Notes 5

Question 1

The psyche

Answer 1

Refers to the full human mind in its widest sense

Made up of: Logos, Nous, Pyr

Question 2

Nous

Answer 2

translated into mind, thought, “imagination for reality”

• Mean the mental picture of the world that the individual is using.

Question 3

Logus

Answer 3

translated as logic, rational thinking
refers to the type of rational logic that could be understood by all.

function: is to condition the mental picture created by nous

Question 4

Pyr

Answer 4

translated as fire, drive or impulse

it refers to the light and energy used in and by the Psyche

Question 5

Split of the psyche into 3 parts can be compared to what

Answer 5

• distinct between narratives and analyses used earlier
• narratives compared to nous(heart)
  -Analyses compares logos(head)

additional element Pyr(guts) - for the amount of life and energy used to create and apply them

• Nous (most powerful), Narrative is also considered to be more important than analyses.

Question 6

Ego

Answer 6

is the individual, his/her self, as distinct from others

individual likes to feel good about themselves

• ego is the filter which an individual sees the world.

-healthy ego, see the world as it actually is and tries to engage with the world

-unhealthy ego- varying degrees of self deception to excuse or justify their actions to make them feel better about the world.

Question 7

rationalisation

Answer 7

• when an individual makes a judgement based partly on the way they are and partly on the way the world is, this is referred to as rationalisation

Question 8

if individuals have healthy ego

Answer 8

higher self regard
a greater sense of self
liable to ego defence mechanism being activated in order to protect their high self regard.

Question 9

Ego and rationalisations examples

Answer 9

• eg actuary exam - name not on pass list
• students ego might distort reality to avoid the bull brunt of the negative news by deciding that the exam was unfair or that they were unlucky, rather than accepting the reality that they probably just did not do well enough to pass.

ego defence mechanism: the more emotional the student felt at the time of failing/the higher the expectation of them passing, the greater their likelihood and severity of rationalisations .

Question 10

Ego defence mechanisms involve projection

Answer 10

e instead of accepting their own failure, students blame something or someone else, like saying it’s the exam’s fault for being too hard.

Question 11

what was a classical analogy for the ego

Answer 11

nemean lion - skin was though that only its claws could cut it.

Individual ego can defend themself from reality that they don’t like and only the individual can open up their eyes to these realities.

Question 12

rationality spectrum

Answer 12

• end of spectrum: Lotus
  dispassionate, neutral reasoning which would be understood by all.

other end: ego
factually incorrect rationalisations - heavily distorted ego

in between a wide range of rationalisations
some close to logos, with very little ego distorting
some close to being factually incorrect or have more ego distorting them

quality of rationalisation: influenced by the degree of nous and level of effort (pyr) applied in creating them

Question 13

the challenge of life - the hill

Answer 13

• life similar to hill
• progressively meeting our needs in life in an uphill battle
• harder to progress than it is to regress
• initially very steep, but flattens on accent
• go up the hill, depending on how much we require of ourselves, what we have (our resources) can flatten the hill, but not change its uphill nature.

Question 14

challenges engaging nous

Answer 14

difficult to engage the nous
involves openness and degree of uncertainty, vulnerability and doubt

patience required for creating a better mental picture, take time

engaging nous is rewarded as an inward journey into the psyche, involving contemplation and reflection and drawing from thoughts

involves becoming abstract, which means a a bit of disengaging from the world. The individual ego is likely to be fighting against this: the individual ego wants to feel good and this is usually trying to create beneficial outcomes from engagement with the world (ego’s need for immediate, positive results from interacting with the world.).

Question 15

The psychological study of Nous

Answer 15

• most people did not like to be left alone with their own thoughts
• many people studied, in particularly, men, chose to give themselves mild electric shocks rather than be deprived of external sensory stimuli to their ego
• person’s deeper understanding (Nous) can be seen as a threat to their Ego-defense mechanisms. . This is because being more open may reveal that the person might show that they were hiding from certain parts of reality. Realizing this can be unsettling or distressing.

Question 16

challenges engaging Logus

Answer 16

requires discipline, effort, and rigor.
environment with stability, safety, and minimal distractions.
The individual’s ego often resists, preferring a more pleasant and less realistic view of the world.
preference for avoiding full discipline and effort, often using rationalizations that make sense to the ego but may seem illogical to others. Applying logical reasoning (Logos) comes at a cost for the ego, competing with other thought processes. The ability to apply logical reasoning is constrained by the individual’s level of intellectual understanding (Nous).

Question 17

challenges engaging pyr

Answer 17

• using pyr is challenging because it requires igniting, good fuel and good air to create good fire.
• good fire needs to be stoked regularly to keep the flame going to maintain the light and heat coming from it.
• Ego perpective: Pyr is dangerous, just like fire, and if not managed properly, it can burn or smoulder and create smoke.

Ego incline to be risk averse, so it’s inclined not to fully engage Pyr.

Engaging Ego defense mechanism has an opportunity cost due to the amount of Pyr needed to operate them, reducing the Pyr available somewhere else for the Psyche.

when the individual Nous or Logos not engaged, result in an unrealistic mental picture of the world and a somewhat irrational understanding of it, then the individual Pyr, is likely cause problems.

individual may have to manage or suppress their pyr to avoid creating problems.

Question 18

challenged engaging the full Psyche

Answer 18

• The qualities of openness, uncertainty, doubt, and vulnerability that support Nous often clash with the stability, safety, and lack of distractions that favor Logos. This conflict presents an extra challenge in effectively combining Nous and conditioning it with Logos. Furthermore, involving Pyr is at odds with engaging Nous and applying Logos, as Nous demands a certain level of disengagement from Pyr, while Logos needs disciplining it.

best balance - healthy ego - behave in a passionate but gentle manner with a proportional degree of humility.

passion gets the fire working, gentleness helps keeping the flame going, maximise the light and energy created, and the humility prevents the ego getting in the way of engaging Nous or resulting in rationalisation instead of application of logos.

Question 19

Human Psychological Behaviour

Answer 19

Some fully engage their Psyche - both Nous and Logos

• some only engage logos - create understanding of the narratives of others-
• others not engage logus or nous, instead use different degrees of rationalisations to amen sense of things for themselves and others what think like them.

Question 20

conforming

Answer 20

do not engage their psyche beyond their rationalisations.

• passively rely on the narratives (nous) and on the analysis (logus) of others.
• limiting resources ( time, skill money), means individuals may be selective about where they engage their full psyche - maybe in areas they are good at
• may confirm if they know beforehand that they have limited skills in certain areas - give more comfortable, less volatile outcome.

eg investor have no special skills at equity analysis.
may choose to conform by following a passive strategy, giving them an average market outcome.

Question 21

cost of confirming

Answer 21

• if not fully engage their psyche
• bring costs in terms of their ego defence mechanisms.
• reduce an individual capacities for engaging Nous because they create a closed-mindedness and reduce their capacity of the openness (required for Nous)
• ego defence mechanism distort the use of the logos.
• by confirming and joining a group, individual become part of group ego, see things partly the way the world is and partly the way the group is.
• subject to group ego defence mechanisms, rationalisations make them feel better.
  -reduce the individuals capacity for engaging the nous and further distort the use of logos.

eg socially focused politician may find it challenging to support certain economic policies, such as specific tax cuts, as it could lead to a loss of support from their core voter base.

Question 22

benefits of conforming

Answer 22

-the decision to conform depends on factors like an individual’s effort, circumstances, and self-awareness of their skills.
- beneficial: when lack a special advantage and can’t develop one soon. the better the narratives to which the individual conforms the greater the benefits to them.

-wise choice in certain situations,
- especially when deviating from a peer group poses significant risks.
-strategy to reduce risks
-psychological benefits for those who either cannot or choose not to bear the uncertainties of a different path.
Eg pension fund trustee might face an unconventional investment strategy that, long run be the best interest of the firm, but differs significantly from the norm among other pension funds. The benefits of conforming lie in risk reduction and aligning with established practices.

-If the strategy fails, the trustee faces scrutiny and personal criticism, with limited recognition for success. -
Due to these risks, trustees may resist such strategies and opt to conform to industry norms.
Conforming - preferable alternative - lack of skills or resources for a competitive strategy. It offers a more predictable investment outcome compared to attempting unfamiliar approaches in financial markets.

Question 23

herd like behaviour and market psychology

Answer 23

• individuals within a group are significantly influenced by the group’s thinking, often
• due to insufficient individual thought.

In situations where group norms are objectively beneficial, - higher education - positive outcomes
-if the arguments supporting group norms are weak, like guaranteed success for internet companies, it can lead to misallocations of resources and poor investment decisions.

• commonly seen in financial markets, Market bubbles and crashes are often attributed to herd-like behavior.
• may take a long time for the herd to realize its irrationality, and contrarians may experience prolonged underperformance, risking their business viability.
  As economist John Maynard Keynes noted, “Markets can remain irrational a lot longer than you and I can remain solvent.”

Question 24

aggregated market pyschological behaviour

Answer 24

• Five percent of the people think; ten percent of the
  people think they think; and the other eighty-five percent would rather die than think.”
• Thomas Eddison
• A range of conformist narratives is likely to arise in markets given the large no. of groups participating.
  -little/no financial training often follow simplistic, basic narratives eg by following stories/ideas reported in the media.
• At the other end - seek advice from experts, conforming to the narrative given by their advisors. The quality of advice may vary, but can be argued that if they received some training, then better result than with no advise.

In between, some individuals who read and apply some though to combining various intermediary narratives, but due to the complexity of financial markets, these narratives may be simplified or lack a comprehensive understanding.

Understanding group norms and identifying where market participants aren’t fully engaging their psyche- - advantageous for competitive investors.
-lots herding participants in the market, may result in mispricing, can be exploited by an investor using superior nous or logos.

The majority of market participants often follow norms rather than fully engaging their minds, making their behavior dominant in the market.

Question 25

finding the competitive investors edge

Answer 25

A competitive investor must adapt to their environment, involve conformity, use their Nous, Logos, and Pyr, to understand the market to trade well.

-create their own narratives.
- best at the edge of existing group narratives.
- need to be free to think independently, investigate, and create narratives and carry out analysis.

• need self-education - common ideas may lack a competitive advantage. The investor must challenge the belief that existing narratives guarantee outperforming investments
  instead - develop and trust their own understanding of financial markets.
• involves non-conformity, as every investment is a belief that the market is wrong, and the investor has superior knowledge or has conducted a more profound analysis.
  If a competitive investor struggles to explain their edge clearly, likely the edge does not really exist, and have some misunderstanding on their part.

Question 26

a framework for using investment psychology

Answer 26

• due to the psychological challenges involved, most individuals adopt narratives from others and rationalize market values.
  -results in herd-like behavior, contributing to unpredictable market prices, potential manias, booms, and busts.
• Some individuals gain advantage by using psychological potential, but this is difficult and prone to mistakes.
  -Recognizing market irrationality isn’t enough; exploiting it requires understanding when the market might return to rationality.
  -Need to understand the market but also develop insights into the behavior of others.

Question 27

Defincies in the narrative of the EMH

Answer 27

-investors are not rational:
-various irrational behaviors have been studied.
- Many individuals follow what others say about the stock market and come up with reasons to justify their actions. This collective thinking creates herd-like behavior.
- justifications persist because others in the market are not fully using their minds—specifically, their intuition (Nous) or logical thinking (Logos). This challenges the idea that markets are always efficient.

-Asset prices don’t always reflect all available information
- too much complex information for investors to fully understand. Limited time, skill, and resources can restrict their use of (Nous) & Logos), leading to herd-like behavior.
- (EMH) suggests that a few well-informed investors should bring prices to fair value, but real-life examples, like those in the 2008 financial crisis, show that even smart investors struggled to influence prices. This challenges the EMH idea that markets are always efficient.

• The EMH as a group-ego defence mechanism
  Problems in financial markets that question the Efficient Markets Hypothesis (EMH) are often treated as criticisms rather than real challenges because they’re examined using the same ideas as the EMH. A competitive investor regard EMH as group ego defence mechanism, make them feel better
• have been in place for a long time - difficult to argue.

Investors with market power
- competitive investor argue that EMH ignores that some market participants have market power-
- when dealing with sizes much batter than the rest of the market, they can “bully” other investors.
- unlevel playing field
- make it less likely that the markets will reflect all the information and trade at their “fair values”

Question 28

creating an investment narrative with a competitive advantage

Answer 28

• a better understanding than average of the non-logos behaviour of other investors and have a strategy to profit from them
• deeper narrative that facilitates a greater capacity to
  apply Logos - this is likely to come from building up a better understanding from considering a greater amount of information.
• A recognition of deficiencies in the current consensus market narrative (herd like behaviour)
• An allowance for the expected behaviour of investors adhering to the EMH or CAPM and having a strategy to profit from them
  -Recognition and understanding of the likely behaviour of the bigger players in the market – especially those that aremostly winning and those that are mostly losing – and profiting from using this information.

Question 29

applying the investment psychology framework example

Answer 29

• The boss got a report saying “Brexit is bad” from a stockbroker, claiming leaving the EU will harm the UK.
• not enough Nous has been applied, resulting in a compromised effect on the Logos.
• psychological perspective is not arguing whether the statement is right or wrong but rather than the narrative is too shallow.

Question 30

comparison of the likely viewpoints of a consensus vs a competitive investor

Answer 30

Question 31

characteristics of astute investors

Answer 31

• well developed and applied Nous, Logos and Pyr
• apply patent and open -mindness over a long period of time
  -be discipled and logical in carrying out their investment processes
• have significant drive
• competitive investors: narratives their own
• continually recalibrated to reflect the feedback from market
• actively critical understanding of the market
• not allow success or failure to go to your head.

poor investment mangers - suffer from ego/tiredness issues, not fully recognise what is required to do well in investments
- more ruled by emotion (Pyr), than thought (Nous), and reason (logos)
-narratives shallow
- try solve complex events in a simplistic way.

Question 32

professional investors and amateur investors

Answer 32

• reaction very different
• amateur investor: see a popular stock, say that looks like a good company, everybody will be using their product, they look like they will be doing very well, I should invest in the,
• emotional (pyr and ego), seeing the upside and not really considering the downside.

professional investor: only invest if they have investigated the downsides, have a plan,
eg stop loss level, for that they will do if the investment does not go the way they planned.
- apply logos to differiante between good company and good investment