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
(
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
(
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
(
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
(
BCS
) and
Lloyds
(
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
(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
(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
(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
(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
(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
.