We know Wall Street is at war with Main Street America. In military terms it is a “Psy-Ops” or “psychological operations” war, by nature mysterious because it is fought in the shadows, by enemies who appear and disappear suddenly—like phantoms, stealth bombers, ninja assassins, like Iraqi insurgents and U.S. Special Forces inside Iran. Secrecy are essential to their successes. We are taking a totally different approach to this “war.” The popular press focuses on the weapons used in this psych-ops war by various names: behavioral finance, investment psychology, neuro-economics, the “new science of irrationality,” brain research, propaganda, and other esoteric names. In the past decade there have been many excellent books and ongoing press coverage of this new and rapidly evolving field.

The false and misleading promises of neuroeconomics
But so far, the works aimed at helping Main Street investors have approached the world of behavioral finance with one core assumption: If you, the investor,simply become more aware of your irrational behavior, apply some simple psychological rules, minimize that self-sabotaging behaviors, and act “less irrational,” then you will be able to beat The Street, beat the market, beat the averages … become a winning investor and get rich. The thrust of these earlier behavioral finance books is simple: A little education on behavioral psychology, a lot of self-discipline and that good old American “can-do” spirit! The implication is, of course, that if you, or any other of America’s 95 million Main Street investors study hard, understand and practice the basic tools these experts teach, you will be reborn “less irrational” and fully capable of “outwitting the markets.”

Unfortunately, you can’t fix an irrational mind using the brain’s own “flawed rationality”—certainly not against an enemy — Wall Street’s Happy Conspiracy — that’s doing everything it possibly can to keep Main Street investors ‘irrational and woefully uninformed,’ which is a clearly stated goal of behavioral finance psychologists and quant mathematicians now working for Wall Street. Seriously, ask yourself: Can Main Street investors ever “fix” their brains, make themselves more rational and beat Wall Street? The correct answer is “no,” but that’s not the real problem with behavioral finance.

Main Street will never win a head-on battle against Wall Street
The press, media and pundits all operate from the false assumption that Wall Street and Main Street are fighting this war on a level battlefield, equipped with equally powerful weaponry—and that if the Main Street investor just studied hard, understood and applied some apparently rational tools to his irrational thought processes, he will become a winning market investor. Sorry folks, but that is pure fiction. In a head-to-head battle, this psych-ops war is a total mismatch—what the military refers to as “asymmetric warfare”— a disaster for Main Street, like walking the streets of Baghdad alone.

Forced to fight ill-equipped and alone, the average investor doesn’t have a chance against Wall Street’s overwhelming firepower and organization. It’s not a fair fight. Wall Street has a 100:1 advantage in weapons, strategies and the ability to control the odds. Main Street, on the other hand, has no allies and no armies fighting on its behalf. We are fighting solo, armed with muskets against the Wall Street War Machine with its equivalent of stealth bombers, bunker busters, Apache GunShips, NightVision, satellite-guided cruise missiles and more. But … if Main Street doesn’t get suckered into fighting Wall Street on Wall Street’s terms, indeed, doesn’t fight Wall Street at all … the rules of engagement, and the chances of beating Wall Street increase.

You cannot “fix” an irrational mind with “rational tools”
Unfortunately, the media, press and behavioral finance experts continue reinforcing the old strategies, rules and tools that keep the Wall Street War Machine in business—by supporting the illusion that if all those 95 million “little guys” investing all over Main Street America just got a little “less irrational,” a little more disciplined, they could overcome the handicaps of their irrational and woefully uninformed minds and win.

That’s the wrong approach—it doesn’t work folks! Never will work. Investors rationality is not the problem. Even if Main Street investors do increase their rational powers, they will still lose. They can never win against Wall Street playing by Wall Street rules of engagement in an asymmetrical war. Main Street will keep on losing as long as they play at Wall Street’s casino by Wall Street’s rules because Wall Street controls the odds and is defended by heavily-armed “guards,” the quants and their amazingly sophisticated high-tech weaponry.

In short, it’s time to stop kidding ourselves and look at the Wall Street Psych-ops War Machine for what it is, this huge federation of 25 loosely-connected organizations bound by the motto that “Greed is Good” and by the “Iron Law of Wall Street.” They will use various elements of these behavioral finance principles to manipulate, control and dominate Main Street Americans, and take advantage of them. And they are doing it one at a time, like snipers picking off unsuspecting targets on the streets of Baghdad.

The outdated conventional wisdom of behavioral finance
If you want more of the conventional thinking on behavioral finance in America today, you are encouraged to review these books, many of which we’ve reviewed on DowJones/MarketWatch.com over the years. Read them, you may learn a lot about yourself and your enemies, but keep in mind that they are actually giving false hope to individual investors—by keeping alive Wall Street’s outdated and delusional theory of the “rational investor,” including the Taleb’s books, the Black Swan and Fooled By Randomness:

• The Black Swan. Nassim Nicholas Taleb (NYU professor of mathematical finance)
• Investment Madness. John Nofsinger (Washington State University finance professor)
• Capital Ideas Evolving. Peter Bernstein (Wall Street risk management guru)
• The Myth of the Rational Markets. Justin Fox Fortune/Time columnist)
• Mean Markets and Lizard Brains. Terry Burnham (Harvard University economics professor)
• Predictably Irrational. Daniel Ariely (MIT behavioral economics professor)
• Your Money and Your Brain. Jason Zweig (Wall Street Journal columnist)
• Animal Spirits. George Akerlof & Robert Shiller (Yale University professors)
• Train Your Mind, Change Your Brain. Sharon Begley (Time science columnist)
• Investor Therapy. Richard Geist (Harvard University Medical School)
• Beyond Greed & Fear. Hersh Shefrin (Santa Clara University professor)
• Mind Over Money. John Schott, M.D. (Harvard Medical School psychiatrist; money manager)
• The Owner’s Manual for the Brain: Pierce Howard (Center for Applied Cognitive Studies)
• American Mania. Peter Whybrow (UCLA Professor of Psychiatry)
• The Advertised Mind, Eirk de Plessis (Market Research executive)
• Advances in Behavioral Finance, vol. II, Richard Thaler, ed. (University of Chicago)

The behavioral finance principles that follow are not the only ones, but from a practical point they just happen to be ten often popping up in the press that appear to work most successfully for—and are exploited by—Wall Street’s War Machine in its relentless and secretive battles to control the mind of the American Investor. There are exceptions, but these will help you round out your understanding of how Wall Street controls your mind and your money.

1. Investors always behave irrationally, emotions rule.
2. Irrational exuberance feeds bulls, fear drive bears
3. Market cycles are historically unpredictable
4. Main Street investors cannot beat professional traders
5. Optimism sabotages the investor’s thinking mind
6. The more you trade the less you earn
7. Conflicts-of-interest are everywhere—trust no one
8. Primitive emotions rule investor’s brains, not the facts
9. Irrational investors need therapy—to surrender the fight
10. Quant math geniuses already control the investor’s mind

Don’t believe me? Okay, then keep on fighting them, but if you keep on playing their game, you will lose—until you stop sabotaging yourself. Just remember, if you play Wall Street’s game by Wall Street’s rules you will only win what Wall Street decides to let you win—the leftovers from the “Iron Law of Wall Street.” Everything favors them. They control the game and the odds, its fixed, you can’t beat The Machine.

What should you do? Know their rules … then stop playing their game by their rules,  play a new game—your game by your rules.

As Nobel Economist Paul Samuelson once put it: “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office.” And even tougher when you’re playing against Wall Street’s quants who have huges bonuses on the line, gigabits of data about the behavior patterns of individual investors, sophisticated software technology, substantial leadtime, and are playing the game fulltime.