The post was originally published at The Financial Philosopher.

It’s quite true what philosophy says, that life must be understood backwards.  But one then forgets the other principle, that it must be lived forwards.  A principle which, the more one thinks it through, precisely leads to the conclusion that life in time can never be properly understood, just because no moment can acquire the complete stillness needed to orient oneself backward. ~ Soren Kierkegaard

Man is a perpetual naive scientist: Formal scientific methodologies generally involve Describing, Explaining, Predicting and Controlling, which are all extensions of everyday human behavior.  The naivety in this regard, as associated with financial markets, is financial market participants believe that by describing and explaining the past with empirical evidence, they will be given the capacity to predict and control the future.

Additionally, this empirical evidence is often compiled haplessly and contained within a certain bias to a desired result.  Although completely within in the bounds of human nature, this naivety is surely among the greatest of man’s arrogance and foolish behavior.  This is not to say that science is required for financial success but rather a suggestion that a good scientist is almost always preferable to a bad one.

Describing and explaining is integral to understanding or, at a minimum, a means of satisfying simple curiosity; and predicting is often perilous but can be done prudently; however the controlling aspect is almost always tragic.  Because man is so engulfed with the desire for knowledge (of things past and of things future) there is no ability to see himself as he is now.

Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

Last week’s 662-page Financial Crisis Inquiry Report, for example, is almost useless; however it is one of the only predictable aspects of the entire financial crisis: Humans, to satisfy their desire for control and for narcissistic display of knowledge, will perpetually look to the past and wonder how things could have gone so wrong, then will proceed to rationalizing the event into a means of controlling (preventing) a similar event in the future.

Studying the past, for the purpose of preventing the tragedies from reoccurring again in the future, may be responsible and even noble but it is inevitable that other similar tragedies will occur. Just as sure as one can be that there will be more hurricanes, famines and wars in the world, there will be another market meltdown in the not-too-distant future.  How might we prevent it? We cannot and we must not; because the nature of financial markets is a part of nature itself–human nature–and there is no prevention:  There is only observation, postulation and acceptance.

Reason or Rhyme?

As Mark Twain said, “History does not repeat itself, but it does rhyme.” I suppose one may argue that studying a problem of history, and understanding it, is a prudent means of preventing the event from occurring again; however the moment the study of a problem begins, the same problem is manifesting itself into a different form, destined to reoccur. Because we naively search for the reasons, and even if we find them, we miss the rhymes.  In fact, we have quite the paradox: It is a mistake to say that a natural occurrence is a mistake. Nothing attributed to nature is a mistake; it may be random; but randomness and chaos are natural parts of order and therefore should be accepted and even embraced. Fires replenish the forest; death is necessary for the continuance of life; and great recessions are necessary for great progressions.

‘I have done that’, says my memory. ‘I cannot have done that’, says my pride, and remains inexorable. Eventually–memory yields. ~ Friedrich Nietzsche

The foolishness of man is a part of the nature of man; therefore foolishness is a necessary function of the overall social organism that is our financial markets.  We can describe and explain what has already occurred; but thinking we can predict and control nature in the future is no different than thinking there is only one word that rhymes with blue.  The Financial Crisis Inquiry Report, and the thousands of books, periodical articles and Internet postings describing and explaining the causes of the recent financial meltdown, go a long way to satisfy our curiosity and desire for knowledge; however they will not provide a meaningful degree of prediction and control capacity, in my humble opinion, to make the intentions truly worthy.

Your humble author, however, will not suggest that the attempt of describing, explaining, predicting and controlling is wrong, no matter how foolish it may appear. Alas, it is natural. Let men be fools because that is part of their (our) nature.

Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes. ~ Jesse Livermore

I will end by stating that the observations in this post point to a conclusion that is one part humorous, one part frustration and two parts cynicism: All of the complaining we do about the “idiots in Washington” or “the fools at the Fed” or the “folly of herd behavior” is simply a complaint about the human race itself.  Complaining about human nature yesterday and today, and expecting a different outcome tomorrow, is no more wise than banging one’s figurative head against the metaphorical wall of human nature.  It is a naive view of man to expect man not to be naive.

Shrugs and Dogs

As difficult as it may be, let the federal government and mass media do what they do, which is to spend a ridiculous amount of time and energy attempting to justify their respective existence by providing information for the consumption of the knowledge-hungry masses.  If one wishes to be wise, however, one will acknowledge one’s own ignorance, observe the herd from a distance, and perhaps shrug in amusement.

In summary, the cause of the financial crisis was not Wall Street, Congress, the Community Reinvestment Act, George W. Bush, Fannie Mae, Freddie Mac, or Alan Greenspan.  It was all of them and all of us collectively. It was the social organism that is the financial markets; it was human nature.  Good judgment and wise men do exist; but all humans will continue to make self-serving and foolish choices; it has been this way since the beginning of time; and human nature will never change.

I think I’ll stop writing now and go spend the afternoon with my dog.

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Kent Thune, blog author of The Financial Philosopher,  is Certified Financial Planner and free-lance writer.

Category: Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Naive Science and the Nature of Financial Markets”

  1. joinvestor says:

    Although it’s true that human nature doesn’t change it’s still critical to observe that the individuals who personify it (and society’s knack for idiocy) do, and in that observation lies hope.

    What I’m saying here is that those who need to learn the lessons of their own behavior are the participants who “spend a ridiculous amount of time and energy attempting to justify their respective existence” and therefore time spent “Complaining about human nature yesterday and today, and expecting a different outcome tomorrow” is not a waste of time for the individual.

    Over time individuals learn. Then different individuals take their place in the long-running show of those who need to learn these same lessons. Over thousands of years then our species moves slowly but surely out of the muck of greed, violence and stupidity into the light of humanity, cooperation and civil society. We begin to understand that we are no less and no more than any one else. Because it takes thousands of years, it may seem like we’re not moving. But we are: a thousand years ago, beating a child or a woman was considered normal everywhere on this planet. Today, forcibly suppressing or beating any human being is a scandal in most parts of the world.

    Just a thought.

  2. Sechel says:

    The credit bubble was global occuring in many countries and was not strictly a U.S. phenomenon.

  3. louiswi says:

    Spending the afternoon with the dog is the best thing you could be doing. From my personal point of view; having spent a full life, I can say everything I know about life liberty and the persuit of happiness was found by observing the nature of dogs. Dogs totally get it. Their ability to deal with the nature of humans allows them to enjoy an extraordinary quality of life-in most cases.

  4. Raleighwood says:

    Interesting – a culture/country with no moral compass or accountability. People are people and shit happens.

    Time to wipe the values and morals from the kids and have them parrot the likes of Paulson and Graham. Teach them that rules and regulations to mitigate greed’s impact are for fools.

    I think I’ll go home and play with the cat – if she’s in the mood.

    http://www.nakedcapitalism.com/2011/01/fcic-report-misses-central-issue-why-was-there-demand-for-bad-mortgage-loans.html#comments

  5. wngoju says:

    “It’s all our fault”. True, but useless.

    Put Blankfein in Jail!

    That would be useful. -And- make me feel better!

  6. obsvr-1 says:

    Bill Black on the FCIC report and the nature of the street

    http://market-ticker.org/akcs-www?post=178948

  7. ChrisH says:

    “…a good scientist is almost always preferable to a bad one.”

    I think it’s better to rephrase this as, “a non-scientist is preferable to a bad one.”

    If we actually want to understand this mess, however, then good scientists are preferable to non-scientists.

    Vague grandiose proclamations about mankind explain nothing.

    It isn’t truth, it’s therapy, but the latter may be more desirable to most.

  8. Kent Thune says:

    @ joinvestor: I agree with your thoughts. Social conventions change, usually for the better, over time; however man is still fundamentally as he was thousands of years ago. Observation of man’s foolishness is not a waste of time but I do believe that complaining about it, at a minimum, is not a productive.

    @ Sechel: Yes, the credit crisis was (and is) a global phenomenon, not just limited to the US. The post is directed at all humans in general but points to examples from the US.

    @ louswi: I too have learned much from my dog and from nature as a whole, which is one reason why I am attracted to Taoism. Much of the ideas in this post mirror Taoist themes: Acceptance, humility, non-resistance, randomness as a part of order and more.

    @ Raleighwood: Playing with the cat sounds like a good idea.

    @ wngoju: Justice does happen, although not as frequently as one would like.

    @ ChrisH: We think alike. I originally worded it as you suggested, “a non-scientist is preferable to a bad one” but edited it last minute. I also agree that this kind of thinking is for therapy, not necessarily for seeking truth. As Michel de Montaigne said, “I write to keep from going mad from the contradictions I find among mankind — and to work some of those contradictions out for myself.”

  9. constructivemedia says:

    “How might we prevent it? We cannot and we must not; because the nature of financial markets is a part of nature itself–human nature–and there is no prevention: There is only observation, postulation and acceptance.”

    It is always important, especially for the philosopher, to approach language with caution. The above quoted passage suffers from the fallacy of equivocation. This equivocation of the term nature gives way some rather asocial advice. Human nature is neither transient nor strictly permanent. Which is to say that bureaucratization no more implies the hierarchical structure of medieval feudalism than it does the hierarchical structure of modern finance or politics. One sees repetition and rhyme in history because of his/her orientation, i.e. you see history through the lens of the present. To make the case that the ‘nature of markets’ is only a sublimation of a larger ‘human nature’ itself only a part of a larger “Nature” as a whole, is socially irresponsible.

    Empirical analysis of a closed, well defined system permits one the ability to understand through repetition, and can be very useful for determining universal laws. However, it takes a “leap of faith” (I have also read Kierkegaard) to suppose that all things, events and processes must be such that empirical science explains them. Human interaction does not strictly entail repetitious sequencing. Humans actively intervene with each other and their environment.

    Passively observing current events and recommending that we accept them as necessary, speaks to the unnecessary empirical bias of Mr. Thune. This bias is substantiated by the underhanded “scientific” way in which normative values are baked into the metaphorical cake of modern economic theory, i.e. that we are all greedy, hedonistic self-maximizers, to the exclusion of all other motivations. Humans create their circumstances through a variety of symbolic languages and gestures; of which, “shrugging in amusement” is a hopelessly primitive one.

  10. diogeron says:

    So, in this analysis, Greenspan and the Fed and the CRA and the GSEs get equal billing. I can’t believe the CRA canard keeps cropping up in any attempt at a serious analysis. The implicit thesis seems to be, “If we’re all to blame, then nobody’s to blame.” To quote Ira Gershwin, “It ain’t necessarily so.”

  11. Kent Thune says:

    @ constructive media: I appreciate your views. My writing is largely a representation of my own thought, as in a conversation with myself transposed to written form, which is to say that I am no editor and certainly no philosopher in the academic sense. If you like Kierkegaard, you might appreciate this quote from his book, Either/Or, in regard to today’s blog post: “If the reader has not already decided on the basis of my complete awkwardness that I am no author, nor a literary man who makes a profession of being an editor, then the naïveté of this reasoning will surely remove all doubts.”

    The nature of blogging, at least with my blogging, is that one often writes without really scrutinizing the language or searching for fallacious or conflicting ideas. My way of making sense of the world is often by observing, thinking and writing; and I pay little attention to proper form of philosophizing, which I personally do not believe there is such a form. If I commit fallacy, then so be it. To quote another philosopher, Emmanuel Levinas, “The best thing about philosophy is that it fails.” I’m a creative philosopher, not an academic one.

    Finding common ground, and being a fan of Heidegger, I especially agree with you that “the philosopher approach language with caution.”

    Above all, I am flattered that you took the time to write such a thoughtful comment and I did learn a few things from you.

    Cheers…

    @ diogeron: I am also in disbelief that the CRA keeps cropping up, although I would not consider my blog post “serious analysis.” The tone of this post may be serious but my tongue was slightly in cheek during most of this writing. I also agree that “if we’re all to blame, then nobody’s to blame.” I like that.

  12. budhak0n says:

    @joinvestor . Altruistic much?

    “Over thousands of years then our species moves slowly but surely out of the muck of greed, violence and stupidity into the light of humanity, cooperation and civil society.”

    A great multitude still prefer greed, violence and stupidity. They just fear punishment if they act upon it.

    Just accept people for what they are, and move forward representing your own interests to the best of your ability. The rest takes care of itself for the most part and if it doesn’t that’s why we have people with weapons on the payroll.

  13. constructivemedia says:

    I apologize for giving the impression that you were doing wrong philosophy. I very much appreciate your style and upon reading the Levinas quote thought of Whitman’s, Song of Myself, “Do I contradict myself?/ Very well then …. I contradict myself;/ I am large …. I contain multitudes.”

    My intention with respect to my earlier comments was not to dictate proper style or thought–although, admittedly I do come across in such a manner–but, rather, to address the prominence of a view towards human nature, whereby we are determined as being predominantly hedonistic.

    Your flattering response was too kind given the tenor of my comment and, I commend you for your level-headedness: the true backbone of sound philosophy. So, with every intention of reciprocity and upon the common ground of civil discourse I sign-off with a quote from Kenneth Burke, ” If a race for conformity became the basis of a new competitiveness, it would be the critic’s problem to present as many counter-influences as possible.”

    best

  14. Jim Birch says:

    “Try to disprove yourself” is the fundamental of scientific thinking. Normal (evolutionarily-adaptive) thinking just plays the good enough game, not blowing too much time and energy – turning over thoughts or turning over stones. We love the feeling of getting the gist of it – when we “know” we’re just about right and don’t need to do any more work. It feels so good that people will often go with the feeling in the face any contrary evidence. How many people do we hear who have the gist of what the government does, how the economics works, and so on, based on limited information and even less understanding.

    We’re even more infatuated with the single piece of evidence that establishes something without the need to look further.

    The trouble is that when you throw a few of these mostly true things together in an argument, the feeling of being right actually increases, but the conclusion gets worse. In logic, if A implies B, and B implies C, then A implies C. But in the real world, if A implies B 70% of the time and B 70% implies C, then A implies C only 49% (0.7×0.7), or in other words: not at all. Run an argument with a bunch of these factoids linked up and the conclusions are complete dribble. It can still feel good though, tea party time perhaps.

  15. mathman says:

    Mankind hasn’t learned from its mistakes. We still rely on war to solve problems, castes or classes to distinguish “better than” among our population, still can’t overcome our natural greed, hubris, violence, laziness and short-sightedness, don’t operate with a “big picture” mentality, and on and on.

    Here we are facing the most critical problems we’ve ever had to face as a species, with evidence all around us that we’re doing it wrong, and yet each day we continue to do the same thing with no leadership to point us in the right direction, transition us to a more sustainable way of living, or even preparing for what’s surely coming down the pike. No, we argue about blame, language, cost/benefit, and the like while species are dying all around us due to our ignorance, refusal to see, inability to act responsibly, refusal to change until we have to (by which time it will be too late). We’ll probably be severely impacted by this in the near future and it will be our own fault. The system is set up to resist change, but the planet is constantly changing. Something has to “give.” Guess which it will be?

  16. Kent Thune says:

    @constructivemedia: Thanks for the follow-up remarks. I see our exchange as a valuable dialogue, as a constructive conversation between philosophers to come closer to “the truth,” whatever that may be. I love the Whitman and Burke quotes. Cheers…

    @ Jim Burch: I like the “Try to disprove yourself” foundation of scientific thought. It should be the beginning and end of any serious-minded decision. I’d like to hear someone challenge a politician or talk radio host with those four words and see what follows.

    @ mathman: You capture the reason why Plato decided not to become a politician.

  17. Giovanni says:

    My thought is that while human nature may change gradually, maybe even at a geological pace, we can erect barriers to curb some of our worst excesses. The problem that I see is that our useful collective memory only lasts about fifty or sixty years, about one working career (Or one Elliot wave supercycle, one Kondratiev wave?). Thus the lessons of the Crash of ’29 and the Depression were unlearned and barriers such as Glass-Steagall were removed in just in time for history to repeat. Until we manage to lengthen our useful collective memory we’re bound to keep relearning things. [Insert your favorite Disraeli/Churchill/Truman history quote here.]