Which way will sterling move?
Today I asked a client: shall we pay this bill in USD today? Or should we wait for the budget? Do we expect the pound to gain (or to lose) when people hear what the Chancellor of the Exchequer has in store for us? (What a fab job title!)
So there we were trying to anticipate what the Chancellor would say and what the markets would think? And so was everyone else.
Anticipating the collective mind
Anticipating collective reactions is an interesting business. We can take a poll and work out an average but that is relatively dull.
Let’s take the general election as an example. People wanted to discipline the politicians and were keen on a ‘hung’ parliament. When we achieved that, some people were furious. “I voted ‘Lib Dem'”, one tweeter said.
Yes, indeed. We all had our preferences and as we voted tactically, some of us could actually vote for the party we wanted.
The genius of the outcome is that we had to judge what everyone else would do while they were judging what we would do. The pollsters did work out averages but you and I made a more complicated judgment.
Anticipating the market is a little bit simpler because we aren’t trying to achieve a collective outcome. Maybe we should be, but most of us are only trying to position ourselves advantageously.
So we watch the graphs of forex prices and we listen to the chatter (or in this case lack of chatter) and make the best call we can.
What models can we use to understand the collective mind?
What research has been done on the collective mind? Do you know? Do you know of any models?
Keynes’ remarked that the stock market (or in the above example, the GBP-US$ exchange rate and the UK election) is like a beauty contest. He had in mind contests popular in the UK at the time where a newspaper would print 100 photographs and people would write in and say which six faces they liked most. Everyone who picked the most popular face was automatically entered in a raffle, where they could win a prize.
According to Keynes, “It is not a case of choosing those [faces] which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”
Thanks, Kate. I knew an British economist had made a lot of money on the stock market with this philosophy but I don’t recall any psychological research following up.