literature confirming this.
13 The coupling between, say, system A and system B is nonlinear when at least one variable (e.g. output) of A is a parameter (e.g. input) of B and at least one parameter of B is a variable of A.
14 For a description of an economic system, please see part B.
15 See Cepelewicz, 2020.
16 In Subchapter 4.3 I discuss that this is not always perfect, via the case of inattentional blindness.
17 Just like the physical payment system is backing the payments of money, working memory is the physical system backing the payments of attention. Still, it’s an outdated metaphor. Our storage capacity for memories is estimated to only be around one gigabyte, signifying that our mind is not a computer.
18 The meaning of maintenance hypothesis is one interpretation that is particularly relevant in case of the surreal. It suggests, among others, that when we are confronted with reality checks and other inexplicable events that shake our worldview and increase uncertainty we use ‘fluid compensation’. It basically means that we retreat to safe havens to restore order, meaning, and sensemaking. See Heine, Prouix and Vohs (2006).
19 Please see the vast literature on Coordination Dynamics, starting with the work of one of its pioneers, Scott Kelso (e.g. 1995).
20 Part of the modelling could include things like the Lyapunov function which is also suggested by some cognitive scientists (e.g. Friston, 2018).
21 For arguments as to how these 4 Es relate, see Ward and Stapleton (2011) and Li (2019). See Subchapter 2.4.1. for a 4E application to the market’s mind.
22 Of course, neither of these futures necessarily occurs. Also, I make an early distinction here between access and phenomenal consciousness which I’ll expand upon below.
23 In Lewis Carroll’s Through the Looking-Glass, the Red Queen said to Alice: “Now here, you see, it takes all the running you can do, to keep in the same place”. Later I will explain how this is enacted in the human mind. For an economic interpretation based on game theory, see Markose (2005).
24 Perhaps this confuses some readers in light of my earlier comments, so let me be clear: the mind does calculations and computations but that doesn’t make it a computer.
25 Together with Mises, Hayek and others, Menger represents the so-called Austrian School of Economics. Although heterodox in economic academia, they are more accepted in the investment field (e.g. Spitznagel, 2013). I use them as references because their writings on free markets (vs. central planning) and the role of price discovery are broadly in line with my own convictions. In addition, more than their contemporaries, they were aware that cognitive issues are of relevance to economics.
26 I personally think that the reason Kim’s causal exclusion is considered a “problem” is because of the confusion between affect and effect in making a difference especially in a collective setting. For example, a price―reflecting the market’s discounted expectation of a future state (i.e. of cash flows)―can affect a person. But there is no effect that can be isolated and pinpointed as such because of the collective external activism of prices via securities.
27 Collectively expressed or replicated via labour division in the economy.
28 Source: Stanford Encyclopedia of Philosophy. For a specific view on shared intentionality, see Gallagher and Tollefsen (2017).
29 As in the smallest social unit, consisting of two persons.
30 Again, at its core, trading involves the smallest possible social entity: two people, one being the buyer and the other the seller. Each needs the other to experience trading. Examples of larger groups in markets are shareholders of Apple stock, bondholders of Argentinian treasuries, market makers, ‘bulls’ and ‘bears’, etc.
31 For completion, Cleland was discussing definitions of life, not consciousness.
32 Economically minded readers will recognise the similarity with the “as if” approach by mainstream economists: ‘Let’s assume we understand economic agents, i.e. we assume they act as if they are rational. Then any behavioural problem disappears’.
