Almost by definition of their work, financial advisors are caught in a curious juxtaposition between emotional imprudence and rational discipline.
We have been taught, for example, that markets are driven by emotion — fear and greed being the most powerful forces — and our role is to calm clients when they panic and to limit their avarice when they see opportunities in unsafe places. We do that by trotting out our statistical analytics, trend charts and timeline graphs illustrating the power of modern portfolio theory and other such “truths.”
All of these “rational” tools served us well in the past, as the world unfolded according to plan with sufficient frequency for us to build confidence in their validity.
Unfortunately, all of that changed over the past three to five years as markets grossly misbehaved in a way that defied and largely discredited our traditional explanations. Many observers would also say that investor psychology has changed as a result of their recent experience. But has it? Denise Shull, author of Market Mind Games — A Radical Psychology of Investing, Trading and Risk doesn’t think so.
Instead, she asks: “What if the mystery of market crashes and trader and investor meltdowns stems from a simple but total misunderstanding of our own minds? Could everything we think we know about ourselves — intelligence and rationality vs emotion and irrationality — be totally off the mark? Simply put: Yes.”
Shull brings a highly respected background to her thesis, having both extensive experiences as a securities trader and a master’s level education in neuroeconomics (combining behavioural psychology with decision-making in economic situations). In simple terms, she refutes the classic advice to set our emotions aside when making investment decisions because, in her educated and experienced view, doing so reduces the confidence we hope to have in those decisions as our feelings around uncertainty and risk tug hard at our psyche.
On that note, I found it surprising to learn that our minds deal differently with risk and uncertainty — given how often we use the terms interchangeably in an investment context. In fact, our blood even takes a different path through our brain when faced with uncertainty from the course it follows when we face risk. Trying to fight these innate, natural tendencies with pre-programmed algorithmic or analytical trading decisions just seems so wrong. We leave ourselves no room to consider the emotional context that is often crying out to us to obtain more information before acting.
Consequently, Shull argues, emotions should not be suppressed but rather treated as any other pieces of important data that drive our choices about how we act in investment situations. It is our ability to manage our “psychological capital” of emotions and intuition in support of our reasoning and analytical capabilities that will make for better investment decision-making in times of duress.
Through a series of simulated university-level lectures and four fictional characters in this book, Shull leads us on a journey of understanding that it is not sufficient to be able to “read the market” to be a successful investor (or advisor). We must also learn to “read ourselves” — to figure out the innermost feelings (both physical and emotional) that drive our investment decisions.
We must also keep in mind that on the other side of every trade is another person who brings his or her emotions to the table. Those feelings are obviously at least somewhat at odds with our own, if that person is willing to buy what we are so anxious to sell, or vice versa. In other words, markets should be viewed as much a “social game” as a “numbers’ game.”
Although Market Mind Games is largely written for serious institutional and other traders, it certainly has relevance for anyone in an investment advisory role. It explains the basics of neuroscience in language we can understand, both intellectually and as a result of our experience as both advisors counselling stressed clients and as investors ourselves. It is divided into four major sections with 22 chapters. The chapters are mercifully short and focused — although I did get some sense of repetition of the underlying theme and key points, which is not necessarily a bad thing.
This is not a book you are likely to read in a single sitting, unless you are an incurable student of behavioural economics. I would place it closer to textbook status than storybook, although the four fictional characters allow the author to both educate and entertain — an approach that seems consistent with Shull’s central theme of the overlap between emotions and analytics. For those of us who have always believed that the former trump the latter, Market Mind Games gives us a scientific basis for continuing in that belief. IE