Sunday, 11 February 2007

Behavioural Economics - 1) Psychoanalysis

The four main psychological schools are a foundation for understanding how individuals behave singularly or en masse when making decisions related to financial markets:
* Psychoanalytic School studies the unconscious and mental styles/disorders
* Behaviourist School observes the atmospheric conditions that impact upon an individual
* Cognitive Psychology focuses on how human thought controls behaviour
* Gestalt Theory addresses the creation of holistic mental images from fundamental data and information.
Over four posts, we intend to provide a brief overview of each of these schools. As we have stated previously, behavioural economics is a necessary adjunct to neoclassical economics as the market place is a function of both economic and psychological mechanisms. We start with Psychoanalysis.
There are seven types of Personality Disorder/Style that create issues for individuals involved in trading financial markets. It should be noted that these conditions may apply to all market participants from market makers and analysts to the uninformed and the leisure punter.
1) Paranoid Personality Disorder causes individuals to be overly concerned about being cheated by the system or in face-to-face interactions.
2) Narcissistic Personality Disorder (NPD) leads to operators being hugely concerned with being judged as a success by colleagues, peer group and society.
3) Depressed Personality Disorder causes a person to be in a constant state of disappointment and worry irrespective of the external prompts that should determine their state of mind.
4) Obsessive-Compulsive Personality Disorder leads to market participants overly addressing the minor details in the trading arena. Leads to an inability to see the wood for the trees.
5) Borderline/Histrionic Personality Disorder causes people to be in a constant state of flux with regard to decision making and, consequently, they show an inability to relax and ponder.
6) Avoidant Personality Disorder forces individuals to repeatedly address previous errors and mistakes in order to correct the process or even to take revenge on the system or person perceived to be responsible.
7) Psychopathic Personality Disorder (PPDs) - Requires the co-existence of Narcissistic Personality Disorder (NPD) and Anti-Social Personality Disorder (ASPD). PPDs impacts on the markets on both the individual and aggregate levels. In relation to the financial and football markets, the whole structure of the trading system is psychopathic. Monopolistic abuse is sought out as a business strategy. Manipulation and corruption are seen as competitive advantages. Cartelisation is creative networking at a corporate level. The markets are manipulated in a variety of simple and complex ways that allow advantageous trading conditions for insiders and market operators. The markets are not transparent and disinformation is rife. Insider trading is accommodated and, indeed, encouraged. The accounting and legal systems are swiss-cheesed with loopholes. Institutions, governments and regulatory bodies are co-opted into the power structures. The psychopathic operators seek control of their environment - they deal with absolutes and not probabilities. The less level the playing field, the better.
On an individual level, a PPDs greatest pleasure is to take control of the properties and possessions of others. Power is the prime focus.
PPDs on both a systemic and individual level is by far the dominant Psychoanalytical mode in the globalised marketplace.