Iconoclasts In Finance

11 October, 2010

In early January I wrote a column on how “out of the box” thinkers dominate finance and highlighted that over the last 20 years almost all the ideas that have revolutionised Finance have come from outside the discipline. Amongst examples I cited were the two psychologists, Tversky & Kahnenan (who teamed up in the 1970s to articulate the concepts that we now call “Behavioural Finance”) and the mathematician, Nassim Taleb (of “Fooled by Randomness” and “Black Swan” fame).

Since my day job is to provide investors with fresh ideas, the subject of how brokerage analysts can train their minds to see the world from a fresh perspective is close to my heart. My investigations in this area have now taken me into the world of psychology and neuroscience and towards the published work of a scientist called Gregory Berns.

In his book called “Iconoclasts”, Berns analyses thought leaders from many walks of life – finance, politics, media, technology, sports, etc – who have revolutionized their profession. Berns defines an “iconoclast” as someone who does something that others say can’t be done (eg. Martin Luther King and social integration between races in America or Warren Buffett and his stellar track record of index beating investments). Berns’ view is that there are three critical qualities that iconoclasts have which distinguish them from the rest of us:

a) The ability to see or perceive the world differently from how normal people see it;

b) The ability to conquer fear and thereby prevent it from doing what it does to the rest of us i.e. inhibiting our actions and distorting our perceptions; and

c)  The ability to “sell” their ideas to the rest of their peer group in the face of stiff resistance.

These qualities give us a powerful psychological framework I think for assessing what ails the finance profession. Firstly, we are so lost in the detail of financial statements, newsflow and spreadsheets that our ability to see the world around us with a fresh pair of lenses is limited. This obviously creates a huge opportunity for people entering finance from other disciplines to make a real difference. Whilst the contributions of psychologists and mathematicians to finance have been highlighted above, my sense is that in India sociologists have much more to give to finance and stockmarkets than you would expect.

As I highlighted in January, my discussions with sociologists suggest that the biggest stock price movements over the next decade will be caused by three inter-connected developments: (a) the relentless rise of small town and semi-urban India – cities like Indore, Nasik, Jabalpur, Mangalore, etc.; (b) the tendency among Indian women across a range of socio-economic classes to delay marriage and thereby change the spending patterns that companies take for granted; and (c) the increasing economic and political assertiveness of formerly impoverished groups of people.

Secondly, fear is the most basic of human emotions and Berns’ analysis both highlights not just how powerfully fear impacts us but also how difficult it is for us to control it. For example, as market participants we all know how difficult it becomes to take decisive action when a company is announcing a profit warning; whilst the professional in you says that you need to calmly look at the data and make a call on how much the fundamental value of the company is altered by the warning, the human in you can’t but help look at the plunging stock price and sell your entire position.

Over and above this paralytic impact of fear, Berns highlights experiments conducted by renowned psychologist, Solomon Asch, who showed how sensible human beings make utterly irrational decisions when subjected to even the mildest amount of pressure.

Whilst it is hard to offer pathbreaking remedies for those of us who need to conquer fear, Berns does have a number of recommendations for those who want to see the world differently and thereby come up with fresh ideas. Berns says that “epiphanies rarely occur in familiar surroundings. The key to seeing like an iconoclast is to look at things that you have never seen before.”

At a literal level, travelling is the easiest way to get your mind out of its usual drudgery. A change in profession or a stimulating academic course in a new discipline could also help. The same applies to meeting a wide variety of people. In short, getting out of our comfort zone and forcing our brain to see the world differently is the first step towards immortality.


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Iconoclasts In Finance

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