Behavioral Finance

Loopy Mind Models

By, 05/18/2007

Mind-bending doesn't begin to describe it. Loops, parallel minds, and Greek Gods. All of them describe how the human mind works and help you become a better investor.

Strange Loops:

A New Journey into Hofstadter's Mind
By George Johnson
http://www.sciam.com/article.cfm?articleID=C7265AEC-E7F2-99DF-3B3A60DE6200D457&chanID=sa006&colID=12

Douglas Hofstader, computer scientist and consciousness expert, says the brain works this way: "You make decisions, take actions, affect the world, receive feedback from the world, incorporate it into yourself, then the updated 'you' makes more decisions, and so forth, round and round." What emerges from this cycle is a system that can identify itself—the "anatomically invisible, terribly murky thing called I." Simply put, our personal sense of identity is a feedback loop of stimulus and response—instinct interacting with environment.

I Am a Strange Loop
by Douglas Hofstadter
http://www.amazon.com/Am-Strange-Loop-Douglas-Hofstadter/dp/0465030785/ref=pd_bbs_sr_1/103-7938672-8395814?ie=UTF8&s=books&qid=1179514467&sr=1-1

Bundled Brains:

Falling in Love
By Marvin Minsky
http://www.edge.org/3rd_culture/minsky07/minsky07_index.html

Neuroscience expert Marvin Minsky, author of The Emotion Machine, says the brain works by a system that can be loosely called "Bundle Theory." That is, the brain's software is composed of a number of instincts. When certain instincts are triggered and bundled together by a stimulus, they create a feeling, or emotion. Thus, emotions are the instinctual result of both stimulus and genetic coding.

The Emotion Machine: Commonsense Thinking, Artificial Intelligence, and the Future of the Human Mind
by Marvin Minsky
http://www.amazon.com/Emotion-Machine-Commonsense-Artificial-Intelligence/dp/0743276639/ref=pd_bbs_sr_1/103-7938672-8395814?ie=UTF8&s=books&qid=1179514419&sr=1-1

The Gods Live!

On Soul, Character, and Calling: An Interview with James Hillman
By Scott London
http://www.scottlondon.com/interviews/hillman.html

Lastly, psychologist James Hillman relates similar concepts, but in an acutely different, poetic way. His method is called Archetypal Psychology. According to Hillman, the emotions we feel are universally recognizable in the world's stories, myths, and religions. So, the image of Greek Zeus is the archetypal representation of the father, or Ares is the image of war and vengeance. And so on. The emotions represented in myths are metaphors for the human mind, and are represented as "gods." Why? Because we do not control our emotions, we experience them as they arise; emotions are outside our control. The control we do have is limited to what we do with those emotions, not whether to have them.

Re-Visioning Psychology
by James Hillman
http://www.amazon.com/Re-Visioning-Psychology-James-Hillman/dp/0060905638

The point to investors? Based upon all three models of mind, we should note that emotions and consciousness themselves are strange things—mostly based upon bodily instincts reacting to environment, and not within our control to the extent that we cannot choose what we feel.

The implications are startling for investors. These insights shift the focus of sound investing away from gaming the market to understanding how our naturally arising emotions cause huge disruptions in bias and belief, and how those innate tendencies affect behavior, and vice versa.

It's all the more reason to continually ask "What the heck is my brain doing to blindside me now?" when investing, and to seek a firmer understanding of self before even considering what markets are doing. How are your emotions blindsiding your ability to make sound judgments?

Also implied is the deep need for the scientific method when making investment decisions—the best known human process for attaining objective clarity over subjective bias.

We are very strange loops indeed. The point is to understand it, deal with it, and not allow our biases to warp our investments.

Have a great weekend.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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