The Greedy Cluster
Emotions are as mathematical ordered as stars in the galaxy.
Are emotions subjective or objective? Why are investors known to buy high and sell low? Why do we overreact? Why do we exaggerate? Why are we greedy? Why does the society panic? Why a majority of us move with the trend? Can we define happiness as a mathematical function?
If we could do this, we could change our understanding of the society. We could understand how the society thinks and how it acts. Businesses could understand consumption patterns, target audiences. It could open up new ways of marketing and advertising.
The recent Economist article illustrated the correlation between money and happiness. If money and happiness were studied on an arithmetic scale, money it seemed could not buy happiness, the correlation was poor. But when similar GDP data was plotted along with life satisfaction on a logarithmic scale, the relationship between income and happiness looked more robust. The author does not make an attempt to explain why this happened. Logarithmic scale compares proportions. Somehow the pattern of increasing income was similar to increasing happiness. This lead to a more robust correlation compared to the initial belief that money and happiness correlations weaken beyond a GDP per capita of $ 15,000.
So what happened? The behavioral aspect of society starts with conformity. We are taught as children to confirm to the rules of the society. I talked about the Milgram experiment last time. There is another famous Asch conformity experiment which demonstrates the power of conformity in groups. The subject confirmed with the group answers not relying on personal judgment. Solomon Asch hypothesized that the majority of people would not conform to something obviously wrong. However, when surrounded by individuals all voicing an incorrect answer, participants provided incorrect responses on a high proportion of the questions.
This conformity is at the heart of most human emotions and decisions. Conformity creates herding, which gives society its reactivity and ability to generate extremes. The majority skews in one direction. This creates greed and panic and explains why majority buys at high and sells at low. Now conformity may seem a psychological incidence. But coming to look at it societal behavior like everything else in nature is clustered. Our learning processes are linked to these clusters, a group of people, a civilization, a region, a social network. Society is a cluster of smaller similar looking clusters.
Clustering is the reason humans conform and conformity is what defines societal happiness and sorrow. Clustering also deals with finding a structure in a database of societal parameters. A loose definition of clustering could be “the process of organizing objects into groups whose members are similar in some way”. A cluster is therefore a collection of objects which are “similar” between them and are “dissimilar” to the objects belonging to other clusters. A number of similar things that occur together, two or more consecutive consonants or vowels in a segment of speech, a group of buildings and especially houses built close together on a sizable tract in order to preserve open spaces larger than the individual yard for common recreation, an aggregation of stars or galaxies that appear close together in the sky and are gravitationally associated.
Clustering is a mathematical process and applications can be built around the idea. Clustering can be used in pattern recognition and economic science. The reason 80% of the world lives in 20% of global capitals is also clustering. This brings us back to the Pareto exponential curve. 80% of market greed will be expressed by the society in 20% of the time. The same pattern works for panic. Exponential proportion is everywhere, even in human mood. This is why illustrating a seasonality in human mood is easier than believed. This is why behavior, psychology, social mood is cyclical at all degrees. This is why fear comes after greed. It’s the clustering of greed that creates euphoria and clustering of fear that creates panic and climax.
With advances in our understanding of human behavior, we can improve our ability to see the order in perceived chaos. Today we use magazine covers, changing fashion, contemporary music, kind of films, design of cars, survey indices, put-call ratios and volatility indices as sentiment indicators to gauge market sentiment. However, the problem with current approaches is pinpointing extremes, classifying one extreme from other. How do we differentiate a multi-decade greed from multi-year greed?
Extremes in data, statistics and prices are also proxy sentiment indicators. Now we have historical silver and gold prices, historical number of cars, ever growing consumption, unrelenting credit and we have songs buzzing “I need a dollar, a dollar is what I need”, Aloe Blacc; “ I want to be a billionaire.” Bruno Mars. The popularity of songs expresses the societal extreme need of hoarding cash.
When will these needs finally bust in time is the real sentiment measurement. Defining emotions as a mathematical function and measuring the extreme societal emotions is a quantifiable science. The new age of sentiment measurement will take forecasting to the next levels when we can pinpoint the greed star imploding into a black hole.
Are emotions subjective or objective? Why are investors known to buy high and sell low? Why do we overreact? Why do we exaggerate? Why are we greedy? Why does the society panic? Why a majority of us move with the trend? Can we define happiness as a mathematical function?
If we could do this, we could change our understanding of the society. We could understand how the society thinks and how it acts. Businesses could understand consumption patterns, target audiences. It could open up new ways of marketing and advertising.
The recent Economist article illustrated the correlation between money and happiness. If money and happiness were studied on an arithmetic scale, money it seemed could not buy happiness, the correlation was poor. But when similar GDP data was plotted along with life satisfaction on a logarithmic scale, the relationship between income and happiness looked more robust. The author does not make an attempt to explain why this happened. Logarithmic scale compares proportions. Somehow the pattern of increasing income was similar to increasing happiness. This lead to a more robust correlation compared to the initial belief that money and happiness correlations weaken beyond a GDP per capita of $ 15,000.
So what happened? The behavioral aspect of society starts with conformity. We are taught as children to confirm to the rules of the society. I talked about the Milgram experiment last time. There is another famous Asch conformity experiment which demonstrates the power of conformity in groups. The subject confirmed with the group answers not relying on personal judgment. Solomon Asch hypothesized that the majority of people would not conform to something obviously wrong. However, when surrounded by individuals all voicing an incorrect answer, participants provided incorrect responses on a high proportion of the questions.
This conformity is at the heart of most human emotions and decisions. Conformity creates herding, which gives society its reactivity and ability to generate extremes. The majority skews in one direction. This creates greed and panic and explains why majority buys at high and sells at low. Now conformity may seem a psychological incidence. But coming to look at it societal behavior like everything else in nature is clustered. Our learning processes are linked to these clusters, a group of people, a civilization, a region, a social network. Society is a cluster of smaller similar looking clusters.
Clustering is the reason humans conform and conformity is what defines societal happiness and sorrow. Clustering also deals with finding a structure in a database of societal parameters. A loose definition of clustering could be “the process of organizing objects into groups whose members are similar in some way”. A cluster is therefore a collection of objects which are “similar” between them and are “dissimilar” to the objects belonging to other clusters. A number of similar things that occur together, two or more consecutive consonants or vowels in a segment of speech, a group of buildings and especially houses built close together on a sizable tract in order to preserve open spaces larger than the individual yard for common recreation, an aggregation of stars or galaxies that appear close together in the sky and are gravitationally associated.
Clustering is a mathematical process and applications can be built around the idea. Clustering can be used in pattern recognition and economic science. The reason 80% of the world lives in 20% of global capitals is also clustering. This brings us back to the Pareto exponential curve. 80% of market greed will be expressed by the society in 20% of the time. The same pattern works for panic. Exponential proportion is everywhere, even in human mood. This is why illustrating a seasonality in human mood is easier than believed. This is why behavior, psychology, social mood is cyclical at all degrees. This is why fear comes after greed. It’s the clustering of greed that creates euphoria and clustering of fear that creates panic and climax.
With advances in our understanding of human behavior, we can improve our ability to see the order in perceived chaos. Today we use magazine covers, changing fashion, contemporary music, kind of films, design of cars, survey indices, put-call ratios and volatility indices as sentiment indicators to gauge market sentiment. However, the problem with current approaches is pinpointing extremes, classifying one extreme from other. How do we differentiate a multi-decade greed from multi-year greed?
Extremes in data, statistics and prices are also proxy sentiment indicators. Now we have historical silver and gold prices, historical number of cars, ever growing consumption, unrelenting credit and we have songs buzzing “I need a dollar, a dollar is what I need”, Aloe Blacc; “ I want to be a billionaire.” Bruno Mars. The popularity of songs expresses the societal extreme need of hoarding cash.
When will these needs finally bust in time is the real sentiment measurement. Defining emotions as a mathematical function and measuring the extreme societal emotions is a quantifiable science. The new age of sentiment measurement will take forecasting to the next levels when we can pinpoint the greed star imploding into a black hole.