The Return of the Unconscious, Part I

1. Thinking Fast And Slow — Daniel Kahneman
2. The Evolution of Bruno Littlemore — Benjamin Hale
3. The Social Animal: The Hidden Sources of Love, Character, and Achievement — David Brooks
4. Willpower — Roy F. Baumeister and John Tierney
5. Incognito: The Secret Lives of the Brain — David Eagleman
6. Brain Bugs: How the Brain’s Flaws Shape Our Lives — Dean Buonomano

2011 was frustrating for bulls and bears alike. MarketMinder all year alluded to as much, yet throughout, pros and amateurs got too hot and too cold. Why? It’s impossible to truly say, but the answer lies at least partially in investor psychology. So, to close out this year’s book review, a two-part rundown of some contemporary psychology books.

Along with frustrations, 2011 also brought an “unconscious” revival. Mind you, it took psych’s “scientific” arm to realize what Freud and Jung (and William James, for that matter) said well over a hundred years ago: The unconscious mind is far more powerful and relevant to our motivations, choices and general volitions than our conscious minds. (See my book, 20/20 Money for more on money and your unconscious).

Thinking Fast and Slow — Daniel Kahneman

This isn’t just one of the year’s best psychology books; it’s likely one of the year’s best books, period. Ken Moore’s recent MarketMinder review explains this book cogently.

But a few extra comments: It’s getting high time to mount a criticism of behavioral finance and its role in investing. Folks are now viewing this field as curative for all investing ills, and it’s even a big part of the CFA curriculum nowadays. But for all the learning about this stuff in the last 30 years, I detect no meaningful impact on investor returns or better decision making generally. The explication and categorization of human biases might be a scientific endeavor, but guarding against them ends up more about the (very difficult) discipline of mindfulness and self awareness. Which makes Kahneman’s book a set of informative observations and perspectives, but little in the way of prescriptive solutions. Such are the foibles of psych theory meeting reality.

The Evolution of Bruno Littlemore — Benjamin Hale

Hale’s is a tremendous narrative achievement and delightfully fun to read. This fictional, first-person account of how a chimp develops speech and, ultimately, humanity is another of the year’s best.

Hale takes a few basic features of human development—speech, childhood, impossible love, the innocence of youth and the cynicism of experience, and quite a lot more—and places them upon a chimp’s life. The sweetness, spectacle and miracle of what seems commonplace is brought into relief; we see so much more about what it means to be “us” in Bruno than we do in other people.

But it’s a faux kind of humanity—Bruno’s humanizing is fictional in the same way the book is. Most of Bruno’s experiences come from reading Shakespeare and other great literature. He empathizes and commiserates with Milton’s Lucifer and sees himself in the fairytale of Pinocchio—he understands life in more sophisticated ways than most, simply by his attention to great art. In so doing, Bruno often misses nuances and motivations. He’s a sort of latter-day Dr. Spock: So close to being one of us, but unable to pierce some invisible membrane of understanding. These complex meta-cognitions are among the most difficult to ultimately understand, assimilate and then act upon. It’s a big part of what makes us human. Artificial intelligence still struggles with this, and studies in autism illuminate as much, too.

And so it is with investing. There are legion—countless legions—of analysts, scholars and pundits who can recite the theories, know the equations and expound upon their observations—they’ve studied all the books. But how many truly understand the “meta” text of markets—applying creative thought and experience in conjunction with empiricism, data, logic and theory—to get to how markets truly tend to work over time?

To my mind, this is the key difference between a competent professional financial planner (who knows all the rules and products) versus a truly successful market forecaster (who can guide you to greater wealth via those mechanisms). Bruno’s “evolution,” rise and plight is a worthy guide for reflection on the issue. (PS—of the many little joys in this book, Bruno’s infantile conflation of legendary linguist Noam Chomsky as the “Nome Chompy”—a monster who haunts his thoughts and dreams—is delicious jest.)

Willpower — Roy F. Baumeister and John Tierney

When I was little my dad always told me, “Whatever you do in life, however talented or smart you are, what’s going to matter is your consistency. Can you be there everyday? Can you get yourself up and do what you need to even when you don’t feel like it? This is one of the hardest things for people to do.”

This is the heart of Roy Baumeister’s book, Willpower. And Baumeister, a leader in this corner of psych research, deserves kudos for the undertaking. He harkens back to the original ideas of Freud in proving his case for willpower as one of the most important qualities of life success, but makes his case through the lens of contemporary empirical findings.

Baumeister’s theoretical metaphor is to see willpower as an “energy” at risk of depletion—a very Freudian concept. Your willpower supply can get low—and when it does, you risk losing discipline and doing stuff you didn’t intend to. (For instance, after a long, stressful day at work, you’re much more likely to break down and scarf a tub of Rocky Road.) But you can build your willpower over time.

This yields some practical lessons: Focus on one goal at a time; define, and then do the “next step” only; make a plan to keep yourself focused for the long-run; avoid “decision fatigue” (too many decisions wear your willpower down); have others hold you accountable for your goals; create habits over time instead of planned bursts of work; eat slow burning foods, frequently, to keep glucose in your brain up and avoid sugar; get enough sleep. And so on. Whatever you think of Baumeister’s theories, and however tautological it sometimes seems, this is fine advice.

Many of these are great lessons for investors. Often, bad decisions involve emotional capitulation or avarice—lack of willpower. No amount of statistical jiggering is worth anything without the ability toward self-control.

What the book lacks is a discussion of the spiritual component of willpower. And without delving into the metaphysical components of the human spirit, you don’t have much. Why do we desire anything in the first place? Where’s the fire in the belly and from whence does it come? Dante was pushed forward by Beatrice to write the Comedia; Hank Rearden forged ahead undaunted for himself and Dagny in Atlas Shrugged; Odysseus toiled in listless travel for sweet Penelope and his kingdom; Goethe’s ephemeral “eternal feminine” propelled his art; Schopenhauer’s The World as Will and Representation is a harrowing account of human motivation; Tennyson's heroic idealism “To strive, to seek, and not to yield”... all these matter as much as any empirical study of the will. The world has yet to find balance between these modes—let’s hope that movement comes soon.

Coming soon, part II. Happy Holidays!