In 2007 David Tuckett, a British psychoanalyst, interviewed 52 asset managers in the U.S., U.K., and Singapore in an effort to understand the context of their decision-making and, subsequently, to make sense of the financial crisis and to offer ways to make markets safer. Minding the Markets: An Emotional Finance View of Financial Instability (Palgrave Macmillan, 2011) explores such core concepts as phantastic objects, divided states of mind, and groupfeel.
In this post let’s look at a single dichotomy: the integrated state of mind vs. the divided state of mind. The former is “marked by a sense of coherence, which influences our perception of reality, so that we are more or less aware of our opposed ambivalent and uncertain thought and felt relations to objects.” By contrast, the latter is “an alternating incoherent state of mind marked by the possession of incompatible but strongly held beliefs and ideas; this inevitably influences our perception of reality so that at any one time a significant part of our relation to an object is not properly known (felt) by us. The aspects which are known and unknown can reverse but the momentarily unknown aspect is actively avoided and systematically ignored by our consciousness.” (pp. xi-xii)
The divided state of mind may be advantageous in certain circumstances—“the single-minded pursuit of a goal in battle with no thought for the consequences, or creative endeavour with little thought for consensus thinking.” Generally, however, “the pursuit of reward is tempered by the fear of loss, producing anxiety, which is a signal of danger.” (p. 63)
Tuckett argues that the financial marketplace accentuates rather than mitigates the human potential for developing divided states of mind. (p. 71) For one thing, there is undue emphasis on short-term returns. Even if a fund’s investment horizon is three to five years, there is pressure to perform short-term. Short-term results are also key in handing out bonuses.
Moreover, firms “may disproportionately select excessive risk-takers and predispose markets to gambling, based on –K [anxiety] thinking, rather than balancing risk and reward, based on K [real enquiry].” Tuckett reasons as follows: “[M]y respondents had to buy and hold stocks in a situation of quality uncertainty and information asymmetry, made particularly powerful by the fact that they were often making claims to have seen things that others had not. It is not surprising that this created a conflicting emotional experience. While it could be faced within an integrated state of mind, it is easy to see how it might be quickly and ‘dirtily’ dealt with in the short run by denial and a divided state of mind—in which case we would say that the dependent ambivalent relationship necessarily formed with assets is governed by –K rather than K. In –K decision-making anxiety about uncertainty is set aside. There is no longer an emotional incentive to desist from risky decisions. It creates the possibility that the attitudes and behaviour of many asset managers (particularly in a rising market and when there is pressure on them to perform exceptionally) will be excessively risky and that those who are successful will be rewarded so that it is people in a divided state who dominate the market. Those who make decisions in a divided state, if their gamble comes off, will perform better both than those who gamble and lose and those who are cautious.” (pp. 165-66)
Tuckett also found that “managers did not seem to approach failure in an integrated state of mind using their capacity for enquiry (K) to work through and learn from their mistakes. They did not mourn failure, so to speak, rather they sought to move on and fortify themselves for the next battle. This is what divided states enable human beings to do…. By and large the explanations my respondents gave for failures were not ones it would be easy to translate into successful decisions next time.” (p. 167)
Tuckett’s thesis requires some fine tuning, but I’m sure we can all recall those occasions on which we threw caution to the wind. Our wins, of course, resulted from our own careful enquiry (and genius); our losses from the vagaries of outside forces over which we had no control. And what did we learn that could make us better traders/investors? Nada.