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Monday, 4 August 2014

Metaphors We Invest By

Lost for Words

Metaphor is a powerful engine for driving thought. Or possibly it's a useful compass for guiding it. Or perhaps it's some other metaphor. The point is the we tend to think in metaphors, even about metaphor, and it seems that the metaphors we use to describe a situation  determine how we view it and what we do about it.

So companies may be in a tail-spin, or simply marking time. Or perhaps they're in terminal decline, or maybe it's merely a temporary setback. And maybe we're talking about the same thing, and how you hear it described determines your reactions to it ... metaphor is powerful, acts on us unconsciously and is almost completely useless to an intelligent investor.


The starting place for most discussion about the way metaphor affects our thought processes is a book by George Lakoff and Mark Johnson called Metaphors We Live By.Lakoff is probably best known for his work in politics, where he has characterised Republicans as "strict parents" telling everyone what is good for them and creating an infrastructure to do it and Democrats as "nurturant parents" doing what is best for individuals.

Whether you accept those metaphors should be a matter of personal choice, but the point is that if you frame the political parties in these ways and adopt language consistent with those frames then you'll activate various mental constructs that you hope will favor your particular interests. And, of course, politicians are past masters of framing: climate change, for instance, is framed either in terms of uncertainty or looming crisis dependent on your views (and your relative lack of scientific education).

Tragedy in Two Parts

A stark example of framing is the contrast between how Newsweek and Time magazines dealt with the twin tragedies of two passenger jets being shot down - a Korean plane by the Russians in 1983 and an Iranian plane by the Americans in 1988. The former was presented as an act of murder, the latter as a terrible mistake; most likely the circumstances were very similar, but it's how the events were framed that creates the public perception:
"By de-emphasizing the agency and the victims and by the choice of graphics and adjectives, the news stories about the U.S. downing of an Iranian plane called it a technical problem while the Soviet downing of a Korean jet was portrayed as a moral outrage".
Framing is powerful and, consciously or not, it's used to position and manipulate. And at the heart of framing is metaphor, because metaphors come trailing their own imagery, meanings and implicit assumptions.

Re-imagining Dead Cats

In fact economics (and psychology, although that's another article in itself) is largely built out of metaphor. It's a re-imagining of the first law of thermodynamics (see: Exit the Walras, Followed by Equilibrium), for a start, and is full of metaphors that are now embedded in the topic - inflation, depressions, hard landings or soft ones, overheating and equilibrium; these are all metaphors, captured from other subjects. The idea that the economy is a machine that can be fixed is probably the most common metaphor; if only we could find a decent mechanic everything would be OK.

As Geoff Smith relates in How High Can a Dead Cat Bounce?:
"If economists really live by those metaphors, the world is seen as somehow more secure, less unpredictable .... As we have seen, much of the very substance of the subject - inflation, cycles, depression, expansion, - is basically metaphorical in nature and such fossilized concepts are left as the basic building blocks of the academic edifice."
In comparison physics, for example, is defined by the language of mathematics rather than that of metaphor (see: In the Beginning Were the Accountants). Of course, most popular descriptions of science deal in metaphor because, revealingly, that's the only way to get an understanding of scientific concepts across to lay people (which is most of us, most of the time).  It's no accident that economics has adopted mathematical models to express itself, while ignoring the fact that the equations are themselves describing metaphors (like equilibrium and utility) rather than basic physical reality (like, err, dark matter and the Higgs boson).

Cognitive Fundamentalism

Behind this apparently abstract debate there's a furious argument about how fundamental metaphor is to thinking. To simplify wildly Lakoff argues that metaphor is thought and thought is embodied - it can't be separated from the physical nature of our bodies. His opponents (and "opponent" is not too strong a term) believe that even metaphor must be grounded in an understanding of physical reality and that physical reality exists independently of our embodiment. This resulted in a spat between Lakoff and Stephen Pinker in which the latter mounted the accusation of cognitive relativism - that Lakoff is claiming that the nature of reality is determined by the frame you adopt (he disputes this).

In fact Lakoff has gone on to argue that even mathematics is embodied thought and that we have no way of telling whether it exists independently of our existence.  This is controversial to put it mildly, as it's essentially irrefutable; and scientists take a dim view of irrefutable theories: a theory that can't possibly be falsified is not scientific, at least according to the philosopher of science Karl Popper, as outlined in Econophysics, Consciousness, and Cosmic Karma.

Animal Markets

Whether the philosophical nuances of Lakoff's approach are correct or not one thing that is irrefutable is that clever use of metaphor can frame situations to the advantage of certain parties. And our media uses this framing, as the Time and Newsweek example shows, to present a particular view of the world, a view which is likely to activate certain beliefs and cause certain reactions in readers.

Unsurprisingly  this type of metaphoric framing is rife in securities trading. In fact it's quite hard to describe market or stock movements without reverting to metaphor. Markets may be "nervous" or "jittery", can suffer from "vertigo" or can be "clawing their way back".  Or they may simply be "directionless" and may "drift" idly. Alternatively they can be overrun with animal life - bulls, bears, dead cats and dogs abound, while "sentiment" is unusually prominent for such a hard-nosed environment.

Metaphoric Bias

What's more, the way that we frame events seems to really matter. A paper by Paul Thibodeau and Lera Boroditsky, Metaphors We Think With, suggests that different metaphors can cause different reactions:
"Far from being mere rhetorical flourishes, metaphors have profound influences on how we conceptualize and act with respect to important societal issues. We find that exposure to even a single metaphor can induce substantial differences in opinion about how to solve social problems".
In fact the research suggested that any bias suggested by a metaphor was then exaggerated as people actively sought out information to support it and ignored information that might disconfirm it - a clear case of confirmation bias in action, relying on our limited ability to seek out disconfirming information. But strikingly:
"The influence of the metaphorical framing is covert: people do not recognize metaphors as an influential aspect in their decisions".
Well, you don't need to be a genius to figure out that framing of market events can influence our reactions to them, and trigger the kind of synchronized reactions that are all too common. As ever there are two possible approaches to this.  The first is to be better at judging the metaphor of the moment and to ride the resulting waves of sentiment. The second is to learn to ignore rhetoric and focus on the numbers and the story behind the numbers.

Fundamental Metaphors

Contrarianism is perhaps the embodiment of anti-metaphoric investing: look for the metaphor of the moment and then figure out how or where people are over-reacting. The very best investors seem to ignore market sentiment in favor of a deeper understanding of fundamentals: but maybe they're just deeply unimaginative.

Anyway, it pays to beware of metaphors when it comes to investing. Markets and stocks aren't alive, they're not machines or affected by gravity or human emotions. These are just imaginative ways of describing the aggregated movements of stock prices, movements which themselves may be caused by people reacting to the metaphors used to describe the movements. The metaphor of the moment may well have a short-term impact on the way markets or stocks behave, but in the longer term the metaphor will adapt to the underlying financial performance.

Because while numbers may or may not exist independent of human cognition, they do at least have the ability to represent the underlying performance of a stock. They are, if you like, the fundamental particles of the investing universe. Although, of course, that's only a metaphor.


  1. Great Post!
    "Markets and stocks aren't alive, they're not machines or affected by gravity or human emotions."
    If it's people trading stocks, then aren't they affected by human emotions? Isn't the post about how people cling to metaphors which then influence market behavior?

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