You are here: Home Knowledge Base Addressing Financial Uncertainty Proposals Unforeseen risk threatens us as the outcome of failed thinking. Two solutions are (1) drastically to alter the economics curriculum and (2) to monitor the relationship of two specific emotion groups circulating in public and private narratives.
Symposium 2014

Proposal - Unforeseen risk threatens us as the outcome of failed thinking. Two solutions are (1) drastically to alter the economics curriculum and (2) to monitor the relationship of two specific emotion groups circulating in public and private narratives.

The Challenge

We live in an uncertain financial world, in the sense that we do often know neither the probabilities with which conceivable financial events will occur, nor all the possible events that could occur ...

We live in an uncertain financial world, in the sense that we do often know neither the probabilities with which conceivable financial events will occur, nor all the possible events that could occur. Additionally, we do not even know whether our conceptional structures are appropriate for apprehending and evaluating financial events. Thus future financial outcomes are often not known in any calculable way. Nevertheless we must make financial decisions, since even no decision is a decision to maintain or existing financial strategy. Although the discipline of economics has thus far provided little guidance for decision-making under uncertainty, in practice financial market participants usually act in systematic ways.

  1. The theories we have about the world – especially those not properly known to us – have huge implications and consequences for action.  Whether through the lens of modern “active inference” theory (developing in neuroscience) or standard social science they determine our “definition of the situation” (Thomas 1921) - what we see and what we don’t.
  2. Academic theories are one source of how we see. But the leading academic theories that seek to advise policy (in economics and psychology) have so far made no real attempt to study and draw inferences from the world we live in. Rather they offer conclusions from a formal analysis of an idealised version of the world. The problems of managing real uncertainty are replaced by claims to possible omniscience – in economics knowledge is by axiom, in behavioural psychology by “nudge”. There is little left of these theories if this core assumption of knowledge is dropped.
  3. In finance, standard and behavioural theories are a hindrance – perhaps a defence against the anxieties created by uncertainty and lack of control. They miss the point that although financial assets must ultimately depends on some kind of “fundamental”, human beings have to use their interpretive skills to infer what these values are. They have no given value in and of themselves. The value depends on buyers and sellers reflexive  views as to the future income streams generated by the fundamentals of the underlying entities. It is often hard to know what these are today. It becomes increasingly a matter of opinion the further away from today. In my theory[i] ultimately it depends on the stories about these fundamentals developing and circulating in the market.
  4. Facts don’t tend to change very fast but the perception of the facts changes quite quickly[ii].
    1. Decisions to value and then buy and sell financial assets depend on the human capacity to imagine versions of the future and experience them before they happen – using the human capacity for embodied narrative simulation which draws on very basic evaluative processes based on and in fundamental body states to which we are attracted or repelled.
    2. Human perception is based on active inference. We make what we see  by prior assumption coupled with error sensitivity strongly influenced by conflict avoidance and bad feeling avoidance.
    3. In finance, the inherent danger of acting to commit under uncertainty is overcome by a conviction narrative which excites[iii]. Such narratives tend to be phantastic object narratives maintained in divided states subject to groupfeel developed through social interaction[iv].

In plain language individuals in the market develop conviction by creating stories about the future which excited them partly by placing out of their minds the stories that might worry them and they tend to do this collectively by latching on to a shared story which, for a time, becomes conventional wisdom (cf. dotcoms, mortgage backed securities, impact of QE, etc.).

4.  The solution to the unforeseen risk developing as the outcome of these processes is (1) drastically to alter the economics curriculum and (2) to monitor the relationship of two specific emotion groups circulating in public and private narratives. This can be done by using Directed Algorithmic Text Analysis (D.A.T.A.) to create relative sentiment shift (RSS) time series and measures of narrative consensus[v].



[i] Tuckett, David (2011) Minding the Markets: An Emotional Finance View of Financial Instability. London and New York: Palgrave Macmillan

[ii] Aragones, Enriqueta, Itzhak Gilboa, Andrew Postlewaite, and David Schmeidler. 2005. "Fact-Free Learning." American Economic Review, 95(5): 1355-1368.

[iii] Chong, K. and Tuckett, D. (2014) Constructing Conviction through Action and Narrative: How Money Managers Manage Uncertainty and the Consequences for Financial Market Functioning. Socio-Economic Review. 1-26. doi:10.1093/ser/mwu020

[iv] Tuckett, D., Smith, R. E. and Nyman, R. (2014a) Tracking Phantastic Objects: A Computer Algorithmic Investigation of Narrative Evolution in Unstructured Data Sources. Social Networks.  38 (1) 121 - 133. 10.1016/j.socnet.2014.03.001; Tuckett, D and Taffler, R (2012) Fund management:  An Emotional Finance Perspective. Monograph of the Research Foundation of the CFA Institute, New York.

[v] Nyman, R., Gregory, D., Kapadia, S., Ormerod, P.;  Smith, R., and Tuckett, D. (2014) News and narratives in financial systems: exploiting big data for systemic risk assessment. ECB Workshop on Big Data for Forecasting and statistics, Frankfurt. April 7th/8th. To appear in the Bank of England Working papers series.

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