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Dealing With Scary Mr. Market

By Joel Garreau and Shankar Vedantam
Washington Post Staff Writers
Tuesday, September 16, 2008

A rough beast prowled yesterday. If you read the business press, the market woke up with "jitters" after playing "a game of chicken." It wound up suffering from "dizziness," recoiling from a "campfire" possibly turning into a "forest fire," or a destructive "tsunami."

Really?

The market has a personality? Intentionality? A psychology? It can save us with transcendent behavior or ruin us like a demon?

What's up with the way we anthropomorphize markets -- the way we tell stories about them as if they are creatures with minds of their own?

"We do it for everything. We see clouds in skies and we can't help but see patterns," says Dan Ariely, a professor of behavioral economics at Duke and the author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions."

"We did a study in which we had random shapes on a computer screen bouncing around. Within two minutes, people had stories. The circle was evil and was chasing the little triangle, eating him up. Some other shape was protecting him. It's incredibly natural for us to do it," Ariely says. "We want to see causality. We want to understand the world. We want to see order. If things are just random, it's not comfortable. We find patterns when there are no patterns. We're really, really good at this. It's important to our psychological well-being. If we thought we had no control and no understanding of what's happening, it would be very tough."

Making amorphous forces into characters we can grapple with has a long history. The Greeks made the idea of wisdom into the goddess Athena. To this day, we name our storms: Hanna, Ike.

Our markets, in turn, have invisible hands, bulls and bears, even "animal spirits," as John Maynard Keynes in 1936 called the optimism or pessimism that can drive economics. On Oct. 30, 1929, Variety's famous banner read: "Wall St. Lays an Egg."

"To understand a market as an aggregation rather than a creature doesn't come naturally to people," says Cass R. Sunstein, who researches behavioral economics at Harvard Law School. "When we think about actors or institutions in our world, they normally are agents. They have minds. But a collection of widely dispersed judgments -- the human mind doesn't incorporate that easily."

"Anthropomorphizing does have the advantage of making a market a little more intelligible," says Grant McCracken, a cultural anthropologist at MIT. "If the market has the jitters, it's less unpredictable. It now has a mood, which mood can be imagined to have origins, duration and outcome."

The greater the unpredictability of a system, the more likely people are to ascribe volitional qualities to it, says Nicholas Epley, a professor of behavioral science at the University of Chicago.

Rocks or billiard balls don't move unpredictably. But if a billiard ball were suddenly to move on its own, we no longer would have an explanation for what we are seeing and would ascribe intentionality to the ball.

Epley has also found that people are more likely to anthropomorphize when they are feeling lonely. It is as though seeing humanlike qualities in inanimate objects and systems can give us a sense of social connection.

Is the idea of wearing a barrel and eating peanut butter soup making you feel isolated?

"In the same way being deprived of food makes you hungry, and eating makes you feel better, so, too, when you are deprived of predictability and social connection, anthropomorphism can be satisfying," Epley says.

"The most impressive aspects of the human brain involve making sense of our social environment," says George Loewenstein, a professor of economics and psychology at Carnegie Mellon. "It's natural when we confront the inherently incomprehensible. We often talk about countries as if they are individuals.

"We're going to use these highly developed faculties to try to make sense of the situation. The positive side is that the moment we think of it as a beast, there's a vast array of computing power that we bring to bear on this complex problem. The downside is the extent that the market doesn't operate anything like a beast, a coherent creature. We are bringing an interpretation to it that doesn't really apply."

In an unusual set of experiments published earlier this year in the journal Organizational Behavior and Human Decision Processes, Columbia University business school professor Michael Morris showed that up markets are more likely to be given human characteristics than crashes.

We have the Dow "fall like a brick" but "climb to a new high." You see the financial markets "drop off a cliff" -- an inanimate object moving as a result of gravity -- but "recovering lost ground."

"There is a lot of evidence that our brains categorize something as animate or alive to the extent it moves in ways that a physical object can't," Morris says. "One cue that something is alive is if it moves uphill. Rocks never roll uphill. If you see something rolling uphill, you make an ontological judgment that the thing is alive."

Morris found that anthropomorphizing markets has serious risks. Volunteers who heard market movements described in human terms were more likely than those given inanimate descriptions to believe that market trends were likely to continue. A central hallmark of successful investing, of course, is to buck trends: to sell when everyone is piling on, and to buy when everyone is fleeing for the exit.

If people must anthropomorphize the markets, Morris and his colleagues recommend the advice given in Benjamin Graham's classic book, "The Intelligent Investor": Think of "Mr. Market" as a person suffering from manic-depression.

A half-century ago, Graham wrote: "Mr. Market comes to your door every day with an offer to sell a company, sometimes Mr. Market is manic and he asks far more than it is worth; sometimes he is depressed and asks far less than it is worth."

Of course, in times like these, the stories sometimes make no more sense than reality.

"I have to remind myself," says Carnegie Mellon's Loewenstein.

"Which is the bear and which is the bull?"

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