Behavioral Finance: a (Mostly) Musical Revue

Most of us don’t suffer from “Brain Damage.”

We aren’t “Insane in the Brain.”

As the great Jason Zweig says, “people are neither rational nor irrational. We are human.”

Unfailingly and frustratingly human.

Naturally the dying man wonders to himself
Has commentary been more lucid than anybody else?
And had he successively beaten back the rising tide
Of idiots, dilettantes, and fools
On his watch while he was alive

 And it occurs to him a little late in the game
We leave as clueless as we came
For the rented heavens to the shadows in the cave
We’ll all be wrong someday

Our being flawed isn’t a mere propensity. It is our default setting. It’s not intentional but rather an inherent condition. We are much less than perfect, even if those who love us will (knowingly!) overlook our imperfections.

The study of our humanity in relation to money is known as behavioral finance. Getting a decent handle on our dangerous thinking is a lot like trying to make sense of Ulysses, Jackson Pollack, or In a Gadda Da Vida.

For those scoring at home, our frequent and consistent bouts of irrationality explain both why markets aren’t efficient and why it is so incredibly difficult to beat the market. Josh Brown explained why: “People can’t be accurately modeled. And it’s people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.” Even though we like to think that what we see and learn drives what we believe, the sad truth is that it is usually the other way around.

It’s surprisingly easy to want to give up. We feel what we feel, and feelings can’t be fact-checked, even if we wanted to. Let’s try anyway, mostly with music…just for the fun of it…and because artists often understand humanity and the human condition better than scientists…and the rest of us too, as “poetic dreams can foreshadow empirical reality.” So let’s get it started. 

  1. Believing is Seeing.

By this point, every investment professional and would-be professional has at least a passing knowledge of behavioral finance’s lead actor, confirmation bias, whereby we see what we want to see, accept these desires as true, and act accordingly.

Simon and Garfunkel got the concept by 1970, well before Tversky and Kahneman, when Simon wrote and they first sang The Boxer: “Still the man hears what he wants to hear and disregards the rest.”

The Music Man, perhaps America’s greatest musical, features Harold Hill, a traveling con man who poses as a boys’ band leader who sells band instruments and uniforms to naïve Midwestern townsfolk, promising to train the members of the new band. As he has done many times before, his intention is to flee as soon as he receives the money. Librarian Marian Paroo suspects Harold is a fraud, but holds her tongue since her moody little brother, Winthrop, is excited about the band. As Harold falls for Marian, he “gets his foot caught in the door.” In the final scene, Harold is asked to prove his legitimacy by having the band play. They’re terrible, but (of course) their parents are enraptured by their children’s “talent” and all ends well.

  1. The Selfish Gene

In The Selfish Gene, his first book, Oxford zoologist Richard Dawkins postulated a gene’s eye view of evolution in which the human organism is seen as a delivery vehicle for genetic information and its replication. According to Dawkins, “We are survival machines – robot vehicles blindly programmed to preserve the selfish molecules known as genes.” The more “selfish” genes win.

Dawkins’s metaphor is not advocating individual selfishness, of course, or that genes are in any way sentient. He is merely recognizing that genetic self-interest is hard-wired into human survival machines just as Spinoza saw that the first reality of human existence is the relentless endeavor of each being to preserve itself. Everybody may want to go to Heaven, but nobody wants to die.

More colloquially, but no more metaphorically, we all carry a “selfish gene.” Classical economic theory posits that we act in our own rational self-interest to maximize utility. The rational part of that equation is subject to dispute. That we are self-interested and routinely selfish is not. As Rihanna sings, “Let’s be selfish tonight, tonight (selfish, baby tonight).”

  1. The Easy Button

Obesity has doubled since 1980. Today, roughly two out of three Americans are obese. In this respect, Meat Loaf is dead wrong – two out of three is really, really bad. Despite millions of diets and their accoutrements, most of them fail because eating unhealthily is easier and more fun. It takes major effort to get past what’s most memorable, most accessible, and most recent – and that’s effort we’d prefer not to expend. We all want an “easy button.”

It is remarkable how many of the problems we face in investing, financial planning, and in life generally are attributable to our willingness, eagerness even, to think we have “got a good reason for taking the easy way out.”

We go too fast…

…and don’t pay enough attention.

For most of us, most of the time, if it feels good, we do it.

As Sir John Junor is said to have expressed it, “an ounce of emotion is equal to a ton of facts.”

However, the ability to delay gratificationis vitally important to almost every significant human endeavor. We aren’t very good at saving for the happier future, at foregoing the cake now for a healthier future. We aren’t very good at hyperbolic discounting. Lunch tomorrow is a long-range plan. We routinely do without “lasting treasure…”

…to fixate on “a moment’s pleasure” even though we know – unequivocally – that focusing on the longterm is the right thing to do, in our lives and in our businesses. Notice what Jeff Bezos of Amazon says: “Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

“Put your money on the table and get your math on” is good advice, all too infrequently followed.

We should generally think less about today and more about tomorrow.

  1. The Fear Factor

As Jeremy Siegel explains, “Fear has a greater grasp on human action than does the impressive weight of historical evidence.” “Doctor, my eyes have seen the years / And the slow parade of fears.”

We all face fear. “Forty-five on the back of the jersey upon your soul.”

We can all be “taken over by the fear.”

Fear drives us and freaks us out. It creates bad decisions. Duke Hall of Fame basketball coach Mike Krzyzewski adds, “Winners hate losing more than [they love] winning.” Per Kahneman, “the main contribution that Amos Tversky and I made during the study of decision making is a sort of trivial concept, which is that losses loom larger than gains.” Tom Petty got it right: “Yeah, and it’s over before you know it / It all goes by so fast / Yeah, the bad nights last forever / And the good nights don’t ever seem to last.”

FOMO is real too. As David Bowie sang, “I’m afraid” and “I’m afraid I can’t help it.”

Fear is also why we herd. We like to think that we will go our own way, but we all too rarely do.

And teenagers are perhaps the biggest herders of all, as Avril Lavigne explains.

As David Letterman noted, “Maybe life is the hard way, I don’t know. When the show was great, it was never as enjoyable as the misery of the show being bad. Is that human nature?”

Yes, it is.

  1. The Disease of Me

On January 6, 1995, a man named McArthur Wheeler robbed two Pittsburgh banks in broad daylight. He wore no mask or disguise. At 5’6” and 270 lbs., he wasn’t easy to miss. He even looked directly at surveillance cameras and smiled before walking out of each bank. Wheeler was shocked when he was arrested that same night. Police showed him the surveillance tapes, and Wheeler stared in disbelief. “But I wore the juice,” he mumbled.

Poor McArthur thought that rubbing lemon juice on his skin would render him invisible to cameras. Because lemon juice is used as invisible ink, he reasoned that if he didn’t come near a heat source, he would be invisible. After careful examination, the authorities determined that Wheeler wasn’t crazy and wasn’t on drugs. He was just wrong – like those dreadful contestants on talent shows who think they are great – wildly and bizarrely wrong.

What is now known as the “Dunning-Kruger effect“ describes the cognitive bias whereby we routinely inflate self-assessment relative to our actual abilities, some of us to an absurd degree, as Florence Foster Jennings demonstrated.

We all tend to think that we “wear the juice,” in one form or another. Sometimes, we’re just full of ourselves. We are convinced (or try to convince ourselves) that “All I Do is Win.”

When the Pulitzer Prize-winning writer Norman Mailer smoked pot, he also got to know the mind of the Almighty, which bore, he discovered, a marked and remarkable resemblance to his own.

We all like to think that we live in Lake Wobegon, where all the women are strong, all the men are good-looking and all the children are above average. We like to think that the usual rules of investing and behavior simply don’t apply to us. The typical person can’t control his or her emotions, but I can. It’s really, really hard to beat the market, but I can. Almost nobody can pick the best managers ahead of time, but I can.

We can’t.

We all think we’re the only exception.

We aren’t. Note that the Forbes list of billionaires has 60 percent turnover per decade.

Like Yogi, we all think we’re “smarter than the average bear.”

We’re wrong.

We see bias everywhere. The media is biased. Referees are biased. Parents are biased about their kids. But if someone merely hints at our own biases, we aren’t just skeptical, we’re offended. Like Chrissie Hynde and The Pretenders, we all tend to think that we have the juice, that “I’m special.”

In the “Author’s Message” to his thriller, State of Fear, in which the hero scientist questions the global scientific consensus on climate change, the late Michael Crichton made the point that “politicized science is dangerous,” and then added, “Everybody has an agenda. Except me.”


And as the world is getting smaller, small things take up all your time
Narcissus would have had a field day if he could have got online

We might grudgingly concede that we hold views that are wrong. The problem is in providing current examples.

  1. The Tribalism Factor

When we were waiting for the arrival of our first grandchild, my lovely bride repeatedly told me that she wasn’t crazy about being a grandmother. In her mind, we were way too young. However, when Aiden arrived and from the moment she held him in her arms for the first time, and forever since, she has been all in on being a grandmother. As she describes it still, “my earth shifted.”

Aiden was beautiful and wonderful, of course. But most fundamentally, he was ours.

George Orwell famously defined the tribal mindset as extreme identification with one’s tribe, “placing it beyond good and evil and recognizing no other duty than that of advancing its interests.” In today’s world, that sounds like what passes for normal. As Dylan sang, our side is beloved and blessed by God. The other side is evil and hated.

The Philadelphia Eagles and their fans used Meek Mill’s Dreams and Nightmares (below and very NSFW) to get ready for game-time and to propel them to a Super Bowl championship in 2018.

The lyrics include cartoons and hot cars and even murder, but the particulars don’t really matter. In essence, it’s a war cry by a Philadelphian for the Philly tribe: You don’t believe in us, you don’t respect us, you don’t think we can do it, but we don’t need you and we won’t be stopped. “So I had to grind like that to shine like this.”

Our sports teams, our political parties and candidates, our religious organizations, our ethnic groups, our clubs, our schools, our families, and myriad other groupings get our allegiance and our support, almost no-matter-what. We are inherently tribal. We like to think that we are individuals and contrarians.

Yeah, right.

The anti-Vietnam War anthem, a Buffalo Springfield classic written by the great Stephen Stills, “For What It’s Worth,” makes the point perfectly (yes, that’s Stills, Jim Messina, David Crosby and Neil Young – The Buffalo Springfield) (there’s an interesting Dave Matthews cover of this song here; one from The Muppets here; a cool one from Mia Borders here; Ozzy Osbourne here; the wonderful Lucinda Williams here; a recent one from Loose Cattle with Lynn Drury here; the great Burton Cummings here; Led Zeppelin here; Rush here; Rise Against here; Tom Petty here; a haunting acoustic version from The Lone Bellow here; Ernie Hendrickson and Anne Harris here; one from The Staples Singers here; a Mavis Staples solo version here; Bonnie Raitt here; a Crosby, Stills & Nash live version here; and a solo version by Stephen Stills here).

What a field-day for the heat
A thousand people in the street
Singing songs and carrying signs
Mostly say, hooray for our side

Within our tribes, as Peter Gabriel emphasized, “We Do What We’re Told.”

We think we have the juice, nectar even. Most of the time it’s some secretion we’d be better off not knowing about.

  1. The Planning Fallacy

On Friday evenings when I’m home, I outline what chores I plan to get done around the house on Saturday and what I need to buy to complete them. Inevitably, however, it takes a lot longer than I expect and I routinely need to make multiple visits to Home Depot because I forget something (or multiple somethings).

Things don’t work out as often as we’d like.

As the Rolling Stones recognized, “you can’t always get what you want.”

The planning fallacy projects our fanciful and self-serving renderings forward with the idea that the future can somehow be managed — and perhaps controlled — despite the lack of any actual historical support for the notion. Study of the planning fallacy caused Oxford’s Bent Flyvbjerg to establish what he calls “the iron law of megaprojects” – they will be over budget, over time, under benefits, over and over again.

As John Lennon explained, “Life is what happens to you while you’re busy making other plans.”

Things rarely turn out the way we expect. We never have everything covered. Life happens.

  1. The Centrality of Story

Most of us, most of the time, at least purport to “faithfully pursue” a “policy of truth.”

But sometimes, “when the truth is spoken, …it don’t make no difference.”

And sometimes, we see “truth turn to power.”

Aaron Sorkin has won an Oscar and multiple Emmys for being one of the great storytellers of our time. As he has pointed out, “The value of storytelling is – in whatever form, whether it’s film, television, a play, a book, or a song – the same as it’s always been for thousands of years, which is that it is the most powerful delivery system ever invented for an idea.”

In this sense, we are all novelists, who always put the best “faces” on our behavior. Stories get in the way. We’re all pretenders.

Creating narratives is a basic feature of our minds, the “inescapable frame of human existence.” We are inveterate storyvores, desperate for our constant diet of narrative.

An oft-cited Ohio State study found that a message in story form is up to 22 times more memorable than disconnected facts alone because, as Kahneman points out, “Evidence is not all that compelling.” The Significant Objects Project allowed researchers to sell worthless baubles on eBay for surprising amounts when they linked each one with a compelling story. We may learn facts and data but we feel stories, and that makes all the difference.

Stories are a “land of make believe,” both literally and figuratively.

They aren’t strictly accurate, but our stories (and our songs) “remember when.”

With stories, we’re always “easy to convince.”

  1. The Belief Imperative

Doing something, even (especially!) something amazing, begins with believing it can be done. As with The Little Engine That Could, it starts with, “I think I can.”

Beliefs generally are less things we think are true than commitments we have decided to hold onto. However, beliefs are factive – to believe is to take to be true. Beliefs are meant to represent reality, which makes them controversial and dangerous. Tears for Fears goes so far as to claim that belief is altogether a bad thing, over and over again.

And lies spread on lies
We don’t care
Belief is our relief
We don’t care

They aren’t entirely wrong. As Father John Misty puts it, “Here at the cultural low watermark / If it’s fraud or art / They’ll pay you to believe.”

To the contrary, however, beliefs are both inevitable and necessary. It may be old-fashioned to say so, but it is old-fashioned in the sense that it is tried and true. The key is working to keep our beliefs properly grounded.

Before the scientific revolution, the concept of truth came from the “top down” and was based upon authority, such as that of Aristotle or the Church. The great innovation of science was that it built its concept of truth from the “bottom up,” with its principles discovered rather than pronounced. To “find what’s good and make it last.”

Logically, we should decide what the facts are as objectively as we can and then interpret the facts to come to a consistent set of beliefs about them. As the late Morris Halle of MIT emphasized, there is a fundamental difference between data and evidence. The former requires only a notebook. The latter requires a substantive idea.

 However, our practice often falls short of what scientific theory demands. As Talking Heads would have it (shown below performing the fantastic “Crosseyed and Painless” live as the final song in Stop Making Sense, Jonathan Demme’s remarkable concert film), “Facts are never what they seem to be.”

There is a trend in American thought suggesting that beliefs are generally powerful concoctions designed to fool people, the province of knaves and charlatans. For example, Meredith Willson’s The Music Man is a paean to the power of belief, for good and for ill.

However, there is much more to the human experience than measurement and the acquisition of knowledge about physical processes. Per Bonnie Raitt, “a little mystery won’t hurt.”

Indeed, knowing the facts offers no certain, sure-fire answers and provides no foundation for how to use them. As Tom Lehrer’s famous ditty from the ’60s about Werner von Braun (a key figure in rocketry for both Nazi Germany and the post-war United States) and his rockets explained…

…the job of the rocket scientist, is simply to get the rockets into the air – “Who cares where zey come down?”

To go a step further, heroism of any sort involves somebody taking a big risk for a belief in something better, to “use that evidence and race it around.”

No matter how committed to data-based reasoning and analysis we are, facts can only take us part-way home. Facts demand analysis and interpretation to become useful or actionable. The conclusions we reach and the positions we take are ultimately beliefs – beliefs that should be well-supported by the evidence to the extent possible, of course, but still beliefs. Such beliefs cannot be demonstrated to be true. They must be argued for and defended.

There is a “crumbling difference between wrong and right,” as the Counting Crowes sang.

Even so, most of us desperately want the Truth with a capital-T. We want to follow the instructions and get the desired result. Every. Single. Time. We want to put our money into the machine and get a soda in return. We want to take the “jigsaw puzzle” pieces out and have them all fit together perfectly to create a beautiful picture with none left over.

In the real world, truth tends to be tentative, provisional, necessarily subject to revision, and requires art to interpret. That’s partly because facts are inherently messy things. We argue about what the facts are and then argue about the interpretation of those facts. Out of this messiness we must cobble together our beliefs – including our investment beliefs – to try to create a coherent life. We each have 525,600 minutes per year to get things right…or at least righter.

A world of facts alone is also radically disenchanted. We may want to know, but we no longer wonder. Proper belief transcends mere facts and opinions to something more provocative and more profound. It acknowledges our aching desire for something bigger and more powerful than ourselves,more real than mere opinion but too real to be reduced to demonstrable fact.

I’m a believer.2

I believe in belief. As Tom Petty sang: “All people got soul, honey / All people got dreams / Don’t be afraid to get up on your feet, man / Oh, depend on me / Don’t be afraid to live what you believe.”

You should too.

  1. The Fallacy Fallacy

We all struggle with the truth. We want to be lied to.

If we know the truth, it can set us free.

But we miss it. We avoid it. We don’t seek it. We don’t value it. We don’t hold it close. We don’t live it. We aren’t “true spirits.”

The most powerful lies we tell are about ourselves – not all of them bad. We have created the best possible versions of ourselves in our heads and live most of the time is if that version were real.

Unfortunately, what actually happens rarely comports to our story, even though we tend to build our lives around that gussied-up narrative.

As James Joyce wrote in Ulysses, errors “are the portals of discovery.” Our understanding is backward-looking while our lives must be lived looking forward.

Our human fallacies, weaknesses, and tendencies are utterly pervasive. The more you think and learn about them, the more you see them, at least in others. Correcting them at any point provides more opportunity for error. Reason is hard work, after all.

However, it is imperative that we recall and keep reminding ourselves that just because bad reasons and bad reasoning are offered in support of some proffered conclusion – just about every area of inquiry has conclusions supported by bad reasons – the conclusion is not thereby necessarily wrong. That should offer hope.

As Vanderbilt’s Scott Aikin and Robert Talisse argue (more here and here), it is imperative that “we evaluate reasons as reasons independently of evaluating the conclusion. That’s the whole point of critical thinking – keeping those questions separate.” To do otherwise is to commit the “fallacy fallacy.” And when we focus on our decision-making to improve it, we find that our reasoning “tools are still in the hands of fallible, hasty, easily distracted creatures such as ourselves.” In other words, we create new problems with our solutions.

Similarly, much of what passes for behavioral economics today is merely a careful search for apparent or alleged irrationalities in human cognition and behavior using odd tasks not well correlated to real life. In other words, we have a “bias bias,” with a clear goal of finding ways in which we can be deemed to be systematically less than rational. However, our being less than rational doesn’t mean we’re idiots…at least not all the time.

Our efforts to improve our thinking and thus ourselves will necessarily be endless. As Aiken and Talisse emphasize, intellectual hygiene is a lot like bodily hygiene. It needs to be routine and creates potentially major problems when its regular practice is done poorly or ignored. So, brush your teeth after every meal and reevaluate your thinking after every major decision. You’re still going to get bad breath and make bad decisions sometimes but it’s just what we need.

On most days, all too much of the time, we’re delusional, lazy, short-sighted, partisan, arrogant, readily distracted confabulators. However, and especially when we take the time to engage in careful deliberation – Kahneman’s “thinking slow” – we can accomplish the seemingly impossible, as the advances of science, mathematics, and technology attest. On our best days, when wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, focused, assertive truth-tellers. It’s pretty amazing.

To forget the “on our best days” part can be as dangerous and damaging as the “delusional, lazy, short-sighted” part, no matter how much or where we see flawed, bad, or stupid (read “human”) thinking.

P.S. What songs did I miss?


I suspect that this need is at least partly why we so crave artistic expression. In an age where religion is ever weaker, we still seek group expression and meaning. Listen to the crowd sing along with John Legend in this stirring rendition of the wonderful Simon & Garfunkel song, “Bridge Over Troubled Water.”

This song, written by Neil Diamond, was number one on the charts for seven weeks. Micky Dolenz sang it, but the instruments were played by studio musicians (as the video makes clear).


1 thought on “Behavioral Finance: a (Mostly) Musical Revue

  1. Pingback: Happy Blogiversary to Me (and a prize too) | Above the Market

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