As a trader and an investor, Justice has always been fascinated by the human condition – in particular, the reasons why people think and do odd, perplexing, and sometimes flat-out dumb things. Today he discusses a few books that do a very good job of explaining the “why” behind some of the oddball things humans do. Justice believes if there are underlying patterns and reasons as to why people act as they do – then those patterns and reasons are probably well worth finding out.

As you may have figured out, these Taipan Daily missives are (usually) written the day before. That way they can hit your inbox in time for a read with the morning coffee.

With the old “drinking from the fire hose” routine being extra intense as of late, and Tuesday being a rare travel day for yours truly, I haven’t had time to digest the finer points and nuances of Tim Geithner’s new bank plan just yet. I’ve got my stack of stuff printed out, though, and should have a proper state of fulmination worked up by Friday.

Here’s my quick take: Clearly the market liked the plan, based on Monday’s action – or maybe the market just liked ANY semblance of a plan – and just as clearly a number of commentators did not. Paul Krugman hated it, for example. So did the guy over at LOLFed.

And by the way, speaking of Tim Geithner – how come he hasn’t picked up a nickname yet? Ben Bernanke has “Gentle Ben” and “Helicopter Ben”... Hank Paulson had “Hammerin’ Hank”... even the Prez has “Barackstar” and “No Drama Obama.” I keep thinking of Timmy from South Park (Timmay!), but that’s probably not appropriate given the recent news flow.

Probably the most surprising comment, as relating to the Geithner bank plan, came from John Authers over at the Financial Times. I like John Authers – by and large he tends to be sharp and clearly knows his stuff.

And that’s why this comment from Authers at the end of a recent “Short View” video segment made me sit up and take notice:

If this plan works as hoped, then it’s quite probable we’ve seen the bottom of the whole bear market. If it doesn’t, then we probably haven’t.

Yowza. When you think about it, that’s quite a statement.

And by the way, if you ever wondered what the bears leaving town might look like, now we have a mental image (courtesy of www.englishrussia.com):

to the airport, comrade!

Since putting a bear in the back of a taxicab might strike you as slightly irrational behavior, this feels like a good segue point into today’s main topic.

Swaying to the Beat

I recently finished a wonderful little book called, Sway: The Irresistible Pull of Irrational Behavior, by the brothers Ori and Ram Brafman.

The inside jacket flap promises that Sway will “change the way you think about the way you think,” and in some regards it does just that.

The jacket goes on to summarize:

Drawing on cutting edge research from the fields of social psychology, behavioral economics, and organizational behavior, Sway reveals the many dynamic forces that influence our personal business lives, including loss aversion (our tendency to go to great lengths to avoid perceived losses), the diagnosis bias (our inability to reevaluate our initial diagnosis of a person or a situation), and the “chameleon effect” (our tendency to take on characteristics that have been arbitrarily assigned to us.

For all that, it’s actually quite a breezy little book. The contents do deliver on all that is described above, but it comes in the form of stories and anecdotes written in plain English. I found the whole thing very light and engaging – almost like an extended Vanity Fair article turned into a book.

Pants-Wearing Monkeys?

As a trader and an investor, I have always been fascinated by the human condition – in particular, the reasons why people think and do odd, perplexing, and sometimes flat-out dumb things.

Over the years, too, I have been on a quest to find out the “why” behind a true statement from one of the greatest traders of all time, Jesse Livermore, who observed: “A speculator must fight a lot of expensive enemies within himself.”

This is undoubtedly true. But how come? (Good news: the fight is winnable, but it takes time.)

Some, like blogger and money manager Barry Ritholtz, think we are all just a bunch of “pants-wearing monkeys” (himself included). Others simply shrug and accept that deep irrationality in certain areas is just part and parcel of the human condition.

But the reason I found Sway so engaging a read is because the Brafman brothers do a very good job, again, of explaining the “why” behind some of the oddball things humans do.

Or to put it another way, randomly irrational behavior is not all that interesting because there’s very little you can learn from it. But if certain surface-level irrational actions actually make logical sense as phenomena once you dig down to the roots – i.e. if there are underlying patterns and reasons as to why people act as they do – then those patterns and reasons are probably well worth finding out.

Further Down the Rabbit Hole

If you’re a fan of this type of thing – human psychology, behavioral economics and what not – then I think you would enjoy Sway. As I say, it’s a relatively light, fast, breezy read, with a lot of funny stories and some fascinating anecdotes too.

Going deeper: If you consider yourself a budding connoisseur of the rational (or should I say irrational) mind, you can also take things further with a book that is less fun, but perhaps even more enlightening: Influence: The Psychology of Persuasion by Dr. Robert Cialdini.

Here is an excerpt from an Amazon review of “Influence” I penned many years ago:

[In his book Influence: The Psychology of Persuasion] Professor Cialdini takes a refreshing look at the frailties of the human mind, and his conclusions are a reminder of how damningly automatic a human response can be.

He illustrates how the behavioral / cultural conditioning we receive from birth, designed to make us functioning members of an orderly society, also creates exploitable weaknesses within our psychological frameworks.

These weaknesses are compelling (and permanent) because the patterns are so ingrained; we can't short-circuit them without short-circuiting beneficial social behavior patterns also....

As a trader, I bought this book to hone my understanding of human psychology and various influences on the decision making process, in the hope that Cialdini would shed a light on the complex emotional processes that lead to buying and selling. He surely did.

And for the Truly Hardcore...

If you’ve already read Influence, and you think Sway sounds like just another Malcolm Gladwell-style coffee-table-slash-beach-read book – which it kind of is, not that there’s anything wrong with that – then maybe you’re a candidate for the really hardcore stuff.

If so, you might want to check out Psychology of Intelligence Analysis by Richards J. Heuer Jr.

This one is available on Amazon.com, but you can also get it free from the CIA.

Do I mean that CIA, as in, the Central Intelligence Agency? Yep... apparently it’s required reading for analysts (or was at one time). The CIA keeps a free copy of the book online here. Obviously there’s nothing breezy or easy about this one, so be forewarned.

If you pull any good insights from these tomes, or have some good “brain food” selections of your own to share – or, heck, if you just know a good nickname for poor ol’ Tim Geithner – let me know: justice@taipandaily.com.

Other Related Topics: Justice Litle , Market Analysis , Recommended Readings , Safe Haven Investor

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