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It will be a matter of secret regret to some liberals that the US stock market has not collapsed. The Trump administration is politically illiberal and economically reckless. It follows that the US government should be spanked soundly with the carpet slipper constituted by the S&P 500 index.
So far, the US market has only administered a couple of swipes to the White House’s derrière. The punishment has been light in comparison to the bearishness Trump inspires among many liberals. Stocks have risen of late.
The disconnect is a nice example of the assumptions of a cultural group failing to play out in financial reality. Another strand of this delusion even has its own acronym: Weird. This stands for “western, educated, industrialised, rich and democratic”.
A Swedish fund manager determined to play the Cambodian stock market according to the dynamics that apply in Stockholm is being Weird. In Phnom Penh, local rules will often prevail. The fund manager is liable to lose money.
Weird and its variants matter a lot in behavioural finance, the subject of these columns. Behavioural research can help private investors reduce biases that make them poorer. But Weird may figure as a key bias of behavioural researchers.
Daniel Kahneman is the best-known of these, thanks to his brilliant 2011 book Thinking, Fast and Slow. Many of the experiments described there delved into human responses to different financial scenarios. The guinea pigs were mostly US university students.
The sub-discipline he popularised therefore leaned heavily on narrow social samples for findings that implicitly apply to everyone. This may be one reason some behavioural finance experiments are tough to replicate. Psychology more broadly is at the epicentre of a so-called “reproducibility crisis”.
If one group of researchers cannot repeat the experiment of another to produce roughly the same results, the original findings become suspect. Some discoveries in Kahneman’s own field of prospect theory — which describes biases in the way people assess risk and rewards — have been challenged in this way.
“There is no general theory of psychology that applies to everyone,” concludes Ben Kumar, head of equity strategy at 7IM Investment. Most investors fear losses more than they welcome equivalent gains, a key finding of Kahneman. But the phenomenon plays out differently in different places and at different times, Kumar says.
Life would be easier for private investors if human behaviour was more predictable. As the economist John Maynard Keynes wryly observed: “[In investment,] we devote our intelligences to anticipating what average opinion expects the average opinion to be.”
Some elements of investment cross borders, as pointed out by Tara Sabre Collier, senior director for impact investing at Chemonics Europe: “Maths is a universal language. Either you are in the top quartile for performance or you are not. Still, understanding the drivers of financial return or social impact requires local market knowledge and, ideally, presence.”
Some calibrations depend critically on context. In China, when a company joins the market, its shares are expected to rise steeply on the first day of trading. Increases of more than 50 per cent are common. In the UK, investors hope for a first-day “pop” of just under 10 per cent. Any more, and there is dark talk of underpricing in the City of London. The investment bankers responsible might have to assume false identities and flee the country.
Research suggests that China’s numerous retail investors often see the stock market as a kind of lottery. High volatility may therefore be an attractive characteristic rather than an unappealing one. An appetite for speculation may be the flipside to a parallel quest for stability reflected in heavy investment in gold and real estate.
Contrasts between western societies and Asian ones are often cited as proof of the Weird phenomenon. Purported proof comes in the form of the Michigan Fish Test, an experiment in which study groups were shown an underwater scene. Americans, true to individualistic stereotype, noted the big fish present. Japanese participants holistically remembered small fry and pond weed too.
Britons would presumably have pondered the palatability of the fish when deep-fried and served with chips.
The UK has a distinct culture in investment, as it does in other things. “The UK has a value bias, in contrast to the growth bias of the US,” Kumar says, “Americans always want to create The Next Big Thing.”
A cynic might add that Britons always want to squash The Next Big Thing. The top tier of the UK’s largest companies has changed surprisingly little in decades. They have patiently paid out steady dividends even as the US incubated the technological revolution.
As a liberal myself, my visceral feeling is that a Trump government should be very bad for business. But, as Keynes pointed out, the task of investors is to divine where average opinion lies. It is not to consult their own beliefs.
The level of the S&P 500 balances the views of fellow pessimists with the opinions of investors who approve of Trump or are indifferent to him. The reconciliation it currently appears to have reached is: “Pay attention to what he says to the extent that he might follow through on it.”
Damage to profit expectations from tariff uncertainty has been partially offset by the strengthening outlook for Big Tech. The undermining of US democratic institutions is deeply depressing. But it is too tangential to the immediate economic outlook to register in stock prices.
It would be weird — rather than the acronym Weird — were it otherwise.
Jonathan Guthrie is a writer, an adviser and a former head of Lex; [email protected]