The pattern of belief

The first week of Jun I transformed myself into a movie buff. I saw eight films at Transilvania International annual Film festival in Cluj. Pa-ra-da, Marco Pontecorvo’s moving feature film about homeless children in post-Ceausescu Romania. This according to New York time was Europe’s answer to the Indian rags-to-riches blockbuster “Slumdog Millionaire.” Then it was Dominique Blanc, French award winning actress in L’autre. She played the role of a jealous obsessive woman after opting out of a relationship. Award winning Filmephobia, Kiko Goifman (Brazil) made a documentary about fear in contemporary society. The crew of this film-within-a-film documentary explores the limits of the psyche by exposing phobics to their greatest irrational fears. ‘Valentino the last emperor’ is a feature-length film on the legendary designer Valentino Garavani in the wake of his exit in 2008 from the company he founded in Rome more than 45 years ago. The film won the Chicago film festival. ‘Hollywood I am sleeping over tonight’, directed by Antoine de Maximy, a French comedian is a film about the director’s journey from East coast to West coast. The travelling cameraman takes to the road, on foot, hitchhiking, by taxi, by bus, by bicycle and even in a hearse. The film paints a picture of the United States that is both touching and surprising. Then was ‘Man on Wire’ an Academy Award-winning 2008 documentary film directed by James Marsh. The film chronicles Philippe Petit’s 1974 high-wire walk between the Twin Towers of New York’s World Trade Center. It is based on Philippe Petit’s book, ‘To Reach the Clouds’. The last film was ‘Gabhricha Paus’, The Damned rain, by Prashant Pethe. This was the lone Indian film to figure in the list of 31 projects selected for the prestigious funding from the Rotterdam International Film Festival.

The last film completed a cycle for me, as it connected me back to an article ‘who is killing the cotton farmers?’ I wrote here on 05 Feb 2007. This connected me back to psychology, prediction, philosophy and time. All that we call art or cinema has individuality about it. We celebrate individualism, we make films and paintings about them, we blog, we sing, we express. On the other side of individualism is the generalism, the groupism, the masses, the social mood, which has inertia and is different than individualism. It’s like a continuum of shades, only clearly different in colors at extreme but without really a clear line of separation. We can never grasp it totally like one single film at one single Cannes film festival. We can never see the big picture, it’s too big for all of us to even visualize. Some pictures we relate to, some we don’t, and some we don’t want to. This is why we will have many festivals and thousand of films animating that subtle mood, that human emotion, the infinitesimal part of the universal ever-changing mood. Actually the stories we see in films is what we write about in markets. It’s just that we call it differently.
The reality of rain for a farmer is harsh, but it can just be a mood spoiler for the city man. Human mood is shocking and beautiful at the same moment. Despite this diversity and contrast, does this mood have a form? Is belief patterned? Does emotion have self similarity? Water is the similar aspect but has different meanings or different interpretations as settings change. How different are interpretations anyway? Let us say a farmer and a trader. There is a human anticipation (for rain or for news), there is debt (farm land or house mortgage), there is prediction (regarding rains or markets), there is unrelentless speculation and hope (things would be different this time), there is a risk and return (correct or incorrect) in both cases and there is an inertia to hold on to the status-quo. The farmer can’t stop farming and so can’t the trader resist the lure of a trade. We are tied to our vocations, different occupations, interpretations but with a similar emotional frame.
Interpretations are the color, the illusion, the chaos as one might put it. Was it really the rain that killed the farmer? There is a more than a decade long secular negativity on cotton. There was no mention about the cotton prices in the film. Why? Because the reference frames to explore the emotion was different. So whom do we blame for a life lost, it was definitely not the cotton price also, if it was not the rain. It was the emotional drift. Human inability to detach, to stop, to pause, not to trade, to take a vacation, to not go to work one day (you should see the film). It’s not that we are mechanical. It’s that we drift.
Behavioral finance also refers to a similar psychological tendency as drift. In his survey of the literature on post earnings announcement drift, Bernard (1993) discuss evidence concerning market prices underreact to analysts forecasts. He explains that the post announcement stock prices for firms that have reported “good news” tend to drift up, whereas the prices for firms that have reported “bad news” tend to drift down. It pays to hold stocks that have experienced recent large positive earnings surprises, because the market does not fully adjust to the good news. Instead, the market adjusts over the three quarters that follow an announcement. This same underreaction or overreaction of prices is later ascribed to analyst behavior. Behavioral finance does not make an attempt to differentiate underreaction or overreaction in prices from that witnessed in analyst behavior. The subject also talks about two types of investment approach viz. momentum and reversal (contrarian) approach. Momentum approach is nothing but herding approach, more common and comfortable owing to the sentiment drift.
We at Orpheus will not be surprised, if the following question was raised for the first time ever to the behavioral school of thought. What overreacts, prices or people or both?  Inability to book a loss or procrastination can be associated with the drifting sentiment. The other behavioral ideas like extrapolation bias, psychological herding all is an extension of this drift. When people get together, group thinking takes over and the group is assumed to think right, this is why herding (drifting) becomes natural. Technical analysts have also unknowingly handled the idea of drift. Why do bear markets have two stages of fall? Why do markets extend? Is this not because the sentiment has inertia, it cannot just stop after a deep crash, it needs time to reflect, make up its mind. This is why the group sentiment shifts. Even if top formations are sharper and faster, there are many cases of historical tops being retested, sentiment does not let go easy of status-quo. This is the way we as a group are and this is why we feel comfortable, drifting. Where did the frog in the well come from? It came from our need for the status-quo. We love the proverbial well.
Why is dramatism the most touted approach to bringing real change, because dramatism is the only way a drifting society can be caused to change its approach. Moving out of the comfort of groupism needs overcoming fear of being alone and changing status-quo. Groupism to individualism or vice versa is also about movement, change. Hence any questions regarding dynamic sentiment or drifting sentiment can be put to rest if one associates drift with pulse or life. If mood is such an important driver for economic trend then it got to be moving and not static.
Now if we have come to terms that sentiment moves. How can we start quantifying it? Sentiment surveys are trashed by behavioral finance, but not even one behaviorologist talks about the cyclicality in sentiment surveys. The bullish percent readings move from one extreme to the other in a banded (0 – 100%) fashion. Now one may ask what has belief, fear, greed, panic got to do with sentiment readings? Well the readings are only expressing the degree of belief or greed in market on the positive extreme and degree of fear and panic or the lower extreme. The cyclicality of sentiment can be observed across time frames, 1 min to multi years, people (traders) will move from euphoria to complacency (passiveness) on all time degrees. So now if cycles are not mathematical, how can mood be mathematical? What if cycles were mathematical, then mood becomes mathematical too? Time translation we explained prior not only connects the bell curve (efficient school) with the Pareto curve (inefficient school) but also is the underlying force that drives and defines mood.
The human mood drifts because of time. The larger the time behind a mood, the larger the impact. It’s the degrees of mood which cause war when they are at an extreme low, the same degrees of mood which are in positive time cause euphoria and invariably bubbles. There is a theory about mood drift causing market movement, there is a theory about markets causing changes in mood, there is a theory of what credit leverage can do with social mood. There is no theory about what time does to mood? Whether mood like everything takes the pattern of time? Whether mood also fractals like everything else in nature and price? It is easy to demonstrate that social mood is a pattern, not just a cycle. Fear and greed has a pattern, just like belief. They all assume the pattern of time, the pattern of time triads, triangle in a triangle.
Behavioral Finance became a school of thought because there was an observed pattern, a pattern of behavioral flaws. It is just that behaviorologists saw emotions like films, many films, many emotions, and many flaws. No attempt was made to group them. Robert Prechter’s Socionomics was the first subject which ever attempted to classify mood. In 2002, Prechter said that he expected it to take another ten years to construct a full theory of the components, aspects, processes and structure of social mood. This article attempts to extend Prechter’ s work, even if not in the direction Prechter might have imagined 20 years back.
Socionomics demonstrates the social mood trend, which we are labeling as drift. Prechter accepted that component work was more of observational summaries and not a hypothesis. Time translation and its impact on mood is a hypothesis for us. It was seventy years back R N Elliott said that human emotions are rhythmical and their waves governed “all human activities, whether it’s business, politics or the pursuit of pleasure”. Elliott said “Human emotions” is not a precise term. For us at Orpheus human emotions are measurable and mathematical just like price, it’s just that quantifying mood for 1 min time frames is a cumbersome process, as the trader is busy trading rather than filling sentiment surveys regarding how he feels at that moment.
Socionomics suggests that there appears to be a social polarity that underlies all social interaction. Prechter refers to these opposites as “positive” and “negative”, which according to us are the polarity of time reflecting in the mood. He illustrates two poles of social mood viz. confidence/fear, constructiveness/destructiveness, happiness/unhappiness etc. In his book ‘The Wave principle of Human social behavior’, Prechter details a thorough classification of changing moods causing changing prices or changing trends. However, the seminal work does not delve much into the linkage of mood with time. The guru admits that his observations could be used to probabilistic predict social mood, but he does not suggest that mood could itself be a self similar fractal and measurable as a Pareto power law curve. Prechter has demonstrated smaller aggregations to suggest mood expressing a fractal form, but he still admits that his classification of moods is roughly representative, not precise or conclusive. Understanding time fractals simplifies many challenges linked with quantifying mood.
A human mood doesn’t need a language to communicate. I remember cooking with my chef for a complete week in Mysore (South India), we both spoke two different languages in the same country. The society mood is interwoven in time and time translates and moves giving a pulse to social mood like it pulses everything else. Even if we communicate or miscommunicate, the polarity of mood is a universal mathematical truth owing to the underlying time.
The best traders I have met question their own emotions. It just like Philippe Petit the man on the wire told himself, “it cannot be done”. It was only when the dream of tightrope walking the twin towers was improbable that the hurdle could be overcome. This is how celebrated individualism comprehends the pattern of belief.