Humanities on investors' minds
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By Daniel Cho
Historically, stock markets have repeated a cycle of bubbles and bursts. In 2000, the Korean stock market saw the burst of the millenium bubble, or the IT bubble. In 2008, emerging stock markets took the brunt of the U.S. subprime mortgage crisis. In the world of investing, value tends to overshoot on the upside and then cause severe sideeffects on the downside.
What is driving the stock market cycle of bubbles and bursts?
People who move stock markets tend not to change. Whether it is the Chinese who lived 100 years ago or present-day Koreans, they are all prone to greed and misjudgment.
The humanities have been gaining popularity in many parts of Korean society in recent years. Now the humanities’ reach is extending to the investing public. “The Record of the Great Historian” and “The Art of War” are on investors’ must-read list. “Humanistic investment” are new buzzwords.
Humanistic investment may be just a fad like a stock frenzy over Psy’s “Gangnam Style” syndrome or grow into something bigger like a new investment trend based on a deeper understanding of human behavior. A case in point is neurosicence that finds a growing audience in the investment community. In particular, cognitive neurosicence, which used to be confined to the realm of marketing, is increasingly making inroads into the world of investing. Behavioral economics based on human behavioral psychology is overtaking classical economics as the mainstream science for many investors. According to behavioral economics, humans make decisions, particularly quick decisions, based on spontaneous sensing rather than reasoning, and in many cases, even intuitions based on accumulated experience and knowledge may not lead to a reasonable conclusion.
Entertainment stocks and the Korean wave culture boom (hallyu) were previously thought to be niche stocks, but they have been among the biggest market winners lately. Many analysts and investors believe the rise of entertainment stocks is not a fad but a long-term trend, seeing it as a structural change, not a just cyclical pattern.
From a broader humanities perspective, this could be yet another bubble, which should burst eventually. What looks like a radical or structural change, may be just another cyclical change from a long-term perspective. Likewise, the history of finance is an endless repeat of temporary patterns with variations.
To be sure, this writer is not a stock naysayer at all. It is not an exact science to predict how big the bubble we are seeing now will get and when it will burst. Challenges facing global financial markets will be overcome by collective wisdom, but what is more certain is people’s capacity for misjudgment because our brains are programmed to make mistakes.
The study of humans, including ever-evolving neuroscience, and the world of investing will become increasingly intertwined.