In ancient Rome, a clerical class known as the haruspices trained in the inspection of the entrails of sacrificed animals for omens of the future. Today’s market commentators have replaced bird intestines with an equally fervent passion for equally unreliable forms of long-term divination.
“Bad Omen for Markets from First Signs of Yield Curve Inversion,” a recent Bloomberg report trumpeted. Two thousand years on, the vultures of clickbait clarion calls appear eager to forget that auguries are for the birds.
We would like to take a break from our usual analysis of investing through statistics, theory, and philosophy to look at the world of investing from a new perspective—cultural critique.
We have a rich academic tradition to frame our critique. Anthropology is the study of the societies and cultures of the only species known to believe that anthropology just might work. But unlike the questionably legendary and legendarily questionable anthropologists of yesteryear, we will not be studying cannibalism or mating rituals, but rather the practices and rituals of the Tribes of Wall Street through the lens of the late great Sigmund Freud.
While much of Freud’s early work on psychoanalysis and sociology has been debunked (sorry, mom), his work is still highly influential in the Ivory Tower. As structure for our analysis, we borrow the title of chapter three of his 1913 book Totem and Taboo: Resemblances Between the Mental Lives of Savages and Neurotics - Animism, Magic and the Omnipotence of Thought.
Animism is the religious belief that objects, places and creatures all possess a distinct spiritual essence, not to be confused with the Internet of Things. According to Sir Edward Taylor in his 1871 work Primitive Culture, Animism is “one of anthropology's earliest concepts, if not the first.” It is thus only fitting that it has since taken on a life of its own: while uncommon today in western civilization outside of baseball dugouts, groundhog sightings, and a few environmentalist scions of San Francisco, we find this belief system to be strikingly prevalent among our community of investors. Investors often assign a spiritual essence to the market itself.
Turn on any Bloomberg news update, read a Reuters market summary, or listen to an expert commentator invited to explain daily movements in markets, and a neutral linguistic anthropologist would find a heavy dose of this phenomenon used to explain market mysteries. The following Bloomberg headline may have been plagiarized from the Book of Genesis or Jonah: “The world’s biggest bond market has managed to gulp down a swelling deluge of issuance in recent months.” Somewhere an A.I. bot must be laughing: those chyrons hawking causal explanations don’t write themselves.
According to anthropology professor Pamela Moro (Ph.D. from Berkeley and author of Magic, Witchcraft, and Religion: an Anthropological Study of the Supernatural) “Magic” involves beliefs and behaviors in which the relationship between an act and its effect is not empirically or scientifically verified but, from a Western perspective, rests on analogy or a mystical connection.
We have written extensively on numerous instances of beliefs and behaviors on Wall Street with no empirical or scientific backing that fit this operational definition. Applications of the Capital Asset Pricing Model through discounted cash flow analysis are but one example of a ritualistic practice employed by the Tribe of Wall Street that “is not empirically or scientifically verified.” Worse than magic, these rituals have often been empirically invalidated, and most dangerous of all, the conjurers have cast aside their telltale top hats and capes (in favor of $2,295 Loro Piana zip-ups).
Indeed, there is evidence they may be no better than actual magicians. A recent investigative report on the use of psychics to forecast market movements found they may have done about as well as these more traditional, ritualistic models used within the Tribe of Wall Street: “On the whole, market forecasts from astrological and psychic sources don’t appear to have fared any better than those from more traditional methods of number-crunching and dart-throwing."
Omnipotence of Thought
Freud’s “Omnipotence of Thought” phrase was inspired by a patient he dubbed the “Rat Man,” whom he diagnosed with Obsessional Neurosis on account of his fixation on unrealistic fears, fantasies and theories involving rats. The Rat Man believed his thoughts were so powerful that they could both change and provide insight into the future.
We find a good deal of this among the ritualistic obsessions of the Wall Street tribe members as they run amok in a rat race that never ends. There we find obsession with the power of ideas surrounding GDP growth, TAM (Total Addressable Market), Moats and Market Share, and Income Statement forecasts that have about as much empirical validity when forecasting price returns as rats have when guessing the going rate for cheese.
Indeed, the general belief in the power of the individual mind to foresee the ebbs and flow of time has given rise to a priest class since time immemorial, and the Tribe of Wall Street has employed many in its priesthood. While the Ancient Greeks consulted the Delphic Oracle when considering major political actions like the declaration of war, millions of Americans turn to the seers of Wall Street when making important financial decisions. Casual analyses are now revered like mystics’ mantras—an irony we can safely assume the Oracle of Omaha saw coming.
Yet some Americans, like Jack Bogle, are skeptical of the divination power of Wall Street’s prophets of profit. The renowned anthropologist E. E. Evans-Prichard famously rebutted such criticisms, arguing that outsiders rarely understand the societies they study. Non-believers like Bogle, he noted, are quicker to explain religion as an illusion while believers understand that mystical beliefs are an important “method of conceptualizing and relating to reality.” If an Excel model and a 100-slide PowerPoint presentation helps you conceptualize and relate to reality, Evans-Prichard might have argued, then go for it!
Evans-Pritchard noted that although many of the Azande people he studied decried individual witch doctors as cheats and liars, he never met a single tribesman who did not believe in witchcraft. If a particular diviner was proven wrong, it was because he did not practice his art well: the failure of the individual practitioner does not undermine or disprove the system as a whole.
And so we come full circle on our cursory tour of the anthropological disposition of many among the Tribe of Wall Street. After 10,000 years of Homo sapiens repeatedly displaying such predilections toward Animism, Magic and the Omnipotence of Thought, is it so unimaginable that the modern investment profession’s short 100-year history might reveal similar cultural affinities among the much younger Homo investicus? In an age when commentators can still make a living pulling the same old rabbits out of the same old hats, we should take care to ask how they got there in the first place, when half-truths breed faster than hares.
But why are such traditions so prevalent? In his 1972 book, Violence and the Sacred, the renowned French anthropologist René Girard argued that oftentimes these practices become “unformulated dogma to be accepted on pure faith,” because “whatever makes other things clear does not need, apparently, to be made clear itself.”
Perhaps more relevant to Wall Street, the anthropologist Bronislaw Malinowski noted a curious phenomenon in his 1948 study of the societies of the Trobriand Islands, Magic, Science and Religion. He found that “in the Lagoon fishing, where man can rely completely upon his knowledge and skill, magic does not exist, while in the open-sea fishing, full of danger and uncertainty, there is extensive magical ritual to secure safety and good results.”
If the investment profession is characterized by its need to cope with uncertainty, then it appears that Wall Street may be precisely the sort of culture where we would expect to find reliance on such unfounded beliefs.
This means that vigilance has never been more vital: as financial instruments grow more complex, and market movements remain just as inscrutable, it hardly takes a master magician to make your money disappear.
But for the skeptical investor, where there lurks superstition, there will always lurk opportunity. These misplaced myths inevitably lead to market mispricings, and we believe that understanding the Tribe of Wall Street’s conceptual weaknesses is the first step to exploiting the value of its wares.