On cable, in ads and sales pitches Wall Street pander to your ego with an outdated idea: You’re “the man,” a “rational investor!” Yes, you’re different, you can beat the averages, the indexes. But behind your back, they’re laughing at you, they know you’re irrational when it coming to investment decision-making. Moreover, they actually prefer a market filled with naïve, uninformed and irrational investors. That way, they can easily manipulate you—usually without you ever really knowing it. Oh, they’ll let you make modest gains, enough to keep you in line, to prevent a full-scale rebellion.

But the playing field’s not level and they’re backed by an elite force of a million experts in the financial industry—brokers, salesmen, advisers, analysts, talking heads, slick admen, slicker lobbyists—foot-soldiers and mercenaries armed with superior tools, advance data, huge monetary incentives, and the protection of friendly legislators and regulators, all calculated to feed the anxieties and addictions of American investors. But you already knew all this, right. Since the Buttonwood Agreement created the New York Stock Exchange back in 1792, Wall Street has always been able to control the markets and manipulate investors to its advantage. It’s been a long “one-way street” for a long time.

Happy Conspiracy’s powerful new “psych-ops” weapons

So what is new? Behavioral finance, the new science of irrationality, also known as neuroeconomics, behavioral economics, quant-trading and the psychology of investing. Wall Street has been rapidly adding these new “weapons-of-mass-manipulation” to their arsenal in recent years. With these new psychological weapons, Wall Street has refined “mind control” to a high art better than anything at the CIA and the Pentagon. Why? Wall Street wants to make it absolutely certain you don’t stand a chance against them.

Behavioral finance and economics are also going through a major transition, one which will impact the future of investing here and abroad. Behavioral finance has been around for several decades, with psychologists studying irrational human behavior. Recently a newer, secretive and potentially dangerous version is emerging. Psychologists are being replaced by mathematicians speaking a language as foreign to Main Street investors as ancient Mayan. This shift is having a profound effect on your investment strategy. Here’s brief summary of this historic shift from psychology to mathematics in the shadow world of behavioral finance:

Phase One: Psychologists Lead Early Behavioral Finance Research

Although behavioral finance goes back several decades centering on the work of Princeton psychologist and Nobel Economist Daniel Kahneman, the 2000 market crash was the turning point shifting emphasis away from psychology, emotions, brain scans and MRI machines, to the cold hard unemotional world of quantitative analysis, mathematics and algorithms.

This watershed moment can be pinpointed to Robert Shiller’s 2000 classic, Irrational Exuberance. Shiller says irrationality is “unjustified optimism … wishful thinking on the part of investors that blinds us to the truth of our situation.” Irrationality makes investors their own worst enemy, prey to sophisticated market predators. Wall Street knows this. They are it against you. They don’t want you to change. Shiller says that in the nineties the exuberance of America’s irrational investors blew a huge bubble. Then irrational pessimism burst the bubble. It will happen again during some future market cycle—because investors are irrational, cycle after cycle, day in/day out. This ebb and flow will never change. We are irrational investors. We will never change.

Yes, Wall Street knows this, and thanks to their new behavioral finance allies, they also know how to capitalize on this flaw in the investor’s mind, use our naiveté against us, and beat us, because they run the casino and control the odds. They want investors to remain clueless and irrational. They have no incentive to share what they know with us. They need you to stay that way.

Phase Two: Quant Mathematicians Lead New “Science of Irrationality”

Throughout history, sweeping new trends typically move quietly in the shadows of a culture, then suddenly take over, often in rebellions, Then as they mature, the new becomes the conventional wisdom. Here, however, this new phase of behavioral finance may well continue in the shadows indefinitely. Why? Because their language—mathematics—is about as foreign to the average investor as ancient Mayan.

The leader of this new behavioral finance is University of Chicago finance professor Richard Thaler. He edited Advances in Behavioral Finance, vol II, a 712-page volume consisting of 19 articles loaded with cryptic math equations, understood only by an elite group of insiders, quant mathematicians, behaviorists  and their Wall Street portfolio manager clients. Unlike the earlier psychologists, Thaler and the new generation of quants really don’t care “why” investors are irrational. They simply begin with the assumption that financial markets and investors are irrational and always will be irrational, quite the opposite of Wall Street’s outdated “rational investor” theory.

Let me repeat: Wall Street and the new behavioral finance geniuses do not care why investors behave irrationally. They just want you to stay that way. Their goal is very simple: Using sophisticated quant math programs, their objective is to take advantage of the irrationality and the vulnerability of the masses as we ebb’n’flow through the cycles of bull/bear, greed/fear, bubble/bust.

Want proof? The term “irrational” is rarely mentioned in Thaler’s behavioral finance bible. In fact, these new behavioral finance leaders and their Wall Street allies actually have a clinically detached attitude toward America’s 95 million investors, as if we are experimental lab mice being studied in cages. Thaler captures the cold icy detachment of the new generation of behavioral finance quants in a brief comment: Wall Street prefers “investors who are … irrational, woefully uninformed, endowed with strange preferences, or for some other reason willing to hold overpriced assets.”

Get it? In order to make a killing, Wall Street must have “irrational investors.” And in one article, Thaler and his co-author admit “we use the term ‘irrational’ for the lack of a better word, but without wishing to engage in any deep philosophical debate about rationality.” The truth is they don’t want to engage in that debate because it would expose this entire war game. Then they contradict themselves concluding that: “It seems reasonable to equate nonpecuniary with irrational.” In short, if investors make their decisions for any reason other than cold hard dollars, which most do, then we are irrational.

Phase Three: Today Quants Fighting Happy Conspiracy’s ‘Psych-Ops Wars’

The driving force in this current phase is Barclays Global Investors. They operate in a shadow world all of their own, under the direction of Wall Street’s best and brightest, much as Blackwater mercenaries in Iraq and U. S. Special Forces commandos behind enemy lines in Iran. Here’s how “Outsmarting the Market,” a 2006 BusinessWeek cover story about the secret world of BGI and its team of 100-plus research PhDs, described this rapidly emerging powerhouse: “BGI’s ascendance highlights the coming age of quantitative investing, which seeks to purge money management of human fallibility through the rigorous application of the scientific method.” Yes, purge emotions, feelings and irrationality, and replace them with cool, rational math on Wall Street—but not on Main Street, keep them irrational.

In less than a decade BGI has become the world’s largest money manager with over $1.6 trillion, bigger than Fidelity, Vanguard, Merrill and other traditional Wall Street leaders. About $1.1 trillion is in low-risk market-matching index mutuals and ETFs. Much of GBI’s remaining assets are in higher-risk market-beating arbitrage, hedge and alternative investment opportunities for institutions and high-rollers.

However, BusinessWeek is quick to warn us: “You and I can no more hope do what BGI does than we can hope to rival such famously heroic stock-picking personalities as Warren Buffett and Peter Lynch. Quant-investing BGI-style requires a fluency in applied mathematics as well as access to the prodigious computing power need to continuously crunch the numbers for 10,000 stocks and 2,500 debt issues and execute thousands of trades a day. With 2,640 employees spread among 11 offices around the world, BGI is the largest quant manager by a wide margin …” And then, get this: “Quants ignore the story behind the numbers,” says BusinessWeek, echoing Thaler’s total indifference to the “why” behind the irrational behavior of investors:

“The whole sprawling human drama of business is of no interest to Barclays researchers, who never venture out to call on a company or tour a store or factory. If a thing can’t be measured and factored into an investment hypothesis for testing against historical data, BGI has no use for it.”

Their approach is anchored in the pure rationality of mathematics, with no fundamental, technical or psychological analysis. Moreover, the irrational human behavior and the irrational decision-making of investors is simply assumed as a given in their equations—in fact, that’s why these quants make mega-bucks in the happy conspiracy’s war to control the investor’s mind.

An army of power-players in Wall Street’s “Happy Conspiracy”

There’s a lot more, but you get the picture: The bottom line is obvious—you and me and the rest of America’s Main Street investors are outgunned and outsmarted in the conspiracy’s one-sided game. We can’t even speak their language, and whatever they do is cloaked in a “code of silence” rivaling the operations of the CIA, the Mafia and Congressional lobbyists all put together, protected by iron-clad confidential agreements with these quant mathematicians.

Moreover, the odds against America’s individual investors are getting worse every year. Thanks to the new quants and behavioral economics/finance wizards, the “Happy Conspiracy” is growing more powerful every day! Browse the navigational bars and see who’s among the thirty allies in the “Happy Conspiracy,” the elite army fighting this new psychological war. Learn how they intend to dominate and control the minds and bank accounts of America’s 95 million Main Street investors using the vast array of psy-ops weapons in their growing arsenal.

FirstPubDate: Jan’07