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Monday 9 February 2009

Money and Minds

Beginnings

As any good blog should be this one is about my main interests – psychology (Psy), finance (Fi) and, in particular, the way they interact to cause strange things to happen out in that odd place known as the "Real World". Not all of these things are entirely good mind you – think nuclear weapons, credit crunches and reality T.V. – but many of them make you wonder exactly what it was that people were thinking. Or if they were thinking at all.

Amazingly psychology, as a standalone subject, has only been around for just over a century and a bit. Apparently before that no one thought the human mind was a subject worthy of study. Well some geezer called Aristotle had a go, but after that they left it up to the priests for a few thousand years.

Once the psychologists finally got going they proceeded to make a complete shambles of the subject as they randomly rampaged around looking for analogies to describe the human condition. Freudian analysis arises out of hydraulics, believe it or not: the mind as sluice gates and water pumps. As new technologies developed so psychology leapt onto succeeding analogical bandwagons with the dexterity of Liz Taylor exchanging husbands. You can’t help feeling that this is a subject that doesn’t know its own mind.

Physics Envy

Of all the serious conditions to beset psychology the most problematic is “physics envy” (by analogy with ... well, you can figure that out yourself, don’t expect me to do all the thinking around here). It’s the quest for a set of concrete laws that the human mind obeys all the time.

There’s a horrible problem with this – the brain is unbelievably plastic, able to bend itself to deal with new environments with spectacular ease. We are learning machines, evolved and adapted to morph with our times, not fixed automata mindlessly repeating the same pre-programmed rules time and time again. Well, apart from politicians. Politicians are different. Don't get me started on politicians.

For evidence witness our almost effortless adoption of new technology. Now sure, not everyone deals with it easily and the older you get the harder it becomes, but as someone whose daughter could surf the net before she could speak properly I have no trouble at all in accepting that the young brain adapts itself to the world around it with spectacular ease.

Sadly, though, the mistakes of past psychologists continue to haunt us. So psychoanalysis is still widely practiced (although I suppose sluice gates still work, too) and I.Q. tests designed to measure the change in abilities over time insidiously hide in many corners of the modern world having crept way beyond their original, restricted, roles. In the meantime even medicine has staggered into the twenty-first century and has given up the leeches and bleeding cures. Although they still have those circular saws for use in emergencies, I believe.

Plastic Psychology

Here’s another example. Listen to this chanting from YouTube.

Weird, isn’t it? It’s Vedic chanting from Kerala in India, an oral tradition passed down over three thousand years (and now in danger of dying out). It’s an ancient form of Sanskrit and may be as close as we will ever come to the origins of language having been passed down the generations under strict conditions so we know we’re listening to something very similar to what was spoken in 1500 BC. I think that’s incredible, but probably I’m just easily influenced by ancient civilisations speaking to me down the ages.

Lots of psychological effort has been put into developing theories of language most of which have had to be abandoned as new discoveries like Vedic have overwhelmed the scientific theories: as in so many other areas of psychology we can’t formulate hard rules but only general approaches. What we’re left with is less rules and more guidelines: we can dimly perceive the limitations of the underlying wetware but are left with the abiding feeling that any proposal we make is likely to be undermined by some intrepid adventurer happening upon a remote tribe in some untamed piece of wilderness. We get more data points, they get Coke and a reality T.V. show on satellite. Fair exchange, I guess.

Psychology and Finance

What, you might ask, has this got to do with finance? Well, consider the current state of the world financial system. Tempting though it is to believe that this mess is purely the creation of a bunch of masters of the universe lining their own pockets that’s not entirely plausible. We had to give them some money in the first place. What were we thinking?

What we’re seeing now are vast waves of correlated behaviour coursing back and forth through the markets. Before everyone was blind to risk and willing to take what look in retrospect like ridiculous gambles. Now everyone is fearful, unwilling to risk anything to the point of undermining the whole basis of the credit system we’ve come to rely on. That, my friends, is psychological plasticity in action. It’s not that markets are inefficient, they’re just plain mental.

Investing Alternatives

Partly this is caused by technology that all too often renders us remote from the real-world. Pushing buttons to move billions of dollars around makes people insensitive to the real meaning of what they’re doing – just as driving in the cocoon of a car makes some people intolerant of their fellow road-users in a way that would be unthinkable in face to face contact. New technology needs to be designed to complement our real lives rather than rendering us more remote. Mobile phones and social networking go some way towards this – it’s better to contact people remotely than not to contact them at all.

Not all psychology treats people as a group whose intentions can be divined and manipulated en masse. For instance humanist psychology focuses on the individual and regards measurement as pointless – we are, as Monty Python would claim, “all individuals”. The reality, of course, is that both are true – we are individuals but we’re pushed and pulled by greater tides we don’t understand or even recognise most of the time. Trying to figure some of this out is one of the themes I want to explore in this blog, along with better ways of using technology and some safer ways of making money than giving to a bunch of faceless financiers whose idea of the long term is three months.

And maybe we can have some fun along the way. That’d be cool.

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