Warning, quants, the grand magicians of the illusionary arts of behavioral finance and neuroeconomics, of investment psychology and the “new science of irrationality,” are working with Wall Street’s new “Happy Conspiracy” to scam America’s 95 million investors. They are your enemies. You cannot trust them. Their new books, ads and press releases are deceptive and misleading, part of Wall Street’s secret efforts to dominate, manipulate and control your mind, money and the markets.
This is not a review of Hollywood TV thriller like “24” involving corrupt politicians and corporations. Rather, we are targeting an emerging culture that’s far more dangerous than we just read in “Recipe for Disaster: The Formula That Killed Wall Street,” Wired magazine’s fascinating analysis of how “Wall Street turned to quants—brainy financial engineers—to invent new ways to boost profits. Their method for minting money worked brilliantly…until one of them devastated the global economy.”
Just one? No, the real story is far worse that in Wired: Maybe the ‘one-quant-and-his-one formula’ did create a lethal virus that triggered the subprime-credit meltdown and devastate the global economy. But that’s old news. Morever, Wired suggests it will never happen again “if” we just increase data transparency, “empowering all investors,” thus creating “an army of citizen regulators.” Laudable, but unlikely. Not with 40,000 Washington lobbyists and Wall Street the biggest political donor: They hate transparency.
But that’s not the real reason quants will rule The Street. The real story: Quants are everywhere, hiding in the shadows. Wired’s ‘one quant, one formula” plot is merely the tip of an iceberg dead ahead as the global economy recovers and a new bull market roars back. Quants are hiding in academia, research institutes, think tanks, and on Wall Street’s payroll, locked up in proprietary-secrets no-talk contracts.
Quant-thinking rules everything Wall Street does to America
Quant technologies influence everything Wall Street does “to” Main Street: Not just trading, portfolio management and market manipulation, but every aspect of The Street including financial planning and broker training, day trading systems, data design and transparency, 401k retirement programs, marketing, advertising and branding, lobbying and government regulations, and so many other niches.
The real story is far broader and much more interesting, offering clues to the next meltdown. But first, some context and history about how we got here, why this “Wall Street/Quant Conspiracy” is expanding, how they manipulate America’s mind, money and the markets, and why the next crash will be even more disastrous … all because of the growing influence of Wall Street army of quants and their neuroeconomic tools.
Don’t be misled by their latest pop-psychology books and their cute titles: Blunder: Why Smart People Make Bad Decisions; Blind Spots: Why Smart People Do Dumb Things; Sway: The Irresistible Pull of Irrational Behavior; Drunkard’s Walk: How Randomness Rules Our Live; The Logic of Life: Rational Economics in an Irrational World; Nudge: Improving Decisions About Health, Wealth and Happiness; Predictably Irrational: Hidden Forces That Shape Our Decisions and other misleading stuff on neuroeconomics. These books reflect the relentless dumbing down of Americans in the economics arena.
They read like press releases from a modern-day P.T. Barnum, the great 19th century circus impresario, Remember: “There’s a sucker born every minute.” Today, the “suckers” are America’s 95 million investors because the quants message is grossly misleading. It goes like this: If investors simple learn and adopt the tips in these books they will: (1) understand why their decisions are “predictably irrational;” (2) and as a result, they will stop making the “big mistakes” irrationality creates, plus (3) in the future they will have a defense against the manipulations of Wall Street and its quants.
Wrong. Wall Street’s army of quants are always light-years ahead of the suckers. Quants are constantly inventing new technologies, algorithms and marketing tools that’ll run circles around America’s 95 million “predictably irrational” investors. The pros and academics who wrote these books should be embarrassed. There’s little new we haven’t already read many years ago in classics like Hersh Shefrin’s Beyond Greed and Fear; John Nofsinger’s Investment Madness; Gary Belsky & Thomas Gilovich’s Why Smart People Make Big Money Mistakes; and many since. The new books are just rehashing ideas now part of our conventional wisdom as well as scientific literature.
Quants love manipulating “predictably irrational” investors
The real story reads like covert military special-ops, a dangerous war-game played in the shadows: Yale’s Robert Shiller exposed this game in his 2000 classic Irrational Exuberance. Irrational exuberance put the spotlight on individual investors driven by a “herd instinct.” But that scapegoated the little guy. Their “exuberance” was not the cause of irrational markets. That’s an illusion invented by Wall Street and its army of quants.
“Irrational exuberance” is no longer fits in a world that now includes the exploding new $683 trillion global “shadow banking system.” Today MIT Professor Dan Aierly’s Predictably Irrational more accurately profiles a market driven by millions of investors whose irrational behavior is being secretly “predicted” and manipulated by Wall Street’s quants, armed with an arsenal of neuroeconomic WMDs. P.T. Barnum would love today’s scenario! If he were here today he’d one-up Madoff, Sanford, the CEOs of AIG and all our clueless Wall Street bosses. Barnum would arm his team with powerful new neuroeconomic technologies that’d make his chutzpah irresistible. And that’s exactly what we better expect from the next generation of Wall Street leaders and quants, coming in the next bull market; investors wouldn’t even know they were being manipulated by the next army of quants. How did we get here? To understand how these new books mislead America’s 95 million investors, you need a brief summary of the four stages and principles in their evolution:
1. Investors are “irrational,” their irrationality leads to “big mistakes”
For two centuries, Wall Street’s “rational investor” theory was gospel. But after thirty years of research by many leaders in the neurosciences, Princeton Psychologist Daniel Kahneman was awarded the 2002 Nobel Economics prize for proving that investors are irrational decision-makers who often act against their best economic interests.
2. Main Street’s “irrational exuberance” does not “cause” bulls.
In his 2000 book Shiller defined irrational exuberance as “wishful thinking on the part of investors that blinds us to the truth of our situation,” creating a collective madness that turns investors into irrational mobs. Shiller’s still “old school,” still believes that Main Street investors are a blind mob driven by an “invisible hand,” not quants mind-games.
3. Investment decision-making is now “predictably irrational.”
Chicago’s behavioral finance genius Richard Thaler periodically edits Advances in Behavioral Finance, collections of cryptic quant research. He says Wall Street “needs investors who are irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets. We shall refer to these conditions collectively as ‘irrational’ … it seems reasonable to equate nonpecuniary with irrational.” And earlier, speaking as a true quant: “In the financial markets, if you are prepared to do something [predictably] stupid there are many professionals happy to take your money.”
4. Knowing the new rules makes you more vulnerable their scams.
Bottom line, the new neuroeconomics pop-psychology books don’t work, they are based on a false premise: That “predictable irrational” investors can teach themselves to become “less irrational.” Wrong. Paradoxically, the more we learn about our irrational brains, the more we convince ourselves we’re in control, acting rationally. Unfortunately, that’s impossible, an oxymoron.
We forget that 88% of our behavior is driven by our subconscious mind: Preconceived rationales, family and tribal beliefs, primal convictions, honor codes and commandments, ideologies, dogma and other “irrational” ideas locked deep in our brains, stuff we can’t see but quants can access, re-program, take advantage of and manipulate. So we continue making irrational decisions and big mistakes.
Wrning: Your brain really is your worst enemy. Even if you learn all the new rules from all the new pop-psychology books on behavioral economics your brain will unconsciously ignore the new neuroeconomic stuff you read and convince you that you’re acting “rational.” No wonder Wall Street’s quants can easily predict our behavior in advance and take advantage of America’s 95 million investors siphoning off hundreds of billions in extra fees and commissions annually. And that’s the real story of why and how Wall Street’s army of quants will manipulate and control you in the next economic recovery and bull market.