The Institute Blog

David Tuckett: How Stories about Economic Fundamentals Drive Financial Markets

Fund managers cannot possibly know what the future will bring, yet they have to commit today to holding assets that promise a return tomorrow. Such a commitment requires confidence -- confidence that is hard to find in the face of uncertainty. To cope with the uncertainty, fund managers rely on gut feelings and invent stories that justify their decisions. In the end, it is stories and emotions that drive financial markets. That is, in a nutshell, the theory of asset pricing developed by David Tuckett.

Some unconventional advice to monetary policy follows. Central banks, Tuckett says in this interview with INET Executive Director Robert Johnson, should create stories themselves. This is not to call for central bankers to tell fairy tales. No, what central banks can do is create their own stories -- stories that are anchored in meticulous observation and forensic analysis of new markets and new business opportunities.

David Tuckett, trained in economics, medical sociology, and psychoanalysis, works part time in clinical practice. Since winning a 2006 Leverhulme Research fellowship for a "psychoanalytic study of investment markets," he has been collaborating with Professor Richard Taffler to introduce psychoanalytical understanding to behavior in financial markets.

Part 2: What Bubbles Are Made Of

Part 3: Not Just the Numbers: The Psychology of Emotional Asset Management

Part 4: The Way Down: When Bubbles Pop

Part 5: After the Crash: The Need for New Economic Thinking

Part 6: The Human Element: Reinserting People into Finance

Comments

0

I thought this was fascinating.

A couple of times, it was touched on that the finance sector was responsible for allocating resources, for directing capital to where things were most productive etc.

From a systems perspective, isn't it just that the markets, the investors, the whole finance sector together with its global telecoms infrastructure, are collectively the nervous system of a much larger animal, and that this nervous system is governing incorrectly?

If David Tuckett is saying that the everyman should be more involved and aware of these mechanisms, that direct their money/capital/resources, and that the story is important, isn't it correct to conclude that the everyman should be made to recognise the finance sector as their government? After all, from a systems perspective, that which does the actual governance, allocating resources - directing investment, sending signals just as any nervous system should. Sure, the national governments, states, do governance too, but in what way are they separate from the finance sector? Isn't it more apt to see the governments, central banks and financiers as being, together, the modern system of governance?

If this integrated network, that combines the government, telcos, finance sector entities, central banks and what have you in different roles, can be seen as a malfunctioning brain that needs to be repaired, then perhaps at least that particularly story would serve to provoke some more productive systems theory approaches to economics and governance in general, as well as bypass the harmful rhetoric about socialism, big government, free markets and banks.

In short, is it in line with what Mr Tuckett says that perhaps it would be more productive if the layman stopped merely suspecting that a conspiratorial bankocracy exists, and moved to fully recognising in a more enlightened way that anything involved in signalling, reserving or allocating resources is part of an organic governance mechanism, and would best be treated as government, and held accountable as such.

0

Nice discussion. I also enjoyed Frank Szendzielartz's comments above about the systemic interplay of political governance and economic management, an interplay which technology has enhanced to a point where the stories grow upon themselves like the painful squeal of a music feedback loop. Can we simple beings (economists and mortals alike:) manage the growing complexity and speed? If not, things will get quite uncomfortable for much of the world's population, rich and poor. I am hopeful that (using technology to empower better economic/government systems) we will learn to manage the 'organic' beast which we, our economies and our technologies have become.

0

Correct, and Akerof & Shiller nailed the point repeatedly in their book "Animal Spirits". The elusive issue is how to practically arrive at such governance systems (or risk management systems) that minimize the unavoidable and sometimes yawning gaps between "stories" and rapidly changing realities; after all, the Efficient Market Hypothesis is one such "story" and we know what happened. And here the everyman has a big problem. But I can think of some experiential learning that can point to workable solutions.

Val Samonis
Toronto

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