September 04, 2016

Mass Manipulation, Trading, and the Technology Polarizing Our Societies

"If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits."
~ Bernays, Edward. "Propaganda" (1928).

"This is an age of mass production. In the mass production of materials a broad technique has been developed and applied to their distribution. In this age, too, there must be a technique for the mass distribution of ideas." 
~ Edward Bernays, "Manipulating Public Opinion" (1928)

"We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society."
~ Bernays, Edward. "Propaganda" (1928).

"...In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons...who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind."
~ Bernays, Edward. "Propaganda" (1928).

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July 30, 2016

Violence, Media Contagion, and Investing in a Time of Social Insecurity

When I was training as a psychiatrist, I enjoyed taking overnight shifts in psychiatric emergency rooms. In the Psych ER my job was, in part, to ascertain whether patients were at risk of hurting themselves or others. If the odds of violence were high, then the individual was hospitalized. If not, their problems were further managed outside the hospital. At its core, it was an exercise in predicting human behavior - violent behavior.

If a patient was downcast, regretful, or hopeless, we were more concerned about suicide. If angry, bombastic, or contemptuous, homicide was more of a concern. By reading body language, asking the right questions, and contacting their associates, we could fit together a risk profile and take what we hoped was sensible action to keep the patient and the public safe.  Since I was in training over a decade ago, mass casualty events have surged to epidemic proportions in the US.

Due to the high frequency of global violent incidents over the past few months, today's newsletter will review the psychological dimensions of such events.  In particular, we examine how media reports about violence systematically affect our individual mindsets, create a contagion effect on the mentally unstable, and generate predictable patterns in financial market prices.  The end of the newsletter focuses on investment opportunities related to violent media coverage in currencies and global stock markets. (Future newsletters will cover sunnier topics, I promise).  

Violence and News Media

Lately the news media is saturated with violent news. I'm not just saying that - the data speaks.  Below is a chart of the simple 500-day average of our Thomson Reuters MarketPsych Violence index (Violence TRMI from here on out). The y-axis represents the percentage of references to violent crime or war (as a percentage of all references) in a country, its cities, or its regions.  The grey line is the Violence TRMI for the US, the green line is the index for the Eurozone, and the blue line is that of China.  The date range is 1999 through the present.

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July 03, 2016

How to Predict Brexit - the Human Face of Market Risk

"In fact, it was as a journalist who played around with the facts that Mr. [Boris] Johnson first made his name. He was fired from his first reporting job, at The Times of London, for inventing a quote and attributing it to an Oxford professor (who happened to be is godfather)."
~ "Luck Runs Out for a Leader of 'Brexit" Campaign." New York Times, June 30, 2016.  

Boris Johnson is a former Mayor of London, Member of Parliament (MP), and was a leader of the Brexit campaign.  He was poised to become the next British Prime Minister until engaging in odd behavior last week.  

Johnson started his working life in the media.  In 1989 he was assigned to report on the EU from Brussels by the Daily Telegraph where he misrepresented the dysfunction of the EU in order to gain readership, and he enjoyed the public's shock at his stories:  “I was just chucking these rocks over the garden wall and listening to this amazing crash from the greenhouse next door over in England,” he told an interviewer.  Some of his misrepresentations about the EU became conventional wisdom in the UK, and they may have stoked the euroscepticism behind the Brexit vote (and the subsequent global market declines).

At MarketPsych we research how media information moves investors and market prices.  Some information that hits markets is well-defined, such as the impact of the nonfarm payrolls number described in this past newsletter.  When information fits an understood model, it is taken in stride, and the markets stay calm.  But sometimes events shake our fundamental beliefs about the world, and new frameworks for understanding events are needed.  Today’s newsletter examines human risk in markets - the urge to independence - and a unique media-based trading model that correctly predicted the market direction around the Brexit vote.
 

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