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Wednesday 5 May 2010

Memes, Money, Madness

Meme Machines

The appearance and disappearance of investment themes over time is a fact of life – remember “you can’t lose with the railways”? Me, neither, but in the 1840’s it was a guaranteed winner until it wasn’t.

Other dubious ideas have more legs, like the Efficient Market Hypothesis and the theory that most analysts can figure out which shoe goes on which foot. All of these ideas influence markets and participants and help move prices, sometimes with startling synchronicity. A popular theory of how this happens is based on the idea of the meme, a cultural equivalent of the gene, propagating itself through human brains and influencing group behaviour. So are we meme machines, buying stocks at the whim of transient ideas?

The Selfish Meme

Richard Dawkins introduced the idea of the meme in his book The Selfish Gene in which the gene is imagined as a selfish replicator of itself, using the human body as a way of achieving its sole goal of continued existence. The idea of the selfish gene is a metaphor – genes don’t actually behave in mean, grasping and directed ways but the overall effect of natural selection at the genetic level is pretty much the same. By analogy the meme is an equivalent mechanism for spreading cultural ideas, so memes propagate using human brains and have a life of their own.

The idea of memes was elaborated into the broader subject of memetics, the study of how memes actually work. There’ve been lots of popular works covering the subject but the idea is, in fact, curiously hard to get a handle on. At root the memetic approach is an attempt to use Darwin’s Big Idea – that evolution occurs through natural selection and random mutation – to culture and thus argues that culture is itself a complex, adaptive system. This is not uncontroversial.

Econbiology and Memetics

However, the attraction for financial scholars is obvious. There’s a fair amount of work going on in the world of econobiology which also sees the financial ecosystem as a complex, adaptive system altering itself in response to both changes in its environment – interest rates, central bank liquidity, etc – and its internal state – securities prices, investor confidence levels, etc. So it's not a particularly surprising leap to find that theorists are interested in seeing whether memetics, a theory of how ideas change and effect culture, can help explain financial markets.

However, the research on this is surprisingly thin on the ground. Memes are a popular idea, which are well – if vaguely – understood in the general population. With some sort of post-modern irony it appears that the concept of a meme is, itself, a meme. The general use of the idea is quite common across the blogosphere but is less prevalent in mainstream research for, as it turns out, the quite good reason that it’s phenomenally tricky to define in detail: what is a “financial meme”?

What's A Meme?

Still, a number of respectable researchers do think it’s an idea which is worth following up. So, for instance, David Hirshleifer and Siew Hong Teoh argue:
“Reasons, or financial memes (units of cultural replication …) can be simple (‘buy on the dips’), or can be elaborate structures of analysis, examples, terminology, catchphrases, and modeling (e.g., portfolio theory). The contagion of such memes, their effects on markets, and (more ambitiously) how combinations of memes evolve as they move from person to person, are the subjects of a missing chapter in financial theory.”
The researchers certainly make a case for the existence of financial memes. Their idea is that these culturally propagated popular ideas interact with individual psychological biases to cause mass changes in behaviour. They cite various example of how relatively simple popular ideas seem to have influenced the way that investors behave:
“Perhaps the most basic micro-evolution in financial markets is the perpetual seesawing contest between bullish and bearish memes. These fluctuate in response to fundamental news, the rise through mutation of salient new memes (‘The Internet changes everything’), and emotional factors that influence the public mood.”
Changing Popular Economic Models

Robert Shiller has suggested that markets sometimes change behaviour for reasons that are nothing to do with economics and everything to do with changes in the way people perceive the world. In Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models he suggests that the increases in asset prices seen across parts of the world since the 1980’s are directly related to the lowering of nominal interest rates – as interest rates have dropped money has poured into various assets – stocks, property, etc. Yet this, he argues, is based on a fallacy – the failure to comprehend that nominal interest rates are really irrelevant – what matters is the real interest rate, adjusted for inflation.

What Shiller is arguing is that we’ve seen a rise in asset prices fuelled by a combination of a popular idea – interest rates are low – and a behavioural bias – framing on nominal interest rates rather than real interest rates. Of course, a “popular idea” sounds suspiciously like a meme and there can’t be much doubt that such ideas do, from time to time, capture the imagination of market participants and lead to so-called social contagion – the sort of thing we discussed in Herd of Investors.

Others have tried to track the rise and fall of memes by looking at the spread of headlines and slogans across the mass media and the internet. The immediate problem in all of these cases is that you can only really know what the impact of an idea is after the event. So although meme-type ideas may influence market movements it’s a bit hard to see how they can be of use to investors. However, there’s a bigger problem.

Moveable Memes

This problem is really that the people behind the study of memes can’t actually agree on what one is, which rather reduces what might be a useful way of analysing ideas to a vague concept that everyone can happily use without worrying too much about what it means. If both "buy on the dips" and "portfolio theory" can be a meme it's not entirely clear what isn't a meme.

Critics of the adaptationist approach – the idea that all behaviour can be reduced to its neurological components and explained using Darwinian ideas of natural selection – have leapt upon this weakness. Here, for instance, is Luis Benitez-Bribiesca in Memetics: A Dangerous Idea:
“Memetics seems more like a disparate cocktail of concepts where memes are compared to genes, viruses, parasites, or infectious agents thriving for their own survival in human brains. Memetics seems more like a children’s fable or a virtual game, where memes are obnoxious , autonomous strange entities floating all over trying to control our minds. Despite the efforts of some bright intellectuals … memetics continues to be a pseudoscientific theory that poses more confusions than solutions for the study of consciousness and the evolution of culture.”
Thanks for the Meme-ories

Which is all a bit disappointing but carries the nasty sting of reality. While there’s little doubt that mass perception of economic concepts can impact markets both in the long and the short-term it’s hard to see how the study of memes can aid analysis of this process. The world changes as ideas change and the changed world causes people’s biases to trigger in different ways. Memes, sadly, don’t explain how this happens: they’re a useful short-hand, popular description of ideas, not a device that investors can use.

This doesn’t mean that some way of modelling the spread of popular ideas might not be of use to investors, at least in the short-term. Changes in the confidence of participants clearly affect markets and confidence is related to perceptions about real-world events. Trying to figure out which events are important is the tricky part. In the meantime a meme remains a meme, not a basis for investing real capital.

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  1. Possibly the only truly identifiable financial memes are the bubbles. They're based on a thought construct that spreads virally with no real fact checking or comprehension on the part of those spreading it. There's something about the idea itself that is enough in its own right. Some people become aware of bubbles before they burst (and everyone's aware of them after they burst) so they're identifiable.

  2. That's interesting:

    They're based on a thought construct that spreads virally with no real fact checking or comprehension on the part of those spreading it. There's something about the idea itself that is enough in its own right

    Have we just stumbled on a possible definition of a meme?

  3. Complexity comes from the interaction of numerous agents, each interacting with a few, "neighboring" agents; that is a truism of econophysics. But all agents are not created equal; clearly there are plural networks of interactions in play, some more important than others. What memes there may be in minor networks of actors are mostly irrelevant; the functional question becomes what memes may be current among the agents comprising the most significant network(s).

  4. Here's my question: I will grant you that you can identify a bubble but can you say when the bubble will burst? Chairman Greenspan talked about "irrational exuberance' in 1996 and yet the market rose sharply for the next three years. Were we in a bubble in 1996?
    Are we experiencing a bubble now? One thing for sure - if the market is down 20% over the next 6 months there will be many who produce elegantly written analyses of why we were in a bubble. If the market rises 20% no one will say that we were in a bubble.
    We have a great capacity to construct narratives, after the fact, that fit what happened when in fact we were clueless at the time they occured as explained by Taleb.

  5. Here's my question: I will grant you that you can identify a bubble but can you say when the bubble will burst?

    It is my belief that you cannot, DIY.

    It doesn't follow that the risk of a bubble is not far higher at times of overvaluation. My view is that investors should dramatically lower their allocations at times of bubble prices because the risks of stock investing are so much greater at such times.

    But I don't believe that it is possible to know when the crash will come. I think your example from the late 1990s is a good illustration of that reality.


  6. Thanks for clearing up what the heck a meme is!

    People throw that term around and i'm assuming a few don't really know what it means. I definitely never bother to google it.