In my post The Science of Traders, I linked to some research that discussed the role of hormones in trading. In my post Markets are Driven by Primates and Robots, I discussed the rise of trading algorithms and quantitative finance. In a post of notes from the book Snakes in Suits, I discussed some research on psychopaths and speculated on their role in the ongoing economic crash. The global economy may have been damaged by the actions of sociopaths obsessed with power, who used obfuscation and rogue trading to pursue personal gain at all costs. In a world where people are losing their homes and even dying from economic inequality, cutesy freakonomic ideas will no longer suffice. It’s time to replace economics with something better.
Economics lacks effective predictive power when it comes to describing human behavior and global events. Books such as 23 Things They Don’t Tell You About Capitalism and Economyths and Debunking Economics provide useful critiques of economics. Physics and biology have greater potential to explain the world as compared to economics. Physics can accurately describe details of energy usage and the raw materials used in technological development. Biology can also explain microeconomic behavior better than economics. Investment funds should place a greater emphasis on research from evolutionary biology and neuroscience. Personality and intelligence are heritable and affect career and shopping decisions. The following books describe how humans are primates (probably without free will) who are driven by genes and environment:
• Born Entrepreneurs, Born Leaders
• Essential Evolutionary Psychology
• Evolution and Genetics for Psychology
• Evolutionary Psychology in the Business Sciences
• Looks
• Principles of Behavioral Genetics
• Spent
• The Evolutionary Bases of Consumption
If my premise is true, investors who draw on research from physics and biology will have a better chance of earning high returns than investors who only rely on economic research. The rise of behavioral finance is influencing investment decisions. Barry Ritholtz is an example of an investor with physics training who also recognizes that humans are primates with cognitive biases. He’s become the most popular financial blogger in the world and keeps raising money and earning returns for clients. James Montier is a behavioral finance expert who joined the asset allocation team at GMO, one of the largest funds in the world.
It’s understandable that people are angry at a system that ruined the economy. Some individuals who run large financial businesses may be psychopathic primates (see The Science of Traders and Snakes in Suits). Financial executives bought off politicians and were able to secure bailouts for their banks and hedge funds. No one went to jail for financial malfeasance except for a few forgettable rogue traders. The anger is further justifiable since orthodox economics has been based on hopes and dreams rather than scientifically plausible research.
There’s also frustration over inequality. While inequality is expected in a world where IQ is largely heritable and people don’t choose their genes or environment, that doesn’t excuse it. There are plenty of negative outcomes associated with socioeconomic inequality. Here’s a search that finds medical studies about inequality. In abstract terms, it doesn’t matter that some people are richer than others. It does start to matter when people suffer ill health and die due to inequality.
The anger over inequality can be harnessed for productive purposes. A way of going about this is to examine high income professionals and figure out how to undermine them with superior innovation and automation. This will have the benefit of breaking open clubby social networks and elevating yourself to the level of the rich while simultaneously putting them in their place by reducing their wealth. This frustration can be channeled into entrepreneurship. The cost of technology and scientific equipment continues to increase in effectiveness while dropping in price. While rich people have access to investment resources and the best employees, they may become complacent as social and economic dominance lulls them into a false sense of security.
Envy and resentment can be harnessed in a way that makes the world a better place by making even more products and services cheaper or even free. When you think of a rich person who has everything, you can think about giving their customers better service at a cheaper price – or even for free, in the case of social entrepreneurship. Poor people are going to get replaced by robots and automation anyway, so they might as well bring rich people down to their level. Formerly rich people would then have incentives to care about inequality once they’re getting replaced by robots and nearly free goods, like everyone else:
Formerly wealthy people would then have real incentives to fix the country and not settle for the status quo.
It’s time for the real scientists to take over the investment world.
