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Three Cheers for the Subconscious


Ross M. Miller
Miller Risk Advisors
June 21, 2004

My subconscious wrote most of this commentary. It writes most of all of them. I start thinking about each one a week to ten days before I post them and begin work on a rough draft somewhere around the time the week's PGA tournament pops up on basic cable. I then sleep on the commentary and play with it a little each day until I post it Monday morning. If you don't like any of these commentaries, blame my subconscious. If they still have some typos or sentences that don't quite make sense, blame my subconscious as wellit creates so many of them that it is hard for me to edit them all out as much as I would like to. Life for me is, for the most part, easyI just glide through it and let my subconscious do all the heavy lifting.

As I was writing the first draft of this commentary, the Dubliners were just wrapping up their centenary celebration of Bloomsday. I like James Joyce not because he is recognized as the first writer to place seemingly uncensored subconscious thoughts on paper, but rather because he's such a hard act to follow that he has given literary types headaches that continue to this day. Joyce claimed my father as one of his victims and I grew up with dog-eared copies of Ulysses and Finnegan's Wake as well as the various "skeleton keys" for them peering down at me from the mahogany bookcase that filled the far wall of his study. Freud and Jung were also up there, but I'll get to them later.

It was not James Joyce, but rather gasoline hoarding, that served as the initial inspiration for this piece. In "Black Gold or Bubbling Crude?" I noted that as gasoline prices rise many drivers tend to fill up their tanks more often even if they are not consciously aware of it. At some level, they realize that if prices are climbing rapidly, it costs more to wait than to buy now. This behavior is not universalsome drivers are strapped for cash and others try to delay the agony of higher pricesbut it is prevalent enough that it can make a real difference in a market where supplies are measured in days of consumption.

How can I know what lurks in the subconscious of consumers? Largely from exposure to experimental economics at a tender age. The first experiments that I ever designed and ran involved a sequence of markets where the subjects had to figure out to store a commodity during a low-demand period for consumption in a high-demand period. The pull of the price mechanism was so strong that subjects "did the right thing" from the perspective of economic theory without being consciously aware that they were doing so. This went against the dominant theory of human economic decision-making of the time: Herbert Simon's theory of satisficing. Simon thought people would economize in the making of complex decisions and so would "satisfice" by applying rules of thumb that would do an adequate, though not optimal, job of decision-making. We (my collaborators were Charles Plott and Vernon Smith) were seeing almost the opposite behavior; experimental subjects were making the correct, sophisticated choices without any awareness of what they were doing. (We discovered this by interviewing the subjects after each experiment.) The feedback of the market mechanism--make the right decision and you make more money--was all that was necessary to turn our subjects into optimal hoarders.

That the most complex part of financial and economic decision-making goes on beneath the surface and is only brought to the surface by the feedback of the marketplace appears to have been lost on psychologists going all the way back to the original Tversky-Kahneman experiments. Those experiments, as well as many that have followed in their footsteps, use questionnaires that ask subjects "what they would do" (a conscious decision) rather than observe what they do (which includes subconscious elements). Taking monetary payoffs out of the picture entirely removes any punishment for wrong decisions and any reinforcement for the right ones. (One would think that psychologists, of all people, would know better.) Recently, both economists, including Vernon Smith, and psychologists have begun to use neural mapping techniques to see exactly what is going on in the brain when subjects make their choices.

The fascinating thing about the subconscious element of market decision-making is that it doesn't stop at the individual level. For most of the twentieth century, the textbook explanation for how markets could balance supply and demand was that everyone in the market had "perfect information" and consciously computed the market-clearing price and quantity. One voice in the wilderness, F.A. Hayek's, insisted that perfect information was unnecessary. He saw that what Carl Jung might call the "collective unconscious of the market" and what Adam Smith called the "invisible hand" would bring prices and quantities into equilibrium automatically, without special information and certainly without the conscious efforts of a central planner. Thousands of economic experiments, including those that got Vernon Smith his Nobel Prize, have confirmed that this happens in a controlled setting and is easily reproduced under a variety of conditions. To be even-handed, it is also possible to create and reproduce market bubbles in the laboratory, but this result, which was not recognized by the Swedish Academy, does not imply that economic decisions should be handed over to a politburo consisting of the New York Times opinion columnists, all of whom would have us think that they know what is best for the world.

Many people, however, would be happy to let Paul Krugman run the Federal Reserve and Maureen Dowd regulate the manufacture of condoms because of what appears to be a universal fear of the subconscious, both individually and collectively. While I am happy to allow my subconscious to place "Maureen Dowd" and "condom" in the same sentence, many writers are fearful of what might come spurting out of theirs. (I didn't forget about Freud.) Similarly, economic processes that work in mysterious ways and can do quite well without conscious intervention tend to make people uncomfortable.

Of course, if you really want to get an up-close and personal look at my subconscious, visit and read my novel Rigged. In the process of editing it, I have discovered many things that my subconscious slipped into it and there are likely several that I haven't discovered yet. For example, the title itself, "Rigged" contains "ge." Coincidence or a devious subconscious? Who knows, but I just figured that out a few days ago.

Next week, it's back to new schemes for making money. "Infinite Liquidity, Infinite Capital, Infinite Jest" introduces the ultimate derivative security, which I've probably subconsciously stolen from someone else. Too bad.

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to