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February 24, 2011


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The Ascent of Money is science based? Guess we read different books. Last time I checked Niall Ferguson was a professor of HISTORY, not an economics professor or a science professor. Ive read most of his books and would recommend them.

I am a believer in cognitive biases and what has been termed behavioral economics, but the author of this piece presents this research as fact and makes it seem the debate is really over. Let me be clear, the debate is only beginning and the findings of behavioral economics are only at the beginning stages. To present this information as fact and imply the debate is over, is miss leading and flat out wrong.

A lot wrong with this post- sorry.

Seriously, you don't need pseudoscience to recognize that most people make most decisions based on emotion. Maybe especially men.

Why is every car commercial about sex? Why is every beer commercial about sex? Why do cheerleaders exist? Why do heterosexual women "dress up" for a date? And what about that calendar that sells tools, or that magazine about cars--what are the naked girls for?

Oh, I guess it's just because we all know that most men usually make financial decisions based totally on logic! LOL!

I guess Tyler is right-in that we don't know all the ways that our cognitive biases shape our financial behavior, but I would agree with the post-it is absolutely clear from modern psychology that human economic behavior has as much to do with emotions as logic.

Niall Ferguson is one of my favorite commentators and is a fairly frequent guest on Fareed Zakaria's Sunday talk show on CNN called "GPS" (Global Public Square). This is an extract from his impressive biography.

Niall Campbell Douglas Ferguson (born April 18, 1964, in Glasgow)[1] is a British historian who specialises in financial and economic history, particularly hyperinflation and the bond markets, as well as the history of colonialism.[2]

He is the Laurence A. Tisch Professor of History at Harvard University[3] as well as William Ziegler Professor of Business Administration at Harvard Business School, and also currently the Philippe Roman Chair in History and International Affairs at the London School of Economics. He was educated at the private Glasgow Academy in Scotland, and at Magdalen College, Oxford. During the 2008 U.S. presidential election, Ferguson advised Senator John S. McCain's campaign.[4]

The Times Higher Education noted his "pugnacious undergraduate life and debating style".[5] In 2008, Ferguson published The Ascent of Money: A Financial History of the World,[6] which he also presented as a Channel 4 television series. Both at Harvard College and at LSE, Ferguson runs a course entitled "Western Ascendancy: The Mainsprings of Global Power from 1600 to the Present."

Old Limey- Yeah I know who he is. Where in that bio does it say he does scientific research? The Ascent of Money is "A Financial History of the World"... its a great book. Its not an analysis of behavioral economic. Ferguson is an insightful economic and political historian- he has nothing to do with scientific research.

It is a well known belief that the stockmarket is driven by the human emotions of Fear and Greed. I think that every investor has experienced both, I know I have. When you have made an investment and it starts going up rapidly it is very exhilarating, the greed emotion kicks in and it is very tempting to pile on and invest more and more money as the investment rises in value. Then you log on to your computer or turn on your TV one morning and to your dismay you find that the Nasdaq has gapped down at the opening and is still falling - that's when the fear emotion kicks in and you are faced with a dilemma, "Should I get out completely or should I wait and see what happens"?

The most significant four days since I started investing started on March 9th. 2000.
The bubble had started in earnest around 11/2/1998 when my portfolio was $1.228M, 16 months later by 3/9/2000 I was 100% in 4 aggressive Hi-Tech funds and after a very steep ascent without a significant correction it was at $3.369M and I was feeling euphoric. On 3/10/2000 I lost $10K and started to be slightly concerned, the next day I lost $130,000 and was very concerned but had sold my largest position. The next day I lost another $84,000 and sold two more, then on the next day I lost another $124,000 but by then I had sold my remaining fund, having lost $348,000 in just 4 market days and ending with a portfolio that had dropped to $3.021M. The market kept dropping and didn't bottom until 2.5 years later and if I had buried my head in the sand and stopped opening my monthly statements like some Buy & Hold investors my portfolio would have been down to about what it was on 11/2/1998 and I would have enough capital losses at $3,000/year on my taxes to last me many lifetimes.

I have to be honest and say that during those 4 harrowing days my technical indicators all triggered but it was also the primeval fear of losing so much money so quickly that drove my decision.

Emotions are a big part of investing and are a key causing individuals to do poorly and men actually to under perform women. In the investment world emotions are many times represented by "the emotional roller coaster".

I believe there are individuals who are able to control their emotions - for example Warren Buffett - but they are pretty rare. The rest of the investing world is better off concentrating on asset allocation, getting a good plan and sticking with it.

Incidently, the current period is a case in point. It makes you want to throw your hands up and liquidate everything - the emotional response. Unforeseen, in the background are steps being taken to straighten out the whole Middle East mess. Several years down the road this very well could be seen as a great investment opportunity.

DIY- Men underperform women? Id love to hear more on that research.

Buffett controls his emotions? Unless you work with him, you probably dont know. There are plenty of people who can control their emotions.

Even though one's emotions are always there I have found that what helps me keep them totally under control these days now that I am 76 and happily retired into the slow lane of investing is to have greatly reduced the volatility of my portfolio. These days on a pretty large portfolio it's a bad day for me if I lose $1,500 like I have in the last two days. I can live with that but as I previously stated when you can lose $348,000 in just 4 market days that's such a gut wrenching loss that its hard to take and can cause you to lose sleep, become very irritable and hard to live with. The majority of my portfolio gains these days don't come from capital gains thank goodness, they come from fixed interest and fixed dividends which are either tax exempt or tax deferred.

Old Limey -

Thanks for the great insight. I really enjoy reading your posts along with FMF as a whole.

We are early forties and have been investing since '92. We are fortunate enough to have had the ability to save and increase our percentage of income saved. We make some sacrifices by living quite a bit below our means but we are quite comfortable overall. We are looking forward to financial freedom in a couple of decades.

FMF and the many helpful contributers keep me focused and driven towards our financial goals. It concerns me that more Americans do not believe in some very fundamental facets of PF, not to mention "delayed gratification".

Yes, FMF. We do give some time, money, things to charities. I know it could be more. Can't it always?

I didn't say Dr. Ferguson was a scientist or a professor of science, nor that THE ASCENT OF MONEY is a science text. However, there are many fields of science besides astrophysics and quantum mechanics, and economics and mathematics are two of them. Yes, ASCENT is primarily history, but much of it is about the evolution of the study of economics and other associated sciences (e.g. the effects of Leonardo de Pisa's work and LIBER ABACCI on mathematics). Because the book is largely about these disciplines and how they affect and are effected by human psychology (a science, to some) and history, I don't think calling the text "science based" is so far off the mark.
L. Mason

Ferguson does not have a doctorate degree and does not require the "Dr.".

You stated: "Current economics literature, both casual (Freakonomics, Levitt and Dubner) and science-based (The Ascent of Money, N. Ferguson)"

I include the study of economic and mathematics in the science field and The Ascent of Money is a history book. Its use in this post is silly. There are a number of exceptional choice that could support the above arguments- I believe this was a poor choice and thus forces one to question the validity of the post.

You also state: "But the hard evidence is there. (See Kahneman and Tversky; Peter Bernstein on bubbles; Ferguson on market confidence.)"

You choices here are hardly what anyone would call "hard evidence", to support your claims. (And yes, I've read most of Bernstein's books as well)

"The research Cassidy cites shows that how and, more important, where in the brain we process these data determines"

As an investor, why do I care more about where in the brain we process the data than how we process the data? It seems to me as just the opposite.

The post could have been better. Sentence structure was bad. Questions were asked without really being answered. Referenced materials were poorly chosen. It failed to tell us very much about our emotions and how we could better ourselves.

I am sure you are very knowledgeable and intelligent, and I am sure a better analysis could be presented.

I looked at his website and he does have a D.Phil not an M.Phil- so I stand corrected.

MC --
Not to contradict myself, but marketing and merchandising industries are very gender savvy, but also gender-blind, i.e. they will sell anything to anyone at whatever price the market will bear -- no big news there. Women have a "shopping problem?" Sure, but follow a guy into a fishing shop, a surf shop, and bike shop, etc., etc.
My comment was about men because most money discussion in my world happens between men (BTW how many women are on this comments feed? -hands up, please). AND lots of men slide past the issue of emotions as a pivotal factor in money management decisions, especially - as perhaps I should have said -- it it relates to disposable income, investments, etc., as opposed to the often inflexible decisions and actions of basic household dollars.

If I can plug it, have a look at our book cited in the main guest post. Your observations are integral to section of SEVEN PATHS.

Tyler -
Re: Dr. – apology accepted, thanks. Hard to believe he could hold the academic posts he does without a PhD.
And thanks for the "knowledgeable" etc. comment.

I’ll address mainly Tyler’s comments, because he’s voiced most of the opposition, both to the content as well as the method of the post.

First, in regard to his initial comments:
Is THE ASCENT OF MONEY “science-based economics literature,” as I called it? It is primarily occupied with the history of various people, processes, and events related to the evolution of money and finance in capital markets as well as the wider world, so I think it’s accurate to call it part of economics literature. As to the question of the amount of science in the book, how do we define science? Basically, in line with traditional “scientific method:” observation of phenomenon, hypothesis as to the causes, experimentation to test the hypotheses, data gathering, analysis, conclusions, theory of explanation, evolution of scientific law. Dr. Ferguson makes thousand of cogent historical observations of human behaviors (decisions, actions, etc.) re: money, and hypothesizes as to how these led to outcomes of consequence. While he doesn’t construct experiments (history does that for him, in a way far more random and free of experimental bias), he gathers data from highly relevant outcomes, processes that data, draws conclusions, and posits theories to explain the workings and underpinnings of the antecedent processes. Ferguson fronts up with innumerable citations from statistical records, the finance universe, and behavioral psychology. His familiarity with much of the science of economics is unquestioned, and he incorporates a great deal of that in the book. Science relies on rigorous research, and his is outstanding. I never called this a science text, but if you want to deny that it is even science-based, fine. We may well have “read two different books.” I see a great deal of science in it. I accept that you don’t.

“Behavioral economics -- the author of this piece presents this research as fact and makes it seem the debate is really over.”
What debate? That emotions have more effect on how choose and act than we used to believe? That emotions are fundamental to how and why we act? No, I don’t think these observations are open to debate re: the behavior of human beings. Yes, neuroscience has made great leaps in neural mapping. Yes, the mechanisms in the CNS are a long way from fully understood. No, the study is nowhere near and endpoint – as with any rigorous field. But that doesn’t mean the fundamental discoveries (about emotional influence) are not facts -- as much as we can call anything “fact” or “science.” Facts and science are just our view from our window of time, plus whatever we’ve accurately gleaned from the past. Facts are only facts until we get more information.

Later comments:
“Its (sic) not an analysis of behavioral economic (sic).”
I strongly disagree, and quote one ASCENT’s reviewer: “It’s when he talks about the behavioral psychology of money that Ferguson has the most surprising things to say . . .” If you want to say there is a big distinction between “Behavioral economic(s)” and “the behavioral psychology of money,” maybe we better start a new website.

“He (Ferguson) has nothing to do with scientific research.” I refer to my comments on this above. As chair in History and International Affairs at the London School of Economics, he will be intimately involved with political science and economics, and the research associated with them. As Professor of Business Administration at Harvard Business School he will be dealing with the mathematical, economic, statistical, and behavioral research coming from and consumed by that institution. Magdalen College is one of the more science-based of the Oxford group; N.F. had a good grounding – and he’s a Scot.

“Men underperform women? Id love to hear more on that research.”
You can start here: Institutional Investor, “The Better Half: Alpha Females Prevail” By Frances Denmark, November 09, 2009: “From January 2000 through May 31, 2009, women who ran hedge funds delivered nearly double the investment performance of their male counterparts.” There’s plenty of research on it . . . but is it “fact?”

“There are plenty of people who can control their emotions.”
Plenty more who can’t, even in the world’s capital markets. Let’s consider these: history’s bubbles, Nick Leeson given free rein by Barings Bank, the S&L disaster, the dot com “new economy,” Greenspan’s (love him or hate him) irrational exuberance, the recent collapse of credit and confidence. Did you listen to the Enron tapes from CA’s energy crisis? Were Lay, Skilling, and Fastow operating and manipulating because of analytical evidence? “Plenty?” Maybe as a number, but not as percentage, not in the finance professions nor the general populations. Many people fool themselves into believing they are “controlling” their emotions, or that they don’t need to. “Controlling” one’s emotions isn’t the key; understanding them is.

“ASCENT . . .use is silly . . . a poor choice.”
It’s one of several sources I cite. I’ve given my arguments for how and why it’s relevant. Human emotions in economic behavior is on of the book’s significant themes.

“Forces one to question the validity of the post.” Even if one agreed with your view of ASCENT as a reference, a disputed reference doesn’t invalidate a body of argument.

“Kahneman and Tversky; Peter Bernstein on bubbles; Ferguson on market confidence.) -- hardly what anyone would call "hard evidence."
Camerer and Richard Thaler and lots of others disagree with you on K & T. How is Bernstein’s recounting the history of economic bubbles to illustrate emotional folly in financial markets not hard evidence? Don’t you think historical facts (can I use that word?) cited by expert historians are hard evidence about human behavior?

“As an investor, why do I care more about where in the brain we process the data than how we process the data?”
You may not care at all, but that doesn’t mean that others don’t. That’s why there is so much research being done in this field. It’s part of the science.

“The post could have been better.”
No kidding?

“Sentence structure was bad.”
Now hold on a minute. You’re really getting up my nose here. I’ve won prizes in national non-fiction contests for my prose, and had fiction and non-fiction published in respected literary journals, so you’re getting close to home on this. Show me where my sentence structure was faulty. (In the “petty” dept. - At least I didn’t use “its” instead of “it’s” and leave the “s” off “economics.”)
Give me 3 questions I asked and didn’t answer.

“Referenced materials were poorly chosen.”
You’ve expressed this view, and I’ve defended each of my choices (rather well, I thought). But the most important one you don’t mention -- Cassidy’s article, which has the most to do with the entire scope of the topics, and I made that plain in the early part of the post. Have you read it?

“It failed to tell us very much about our emotions and how we could better ourselves.”
It obviously failed to tell you very much about anything. My apologies. Try our book.

“I am sure a better analysis could be presented.”
I agree. Be my guest. You seem to have a big interest in the area.

A few further remarks that some out there might benefit from:

Re: the range and content of the post, space is limited. Before one can present people with the possible benefits of "controlling" the emotions of money management, you need to convince them that emotions are even relevant. Doing that is not a "no-brainer," as the debates in this post have shown. That’s why this one is just an intro to some of the neuro-econ work and some of the ramifications (Tyler’s disagreements duly noted).

There are two main points in the post. The first is that emotions play a far greater role in economic decisions than we have preferred to believe until recently, including those of finance professionals with analytical responsibilities. Secondly, actions (as opposed to decisions) require an emotional component without which action won’t occur. There is good science to corroborate this. Think about it “unemotionally:” Why do we do things? For our own best interests (be they material, emotional, psychological, etc.). Why are we able to often pursue these things with perseverance and vigor (or not)? Because of the enthusiasm we feel for the benefits we will receive, or the anxiety we feel about missing out, now or in the future. If we feel no enthusiasm, no fear, no conviction, no excitement, no remorse, no enjoyment, no anticipation of good or bad things in the offing, we’re not motivated to act.

History doesn’t invent itself; it’s a compiled observation of human behavior over time. It is simply a recording (often biased) of the results of random human experiments over time. The historian doesn’t (usually) design the experiments, but that doesn’t make the outcomes less valid. In fact, they may be more valid because they don’t carry the (very common) biases of a scientist in their designs (though they do in the data gathering).

"near and endpoint" should have read "near an endpoint."

From an interview with Bernstein you provided: 2nd question "You have great esteem for the proponents of Behavioral Finance, while acknowledging that many economists, such as Paul Samuelson, are much more skeptical about the ability of Behavioral Finance to generate results for investors."

The source you provided clearly indicates the debate over the value of behavioral economics continues.

Besides the one question listed above, the interview really doesn’t address behavioral economics.

I like the New Yorker article and I am glad you referenced it- I read it when it first came out and I saved it in a file. I actually read it again the day of your post. I think I’ve read everything that was discussed in the post.

One example of a poorly written section:
Why is emotion important? What is its relevance? Where is its place in money, finance, and future fiscal security? N.b.: all these require evaluations, decisions, and—finally—action. If emotion has a dominant role in pushing us into this action, then we damn well better learn and accept that, otherwise we’re hog-tying ourselves in one of the very areas we need to master for success in any endeavor, but especially with money.

1. The question "why is emotion important?" is never really addressed. You then jump to "If emotion has a dominant role". You never really tell the reader why its important, relevant or its place.

2."N.b.: all these require evaluations, decisions, and—finally—action. " All these? All these what?

3. The final sentence is bad. "Then we damn well better learn and accpet that" "on of the very"

You have won awards. Have someone read your post and see if they think it’s well written. Take their word for it. If everyone tells you it’s great, I'd ignore me.

I don’t claim to be a brilliant writer. I don’t write posts for this site. I will make mistakes. I type my comments on this site while managing real money in real markets. I try to find alpha by taking advantage of behaviors in a complex system. To correct me for those errors is very petty.

On men underperforming women- I only read a quick summary of the research you provided. I mainly question the ability to accurately test such a difference. Again, I haven’t read the research paper, but it would be very hard to come to any accurate conclusion.

Nick Leeson wasnt given free rein- he committed fraud. The fact that price bubbles exist and fraud is committed doesnt mean individual emotions are out of control. One can buy and sell assets within a bubble without being emotional or allowing emotions to cloud judgment. When making this link you are confusing the individual for the crowd. My quoted comment was in response to another post, but fine.

"emotional folly in financial markets not hard evidence? Don’t you think historical facts (can I use that word?) cited by expert historians are hard evidence about human behavior?"

I think they are observations. I think they are important. I don’t think they are scientific. Discussing a financial bubble is different than running a controlled experiment. It’s very dangerous to blur these lines- people have responded this way vs. most people will respond this way.

I am very interested in finance, history, and financial markets.

I typed this during a busy day, so please excuse any missed commas.

“1. The question "why is emotion important?" is never really addressed . . . You never really tell the reader why its important, relevant or its place.”
Did you read the last four paragraphs of the post? “pleasure seeking in the limbic system . . .fear processing in the amygdala, . . .centers that affect what we do, and how, why, and when we do it.”
“far more of what we do is spawned by our emotions . . . we won’t move, won’t act, until we feel enough fear, greed, desire, disgust, affection, anger, or passion to dislodge us from the status quo.” Fear, greed, desire, disgust, affection, anger, or passion = emotions.
“Current economics literature . . rife with references . . . even economists recognize that human emotions . . . have far more to do with how we decide and why we act . . .”
“endorphins make us feel good . . . induce the emotions of well-being, pleasure, security . . . we will tend to repeat . . . that action . . . tied to emotional reward.”
The entire final paragraph continues to specifically explain what you say is never addressed.

2."N.b.: all these require evaluations, decisions, and—finally—action. " All these? All these what?
Go back one sentence: “Where is its place in money, finance, and future fiscal security?”
1) money, 2) finance, and 3) future fiscal security. All THESE, these three things, require evaluations, decisions, and action.

3. “The final sentence is bad. "Then we damn well better learn and accpet that" "on of the very"
It’s bad, is it? You want to explain why?

4. “Have someone read your post and see if they think it’s well written.
I inquired and was invited to write the guest post, which was then approved by the guy who runs this website. Also weighing in was my co-author in SEVEN PATHS, a Ph.D. in poli-sci, head of Vesta Capital, and formerly head of Meridian Bank, Elliot Homes, Governor of the Rural Telephone Bank, head of the Farm Credit Insurance System, boardmember of the FCA, poli-sci professor San Diego State, NAS grantee. Also the guy who referred me to the site, a retired electronics engineer and sales exec with Intel and Sun, and US-European sales director for a variety of S.V. start-ups.
5. “while managing real money in real markets.” I trade stocks and options every day, write, and run three small companies.
6. “Nick Leeson wasnt given free rein - he committed fraud.” His fraud, by necessity, occurred late in the piece. The methods and complexity of his derivatives trading, before he crossed the lines, were over the heads of his bosses in the UK, but he was making so much money for that department before he went rogue that he was essentially given free rein, and that’s what enabled him to commit fraud. This analysis is not mine but that of Judith Rawnsley in GOING FOR BROKE, HarperCollins, 1996.
7. “confusing the individual for the crowd.” The “crowd” is made up of most people.
8. “Discussing a financial bubble is different than running a controlled experiment.” Ferguson et al do more than discuss bubbles, etc., they analyze them much the same way as you would analyze outcomes of controlled experiments. As I said above, this can be more beneficial because the outcomes don’t carry the ever-present biases of designed experiments. The analyses certainly can be biased, but we rely on peole like Ferguson and Bernstein to minimize that.
9. “people have responded this way vs. most people will respond this way.”
“People have responded this way” over and over again through history and across cultures, and the betting is strong that they will do so again. The “people” we’re referring to are not from a random population, but from within the “experiment,” i.e. the monetary event or process or behavior in question. It’s not necessary for “most” of them to go wrong in order for the e.g. bubble to go wrong, just enough that a large quantum of assets gets pushed in the wrong direction, pushing the process out of balance so that bigger and bigger bets move en masse in one direction. But, in the end, most people do get hurt because most of them end up on the wrong side of the ledger, so to speak, because they lost sight of where they were and what they were doing in the process. So, yes, in that sense, history indicates that “most people will respond this way.” We all wish we were the ones who didn’t. But did being non-emotional save them, or did they just follow a chain of contrarian emotions?

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