The Nobel Committee’s recent decision to incongruously award economics accolades to both Robert Shiller, of Irrational Exuberance fame, and Eugene Fama, a big believer in efficient markets, must have had many shrinks crying “cognitive dissonance.” (Even if Alfred Nobel, the inventor of deadly dynamite who is now known for a peace prize, might have appreciated the method in this mad dichotomy.)
It thus seems an opportune time to analyze, as it were, the many instances of psychology intersecting with Wall Street.
My own bias lies with Shiller. Once you strip away all the esoteric Black-Scholes ratios and 50-day moving averages, it seems to me that investing is ultimately at the mercy of those most basic instincts, fear and greed. Such primal forces are never entirely repressed, but rather reassert themselves with the arrival of each new generation, one with no memory of past booms and busts. Human nature doesn’t change, only the dates do, from the Tulip Mania of 1634 to the Internet insanity of 1999, with a brief stop at the 1720 South Sea Bubble en route. (Tellingly, John Kenneth Galbraith’s groundbreaking book The Great Crash was published in 1954, the very year Dow Industrials (INDEXDJX:.DJI) finally recaptured their 1929 peak.)
Even John Maynard Keynes, firmly in Fama’s camp, knew enough to coin the phrase “animal spirits,” and memorably observed that “markets can stay irrational longer than you can stay solvent.” As for Ben Bernanke, he may or may not believe in the Austrian school of economics but — bald, bearded, and brainy — bears a passing resemblance to a certain Viennese psychiatrist. Indeed the Fed head’s confirmation hearings even started out with an acknowledged “Freudian slip" when Senator Jim Bunning erroneously called the nominee "Mr. Greenspan," and his incessant quantitative easing has exerted a predictable Pavlovian response in equities.
Look closely, and the language of the therapist’s office is inescapable in finance. The Wall Street Journal recently said stock markets are exhibiting "bipolar behavior," while an unprecedented 13-straight flip-flop sessions in the SP 500 Index (INDEXSP:.INX) earlier this year could certainly be characterized as schizo. Ditto Tuesday’s initial 9.6% increase in Netflix (NASDAQ:NFLX); the stock ended the day off 9.1% after its CEO cautioned against undue “euphoria.”
Our own Lloyd Khaner’s Wall of Worry is an indispensable guide to helping investors overcome anxiety, while the stock market’s worst-ever one-day percentage plunge in October 1987 had headlines screaming panic attack. Coincidentally or not, before that annus horribilis was over, a blockbuster depression drug got the green light, and its owner Eli Lilly (NYSE:LLY) spent several subsequent patent-protected years making money talk while America became addicted to Listening to Prozac. By 1988, memories of that manic Monday had already been repressed on Wall Street and Bobby McFerrin’s “Don’t Worry, Be Happy” — perhaps a pointer to future GDP reports? — ruled the radio.
Elsewhere, Intel’s (NASDAQ:INTC) ex-CEO Andy Grove wrote a bestselling book called Only the Paranoid Survive. And as for equity analysts, their conformist mentality -- and the stampede of the herd who blindly follow every word in the manner of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds -- is worthy of analysis all by itself.
In stiff-upper-lip, don’t-emote Great Britain, senior executives at both Barclays (NYSE:BCS) and Lloyds (NYSE:LYG) recently suffered borderline nervous breakdowns severe enough to force each of these type-A personalities away from the office, giving added piquancy to the industry expression “stress test.” Here at home, John Thain’s crisis-era $15,000 sofa purchase at Bank of America-Merrill Lynch (NYSE:BAC), even as his shareholders were seeing their portfolios shrink, deserves its own session on the couch. (Perhaps he donated it to Occupy Wall Street.)
In an odd aside, a New York City psychiatrist was once indicted on allegations of insider trading in BofA stock. Merrill, meanwhile, is among a multitude of bulge bracket brokers to employ experts in behavioral finance, a burgeoning investment area that aims at incorporating personality traits into investment decision making.
At archrival JPMorgan (NYSE:JPM), Jamie Dimon is on record as saying, presumably sarcastically, that increasingly onerous regulations are turning his traders to the talking cure. Complaining about the Volcker Rule, he told Fox News that for “every trader, we are going to have to have a lawyer, a compliance officer, a doctor to see what their testosterone levels are, and a shrink, ‘what is your intent?’” Meanwhile, his unerringly optimistic assessment of the beleaguered bank has many market mavens suggesting the man is either thinking magically or in deep denial.
Mr. Dimon could probably make an armchair diagnosis himself, couch not needed, having earned a degree in psychology and economics at Tufts University. (Since psych students tend to be especially depressed, his current blues likely long pre-date the “London Whale.”) At any rate, Dimon’s wallet will thank him for eschewing the former profession in favor of the latter. While therapists in Manhattan — much like their fictional Seattle counterparts — make good money, average salaries in the industry hardly compare with the $18.7 million Dimon earned in 2012.
For his part, Blackstone (NYSE:BX) chief Stephen Schwarzman also majored in psychology at Yale, as part of an "interdisciplinary" mix encompassing three other subjects. Based on the $3 million birthday bash he threw for himself, there may be certain narcissistic tendencies at work here.
Speaking of work, last year an intensely controversial article in CFA Magazine made waves for suggesting as many as 10% of Wall Street’s employees may be psychopaths. A more recent study in the Journal of Financial Therapy — yes there really is such a Stuart Smalley publication for the 1% — found that 93% of brokers were affected by some type of post-traumatic stress disorder resulting from the Great Recession.
In recent times the stigma of seeing a shrink, while still palpable, has diminished somewhat among CEOs. Indeed, Daniel Vasella, longtime leader of Swiss pharmaceutical firm Novartis (NYSE:NVS), actually was a psychoanalyst in his previous life. What’s on a man’s mind? In this guy’s case it might be money, for the drug giant has just hit a historic high.
Our hour – or rather 45 minutes, for which you will be billed $300 -- is almost up, but anyone who doubts the role that moods play in markets might like to know that September — which sees the most precipitous plunge in sunlight all year — has also historically been the single worst month for stocks. (Here is a S.A.D. article on the subject, by the appropriately named Joe Light.)
And with that, it’s Goodnight Vienna. But before I sign off -- hopefully with greater legibility than our Treasury Secretary exhibits in his indecipherable scrawl -- it is worth noting that another Sigmund, of the fabled Warburg banking family, was among many financiers to put great stock in handwriting analysis. For those who feel graphology is voodoo economics, investing in Signature Bank (NASDAQ:SBNY) may be the better bet. Shares reached a fresh lifetime peak this week after third quarter earnings beat Street estimates by a nickel. Exactly enough, as it happens, to unload all of your issues on Schulz's Lucy.
