Black Monday: How Much of it was Real?

by Martin Boroson

When hundreds of billions of dollars disappeared from the world’s stock markets on Monday, I had to wonder just how much of that “value” was real. For if this much value can disappear so quickly, as if in a puff of smoke, what exactly was it?

Value, even economic value, exists primarily in the human mind and is created by the human mind. The fact that we have created a system, over time, for assigning numbers to this value certainly convinces us that it is real. But it seems to me that the economy is, to a large extent, a story.

Economists and pundits do not really want to admit this. The discipline of economics likes to be considered a hard science. But economics does not even meet the basic criteria of science:  it can’t replicate its experiments and has virtually no predictive value.

Yes, I know that there are some very intelligent and well-meaning economists, but it sure would be helpful if they would admit that whatever they are doing, it is not hard science. It’s more of an intuitive art, bolstered by subjective experience, belief, and selective data–not unlike astrology.

It’s odd that economists are not better schooled in human psychology and human behavior. Of course, psychology isn’t really a hard science either, but it might at least shed some additional light on economic behavior.

How can we possibly hope to understand market behavior without understanding the human mind—and I mean both micro-psychology (the individual mind) and macro-psychology (large systems of minds)?

Of immediate importance would be to understand the nature of human confidence (which is not that far, psychologically speaking, from the nature of faith), and particularly at its extremes:  panic, on the one hand, and foolhardiness (or what Robert Shiller called “irrational exuberance”), on the other.

On top of this—or perhaps I should say beneath this—lies biology. After the 2008 crash, there were those who speculated that it was the testosterone-heaviness of Wall Street that created its culture of excessive risk taking. The implication of this is that biology might be a better tool for market analysis than economics (and that feminism is the best hope we have for stability).

But even that is not really enough, for the very complexity of a global economy gives rise to fundamental, and I would say inherent, unpredictability. There are just too many factors to ever be considered.  As the evolutionary biologist J.B.S. Haldane said, “Now, my own suspicion is that the universe is not only queerer than we suppose, but queerer than we can suppose.”

This fundamental uncertainty is acknowledged in the fine print of any financial product:  “Past performance is not necessarily indicative of future results.”  To expand on that: we never know how the world will evolve, or what new, unseen challenges and opportunities await. Just when you think you have something figured out—well, new information appears. In other words, we really do not understand anything until it is over—and it is never over.

Without getting too metaphysical, perhaps “unfathomable” might be the best word for the behavior of markets. And the study of metaphysics, or the mystery traditions, or at least poetry, would certainly enhance our understanding of how humans create value and assign meaning.

I don’t deny that a market crisis has a real impact on peoples’ lives. In suggesting that the economy is essentially a story, or that value isn’t as real as we think, I am not contradicting this.  Stories can be powerful. Stories can have a huge impact. A story can change everything.

I am simply saying that, in trying to understand economies, we might be advised to pay a bit more attention to the human mind and to our own mindsets and beliefs. We might also want to keep a close eye on the storytellers.