Investor anthropology and the hegemony of technical analysis

There are a bunch of ways I which I feel fortunate in falling in to a philosophy major but if I had the chance to do it all over again, I would include a lot more Anthropology. I read the theory that the universality of nodding the head as a positive signal and shaking for negative is an outgrowth of being presented with food in primitive eras– the nod is reflection of ducking the head to eat what’s offered and shaking is a rejection – and I’m fascinated by the insight into how our brains actually work at a base, hard wiring level and how these patterns persist.  I’m going to suggest today that the career of an investor, and definitely the psychological arc of a industry professional, is subject to its own anthropology dictated by the time period in which they developed industry and investment knowledge.

I refer frequently to the technology bubble and this is only in part because it can be held up as a complete boom and bust cycle worthy of analysis. The other reason is that the 1990s is when I came up, and absorbed the majority of what knowledge I have as to investing and the inner workings of the industry. Most intuitive reactions I have about any market are, at their base, the result of subconscious comparisons with conditions, and the result, then.

In those halcyon days, the old-timers were a consistent source of hilarity with their hackneyed insistence on commodity stocks. Why, we wondered, would anyone care about drill holes and ore samples when crude was on its way to $20 and the history of modern civilization was being re-written by Bill Gates? It was quaint, like long underwear with a flap on the back or the Edsel. In hindsight the foundation for their bias is clear – the old-timers came up in the late 70s, early 80s (or apprenticed under someone who did) when commodity stocks were about the only way for investors to dodge stagnation and the oil embargo.

It takes time to develop a body of knowledge. Most investors not being  geologists, the ability to comprehend the investment application of seismology reports, and the meeting-by-meeting assessment of management and engineering teams (always a key determinant of commodity investing success) is the task of years. Once developed, the last thing you want to hear is that boom is over and your skill set needs to be put aside for a decade or two.  In the same way, for my generation the tech bubble came with its own set of lessons, both good (the transformative power of the Internet, successful capital allocation towards efficiency, etc) and bad (horrendous corruption in the new issue business).

In a practical sense those of my era still struggle with this reflexive impulse to look back at technology stocks for investment opportunities and now I assume it’s the old-timers turn to laugh at us. The last major report I wrote for my previous firm was on Cloud computing despite the ridiculous valuation levels at the time. More generally, however, I would argue that the primary lesson of the tech bubble, reinforced with a sledgehammer in 2008, is a pervasive lack of trust in any type of sustained rallies.

In order to progress as an investor these biases, an accident of history, have to be fought but it is incredibly hard. Every time I see photos of the shiny Chinese ghost towns and hear yet another story of accounting fraud I think immediately of standing over the trader’s shoulder on the first day Yahoo! traded thinking, “This is nuts. There’s no way this can continue.”

In the time-squeezed, quick burnout environment of finance, estimates of how long a “generation” lasts run to about seven or eight years.  So we now have two generations of traders, bankers and brokers who in the back of their mind are at least partially conditioned to expect market disaster every few years. Is it any wonder then that technical analysis has become almost the sole determinant of investment decisions?  Get in and get out before the dyke collapses and don’t bother reading research because they can’t agree on anything and even if they did it would be a sure sign we’re being lied to.

If I tell you the current market “feels” unsustainable, it might be a sign that I am the victim of my own investor anthropology and tech bubble-derived hard wiring. (One of the benefits of an education in the Humanities is the ability to recognize circular arguments.)  Objectively though, I can not help but think that the psychological effects of the huge market upheavals of recent memory, and the lack of positive longer-term equity market returns, will have lasting implications for both professional and non-professional investors. The pendulum will undoubtedly swing backwards at some point, away from what looks like a weird form of investor nihilism, but it will likely take a long, long time – the memories and habits from your formative investing years appear to last forever.

27 thoughts on “Investor anthropology and the hegemony of technical analysis

  1. Hey neat! I’m also a philosophy grad, and I wish I had taken more social anthropology and sociology. It’s probably because those fields base their theories on data, while there’s no such empiricism in philosophy. And as an investor, you always want hard data backing up your assumptions.

    • Interloper says:

      Dullest, most excruciating course I ever took turned out to be the most important: logic. A lot of times, things only look like they’ve been proven. Thanks for commenting.

  2. […] Interloper, “So we now have two generations of traders, bankers and brokers who in the back of their mind are at least partially conditioned to expect market disaster every few years. Is it any wonder then that technical analysis has become almost the sole determinant of investment decisions?”  (Interloper) […]

  3. Having coming out of undergrad in 2005 (finance & philosophy majors, coincidentally) and going straight to a buy-side desk as an equities analyst; I can’t help but agree with the thrust of your post. I was at a FIG-focused firm. To this day it’s hard for me not to look for the short-thesis first and then only acquiesce to a long positioning when that short line of thought proves barren. I also inherently distrust investment thesis where the majority weight rests on some kind of relative valuation argument. That will no doubt prove a handicap at some point, in a healthy/trending market.

    Any anthro-oriented books you’d recommend that may be of particular interest to the finance inclined? I’ve read 10,000 year explosion amongst a few other “popular” titles.

    • Interloper says:

      I emailed Tyler Cowen with the exact same question. He said all of the reall good work is in short papers, but I had trouble finding anything general enough. The danger is pseudo crap like Naked Ape. Anyone with expertise in this area, pls feel free to contact or comment with reading suggestions.

  4. David says:

    Spectacular post. The first one I’ve read that strongly acknowledges the importance of learned behavior and path dependence of individuals in markets.

  5. PD says:

    Many young people in the business have been scarred by the Panic of 2008-9 as have many of their older peers who witnessed the Dot-Com Collapse.

    What’s interesting is that for each one of these landmarks, there are dozens of boom-busts within sectors–and they’re relatively easy to find. It starts off with a hot IPO or initial public debt offerings that excel credibility (think Netscape in the Dot-Com era or Microsoft in the software era about a decade earlier), then come the IPOs of good-to-average companies and last come the ones that no one will touch but brokers will find a few less knowledgeable folks on Main Street who will believe that could be the next Wal-Mart.

    As economics laws are not yet repealed, all that capital begins chasing fewer and fewer marginal profits that sometimes turns to losses.

    When calling bubbles, many may look at the broad equities or credit (or even specific currencies) markets and even a certain industry, such as tech, to point out whether a trend is a bubble. This often misses the mini-bubbles in certain sub-sectors or themes we saw in the last couple decades: biotechs, waste management, roll-ups, emerging markets, ILECs, paging service cos, social networks, education cos, and now, er, cloud computing?

    Recall that clean energy and renewable energy was supposed to change the world a la ’90s Dot-Coms. What we have instead are brewing questions for the White House after many failures in these sectors. That too seemed like a bubble but is overshadowed by the national failures in the Europe.

    Watching IPO and new credit pipelines is very telling. Who could blame VCs for trying to sell at the top? Everyone else is trying to do the same.

    If you think it’s worthy, maybe a blog on how credit fund managers, who the press usually portray as sober, number crunching computers, are just as susceptible to chasing bubbles as equity fund managers? Would be interesting to hear if that resonates with others.

  6. My degrees were in Economics, but I read widely in many areas, from philosophy to law, theology to technology. And I’m a math nerd of sorts, though most of what I do is statistics these days.

    Personally, I think being a generalist value investor gives you a large advantage in the markets. Risk control is built-in to the discipline. It forces you to learn about a lot of different industries, and learn about economic trends.

    • Interloper says:

      Agree. When I’m in a good mood, I believe that Philo teaches HOW to thnk instead of what to think, but that thought is often optimistic. No matter what education you have, it’s only a starting point for career. So many people get hung up on what you’ve learned by age 23 when there’s a lot more years after that to learn. Again, flattered someone of your eminence is coming to visit.

  7. […] on health care law (USA Today) • Investor anthropology and the hegemony of technical analysis (Interloper) • Spotlight Fixed on Geithner, a Man Obama Fought to Keep (NYT) see also The Wonk Who Slays […]

  8. HW says:

    I love your work. Just a thought for future reference: you mean “Get in and get out before the DIKE collapses”. What you have, “Get in and get out before the DYKE collapses” has quite a different connotation.

  9. […] Interloper, “So we now have two generations of traders, bankers and brokers who in the back of their mind are at least partially conditioned to expect market disaster every few years. Is it any wonder then that technical analysis has become almost the sole determinant of investment decisions?”  (Interloper) […]

  10. Octavio Richetta says:

    This is one of the greatest thoughts I have come by lately. It is not that we cannot detect change/paradigm shifts. The trouble is that we do nothing!

    MOHAMED EL-ERIAN: “Right? And there are these shifts and you’re going to feel uncomfortable. It’s like someone in the middle of an earthquake. They’re going to feel uncomfortable, but the answer is not necessarily abandon the city, but rather understand what’s going on and understand what is fragile and what is valued- because if you understand and have the right mindset, you can navigate. We did something, luckily, on the business side that has helped us a lot. Back in ’08, ’09, we invited a professor from the London Business School to come and speak to us. He made his reputation, his name is Don Sull, by looking at why successful companies split into either remaining successful or not. And it’s really interesting. It’s not because they don’t recognize the paradigm shift. Companies are very good at recognizing when the world is changing. It’s what do they do next. And the biggest trap that a company can fall in, the biggest trap that an investor can fall in is that they recognize the shift, but then they become hostage to what is called “active inertia.” Active inertia is active in the sense that you do something, but inertia you’re doing more of the same, but your world is changing and, therefore, you have to evolve with it. And therefore, you know, the message that we tell investors is you’re right to feel unsettled. Okay? That’s because the world is changing, but understand that that requires you to also evolve with it. I’ll give you an example.”

    Keep up the good work. A+!

  11. Rich says:

    I recall an interview with Donald Coxe, around 2002, in which he said technology is dead, and won’t come back for two generations. He then asked what the polar opposite of tech is, where no one had a penny invested, and answered it was gold and commodity stocks. He clearly knew about investor conditioning.

    I am an investing child of the 80’s, when buy and hold ruled. I guarantee you that at some point, maybe next week, or perhaps years in the future, the market will start going up, and it won’t stop. People will say it’s too high, and try to short it, but that will be a money losing proposition for a decade. No one will recognize the market’s character has changed until years after it happens. If by chance you should see it happening, please let me know :)

  12. Idriss Stevenson says:

    Have a look there:

    It’s coming soon, and it takes no rocket science to see it.

  13. metanymic says:

    I just want to note that you are not describing anthropology, or certainly not contemporary anthropology. Hate to be a bummer.

    Foundational references that most immediately come to mind are Marshall Sahlins, Culture and Practical Reason and maybe Lévi-Strauss and his critics (especially in feminist and anti-imperial camps). Oh: Bourdieu is pretty great. It’s hard to think of one text that sums up an all-historical definition of nature/culture and the development of appropriate methods. But a working notion of culture as practice is central, and we’ve done a lot of interesting things to get past functionalism and the universal/vs/relative, nature/vs/culture debate.

    Some recent ethnographies dealing with cultures of finance: karen Ho’s Liquidated, Caitlin Zaloom, Out of the Pits. You could get really fancy and delve deeper into science studies that work in analyses of capital and the production of expertise (i.e., like Melinda Cooper, Joe Dumit, Mike Fortun, Kaushik Sunder Rajan).

    • Interloper says:

      I know, and I struggled with that. Technically, it’s more Evolutionary Psychology, but even that term is politically devicive, so I went this less accurate route. I don’t want to go political -all discussions immediately go to hell.

  14. PD says:

    There are good reasons why economics was once placed as a sub-branch of philisophy.

    Along the same lines, it could be useful to some with today’s formal economics training to read what Adam Smith, I believe, deemed his most important work, “The Theory of Moral Sentiments”. It’s a book that can add to one’s world views.

    While I’ve only read parts of it (it’s not a quick read and requires patience, pause and thought), if one is looking for economics and philosophy theories combined that have stood the test of time, this is one of them.

  15. […] I like the patience theme that he oozes. I like the fact that he acknowledges all these crises, but at the same time knows that the issues often (almost always) are resolved in a better fashion than people thought at the time. I would rather listen to him than the people who he describes who look at the stock price every five minutes. Investing is not about that. Thanks Buffy. This blog post ties really nicely into the whole argument of people who have short term bias, often it depends from what era they are from, check it out – Investor anthropology and the hegemony of technical analysis. […]

  16. meleagrid says:

    sorry, dude, if you took my anthropology class and you wrote that, you’d of failed, no question about it.

  17. […] Investor anthropology and the hegemony of technical analysis (Interloper) […]

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