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Proceedings of the 2011 Annual Meeting of the Academy of Behavioral Finance and Economics, September 21-23, 2011, Los Angeles, California

February 22, 2014

“WE HAVE CURTAILED THE POWER OF BEHAVIORAL ECONOMISTS” Elior Kinarthy Rio Hondo College Drelk@shaw.ca

Abstract

This article is an overview of the resistance by 20th century economic thinking to accept psychology as an equal partner in explaining economic behavior (with dire consequence to the economy in 2008). If anyone deserves the title of founding father of behavioral economics, Dr. D. Kahneman does for trying to break the “ice” between the two disciplines and formulating behavioral economics as a respected branch of economics that applies psychological principles to business and the economy. My behavioral investing theory applies psychological variables (e.g., CEO personality, psychology of banking, new statistical ratios, psychological estimate of share price, reading body language, psychological meaning of central tendencies, consumer confidence, etc.) to successful investing in the stock market. Converting a mutual fund portfolio to an individual stocks portfolio has quadrupled my capital gains.

Key words are: Turf Wars, Global Economy, Adam Smith, Ethics, John Keynes, Daniel Kahneman, Stock Market, Investing, Behaviorism, Behavioral Economics, CEO, Sigmund Freud, Yankee Ingenuity.

__________

May 2011 Turf wars are as American as apple pie, a cultural phenomenon; an early historical development when industries were carving territories for their markets and roles were being delineated. Marking industrial boundaries and responsibilities were necessary for economic development. Today, the threat to my behavioral investing theory is the persistent chasm between psychology and economics. The turf wars that have delineated economic discipline boundaries should have ended when the American culture matured enough and the two disciplines were set up secure and functioning. Understanding the modern necessity of ending turf wars and reversing the trend by integrating psychology, economics, and politics in the market place is essential to prosperity. On the global scale, integrating culture, religion, national skills, natural resources and weather can determine the wealth and stability of any national economy and the ups and downs of specific markets. We have brushed off that truth. America will become a third world country by the end of the twenty-first century if we don’t heed the warning from a changing world. In the old days Afghanistan made inexpensive quality Afghans, Brussels sprouts came from Belgium, Jaffa oranges from Israel, French fries from France and potatoes from Idaho. Then came political and military restrictions on continental trade that resulted in multiple specializations, regional manufacturing, and local distribution. Yankee ingenuity excelled in everything for a long time, so isolationism became economically affordable and nationally desirable in a troubled world. The 21st century saw the trend reversing itself. The world (especially China and India) is producing many quality goods and services cheaper than we do. The clincher was when the Japanese who depend on exports for their survival decided in 1958 to learn from the Americans how to build cars, and beat Detroit at its own game by 1975!

The writing is on the wall.

The Chinese, who must feed a billion mouths, are importing our technology on a larger scale than the Japanese ever did. They are learning from the Americans how to do everything. Our traditional economy will be doomed in thirty years unless we change to a behavioral economy. No more turf wars between economics and psychology. The world has become a global village, to borrow the phrase from Hillary Clinton, and we are losing the competition. The United State’s “Yankee ingenuity” still reigns supreme in the world, but brushing off the psychological insights of behavioral economics when it comes to doing business in the world will lead to much more than just an intercultural nightmare. We have to overcome our proverbial shortsightedness ingrained in our smug culture. Even in the nineteenth century when economists Adam Smith and John Keynes clashed over whether capitalism or socialism would prevail in the world, most of their psychological insights were limited to morality and ethics, not the context of psychology and markets. Pavlovian conditioning, Skinnerian behavioral economics, or Freudian psychoanalysis of Market Relationships are still shunned upon by politicians and economists. Self-esteem, drive, self-assurance, values, expectations, confidence, intention, and motivation were never put to optimal use in any economic, political, social or military equation in America. It wasn’t (and still isn’t) in our culture. We were too big to worry about our “psychology.” We were too selfish to consider or try to understand others. America lacked empathy. When we lost markets because we underestimated the motivation of poor Indians or Chinese to get a life by working hard for pennies a day, we were surprised. Our Harvard economists didn’t understand that human stuff. There was no economic formula to explain why people would work 12 hour per day for a buck. We couldn’t learn how to prevent exporting our job. When we lost wars because we didn’t understand the motivation of poor insurgents to topple corrupt governments in South America, Middle East or Asia, we still didn’t learn. We are losing our edge in everything because we don’t realize the weak motivation of American students to take their education as seriously as Korean students do!

Some psychologists believed that we are only as good as our culture let us be, limiting us to a life in a box. We Americans are not using enough psychology to advance our economy. Our culture discourage us from using psychology no matter how popular Dale Carnegie’s book still is in this country. Although economic indicators were never more important than psychological insights, they have always been preferred. The media turned everything into TV channels competing to sell commercials. Skillful persuasive communication turned economic behavior and forecast upside down.

The complexity of competing forces over your wallet became staggering—a ‘do or die’ phenomenon. The focus on accumulating the mighty dollar when trading goods and services blurred the psychological motivation behind each trade. As long as success reigned, market psychology was only a sideshow with politically correct overtones. The truth is that behavioral economics is still a persona non grata as far as investing in the stock market is concerned. I chose this forum to come out of the woodwork to hammer home that issue.

I write about behavioral investing not because it is the most awesome discovery since the big bang, but because foreign governments, foreign students, foreign businessmen, and foreign investors are finally learning and using it and we Americans can’t be successful any longer without using it ourselves. When, in the nineteenth century, Adam Smith (capitalism) and John Maynard Keynes (socialism) introduced the role of morality and ethics Into economic behavior, economists were not threatened by a fledgling psychology invading their turf. The attempt to “kill” the psychological “monster” by economic professors in universities occurred only in the twentieth century after Dr. Sigmund Freud empowered man’s behavior with drives, motives and sexuality in the factory and the workplace. The threat to pure economics was born. Economists stared in disbelief at the behavioral “virus” invading almost every scholarly economic article written between 1910 and 1979! “Of course, behaviorism” works. So does torture,” wrote Wystan Hugh Auden, the popular Anglo-American poet and ethicist in Behaviorism in a Certain World, 1970. I found it difficult, amidst such twentieth-century vituperative language against behaviorism, to clearly identify the genius peace-loving founding father of behavioral economics. It had to be someone who could reconcile and integrate bitter enemies. I had to wait until the twenty-first century to identify him. My designation of Tversky and Kahneman as the co-fathers of the movement will draw criticism—and I admit it is subjective—but someone had to notice their great contribution. A lot of writers wrote about money and the mind, but these two giants formalized the science with solid research in the last twenty years of the twentieth century! Dr. Amos Tversky taught cognitive psychology and mathematics at Stanford University and at the Hebrew University of Jerusalem. He worked on behavioral economics theory with Dr. Daniel Kahneman who was the only psychologist who ever received a Nobel Prize in Economics. If anyone deserves the title of founding father of behavioral economics, Kahneman does!

Behavioral economics is the branch of economics that applies psychological principles to business and the economy. It may seem more soft or complicated to apply than economic indicators, but it isn’t. Studying CEO behavior in the market place may smell like a soft science, less predictive of company success, less mathematical, less controlling, less involving balance sheets and accounting practices, but analyzing leadership is powerful, simple to apply and is less amenable to cheating! It is the cornerstone of my successful behavioral investing theory.

Proceedings of the 2011 Annual Meeting of the Academy of Behavioral Finance and Economics, September 21-23, 2011, Los Angeles, California

  

 
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