Market Thinking

making sense of the narrative

One world, two ‘realities’

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The growth of AI in both financial markets and society as a whole is skewing our behaviour towards ‘left brain’ characteristics of transactions, data and goal seeking and away from right brain characteristics of analysis, interpretation and context. Computers need binary inputs and thus the AI encourages us to see things in black and white. Such false certainty is dangerous in markets as well as society and both would benefit from a “Red Team‘ approach of forcing each side to consider the prospect that the opposite reality may be just as ‘true’.

Many readers will be familiar with the ‘Brain Trick’ of the spinning dancer shown below. Is she spinning left or right? Or does she keep changing direction?

Left Brain or Right Brain?

Source Wikipedia

According to some explanations the reality that you see depends on which side of your Brain is ‘strongest’ – the left brain is traditionally seen as more analytical, rational and logical, while the right brain is more curious, artistic, imaginative and creative. Soldier or Poet, do-er or thinker. If the dancer goes anti-clockwise/left, it means you have a dominant left brain and vice versa. Of course, most people are somewhere in the middle – according to a quick online test I just took, I am apparently 60:40 left Brain to right Brain – which sounds about right – and yes the dancer keeps switching, I can even ‘make her do it!

The first and perhaps most obvious investment and markets point from this is that two people can see what is apparently the same ‘information’ and yet draw completely different conclusions based on which side of their brain is dominant. Left brain traders see one thing while more right brain long-term analytical investors may see the opposite and given that market prices are based on the ‘net’ outcome of many independent decisions it is hardly surprising that, half the time, half the market think the other half doesn’t understand what is really going on! Sometimes we use behavioral finance terms to explain this – talking of ‘priors’ to describe pre-conceptions for example, or sometimes we use psychological terms like ‘anchoring’ or ‘framing’ or indeed ‘cognitive dissonance’ – when person A simply refuses to accept the ‘fact’ that person B perceives. Sometimes of course the true ‘fact’ is that neither view is true, they are just different interpretations – quite literally in this case of course in that the dancer is not spinning at all, it is a two dimensional image designed to ‘trick’ us. In markets there is a form of ‘truth’ in the way that prices move, but, as previously discussed, that truth actually simply reflects the weight of money, the amount of people that have, quite literally, bought into the prevailing narrative. As such it is always important to recognise that there is indeed an alternative view and that, on many occasions, it may be more correct than yours. At least for the time being.

Top Down or Bottom up?

Another, more nuanced, take on the idea of the ‘two brains’ was put forth by Psychologist/Philosopher Iain McGilchrist in his wonderfully titled 2009 book, The Master and His Emissary, wherein he argues that both halves of the brain actually process the same data differently, the left being more immediate and detail/goal oriented and the right more focussed on the bigger picture – the right brain is the Master to the left brain’s messenger, or Emissary. Thus, while at the margin a few people will be very left brain or very right brain, most are a balance and where you are on the spectrum is what some refer to as your ‘talent stack’. At a corporate (or even a personal) level, what we look for are successful ‘teams’ of left and right brain people, dreamers and do-ers. Right brain Steve Jobs to left brain Steve Wozniak. But left brain isn’t just nerds, in fact most sales and marketing people are often left brain – transaction and deal oriented, often good with language and focussing on the next step rather than the overall strategy. Often though, they fail to see perspective, the wood for the trees, they can become obsessed with data-points while failing to analyse their meaning. That is left for the right brain types.

The title of Iain McGilchrist’s book comes from a parable about a wise ruler whose empire becomes so large that he employs emissaries to carry out his instructions. After a time, the emissary, despite only seeing part of the picture, nevertheless believes they know everything and usurp the master, only to result in disaster. The author’s point is that this ‘always’ happens and as well as detailed studies of behaviour based on observations around strokes and trauma to either side of the brain and the widely different consequences to behaviour, he laments the increasing left brain focus of modern society – something that has only got ‘worse’ since he wrote the book – primarily we would suggest due to the influence of social media.

The left brain is binary – everything is black or white, off or on, just like a transistor. There is no room for nuance or compromise. The use of ever more powerful computers is effectively outsourcing our left brain functions and while in the medium term it will make those who specialise in those areas largely redundant, while empowering those with right brain bias, in the near term, their close association with these technical developments and the money-making, deal-oriented culture around them is making these left brain types much more dominant, particularly in Silicon Valley and on Wall Street. For every Bezos and Musk, there is a Zuckerberg or a Brin or a Dorsey. For every Warren Buffet there is a Jim Simmons or a Larry Fink. The problems as he sees it is that things are out of balance. Western society is increasingly rewarding the bankers, lawyers and the accountants rather than the artists, architects and designers. Data is gathered but manipulated and sold rather than analysed and interpreted. And as we see with Covid, the left brain scientists and transaction oriented Medical Industrial Complex are dominating the right brained Classics and PPE graduates in setting a black and white policy agenda.

Brainstorm or Green needle?

To take the concept of the dancer to the next level and see how social media achieves its goals, consider this audio visual ‘trick’ (with apologies for the slightly annoying presenter). The point here is that the exact same audiofile is heard either as the word ‘Brainstorm’ or “green needle’ and the word you here is almost guaranteed to correspond to the words the presenter is holding up. Basically you hear what you read.

In fact an analysis shows that both words are being said but that our brains focus on the one where there is the extra information, as in the word being held up. This of course is the next level of narrative control and is particularly important in a world that has spent the last 12 months in the midst of an unprecedented real life Psychological Experiment. These behavioral traits are well known to psychologists and given that the bulk of the ‘experts’ advising the UK government are either mathematical modellers (the SPI-M subgroup) or Behavioural Psychologists ( the SPI-B subgroup) we can see that this is really all about forming the narrative. Indeed, as the Guardian pointed out a year ago, the SAGE group contain no virologists, immunologists or even intensive care specialists (!) In effect, obeisance to ‘the science’ means that the (often extremely left brain) modellers, despite their history of wildly over-predicting the dangers, continue to make extreme predictions based on negative assumptions to justify both their past behaviour and their belief in Non Pharmaceutical Interventions, or NPIs, otherwise known as lockdown and social distancing. Meanwhile the behavioral Psychologists use every PRopaganda trick known to the profession to ensure the public hears Green needle rather than brainstorm and not only complies with the official ‘plan’ but also remains convinced that the plan was both worthwhile and sensible. Context and interpretation – right brain characteristics, are overridden by the left-brain goal-oriented ‘sales and marketing’ campaign which sees the world in black and white, with no nuance or compromise.

Narrative tilts in the noise markets

To bring it back around to markets and investing, the header to the blog obviously indicates that we see ourselves as more right brain – happy to outsource much of the left brain processing to computers and others but hoping to provide value added through idea generation and subsequent interpretation of the processed data. This makes us more investor than trader and this concept of other market participants biasing how the information is presented is central to ‘Market Thinking’. Recognising the impact of narrative control on markets not only at the stock level but also at the more macro level, particularly in the shorter term trading or ‘noise markets’ is key to an overall understanding of the longer term investment landscape.

Thus, for example, when bonds sell off, as recently, we ‘know’ that it is usually for a whole variety of technical and market structure, left-brain, mathematical reasons, since increasingly, as with social media, the computers are transacting with little human oversight. However, market moves are often subsequently ‘explained’ in more emotional, right-brain, terms around concepts such as the fear of rising inflation and a veneer of interpretation and analysis is added that can mislead longer term investors. Moreover, we should not ignore the fact that traders, rather like governments with Covid, will often seek to use narrative tricks such as confirmation bias (highlighting only the data that supports the narrative) to control behaviour of other market participants. In effect holding up the card for you to hear Green Needle rather than Brainstorm. Thus when ‘everybody’ is talking about an inflation/reflation trade and looking at charts of the bond market to confirm it, supported by high frequency economic data on prices paid and charts of commodity prices as confirmation bias, then we have our narrative. However, as we saw this last month, this often leads to a short term reversal in those trades as the computer systems that caused the move in the first place, reverse their positions (say, because volatility fell) and the original noise traders cash out meaning there are no ‘new’ buyers left to come in at the higher price.

This then is classic two steps forward one step back market behaviour – the narrative may be essentially correct, but it becomes too crowded and so pauses. If, as often happens, this triggers some profit taking, then we see some drawdown. It will be interesting to see if the reverse ‘sell in May’ narrative appears now with the opposite set of the ‘evidence’ being presented, i.e will the April bounce in Bonds be taken as ‘proof’ that there is no inflation, while the strength of other variables such as shipping rates, Copper, PMIs etc is ignored? ( As we noted in our latest Monthly, we think the inflation narrative remains intact.)

Left Brain Social Media is increasingly dominant

More broadly, we would return to our notion that the central problem with (social) media is that it – or more accurately the AI that increasingly drives it – is left brain and goal oriented, just like the computers that trade volatility in the financial markets. The AI creates competing viewpoints as ‘news’ in the same way some Quant traders look to create volatility and thus it encourages the two very different, indeed apparently irreconcilable, interpretations of the same ‘data’. In other words, the ‘fake news’ creates conflict in order to prosper from it – much as traders generate volatility in order to profit from it. Covid, Climate Change, Conflicts in the South China Sea (to pick the front page of any newspaper) are all presented as dramatic ‘risks’ requiring left brain driven action (usually a lot of government funding is required), but as with our dancer, the same information can, with a little effort, be restated in the opposite direction. The concept of the Oxford Debate was always that you were only told at the last minute which ‘side’ of the argument you had to present, which meant that you had to consider both sides – and thus accept shades of grey. It’s a technique that investors – and society as a whole – could do with re-learning.

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