Inside the Market’s Mind: The Zombie Market, A Thought Experiment

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This is the fifth in a series of articles inspired by the Ph.D. research of Patrick Schotanus, titled ‘The Archetypal Market Hypothesis: A Complex Psychology Perspective on the Market’s Mind.’

‘[A zombie world is] a world physically identical to ours, but in which there are no conscious experiences at all. In such a world everybody is a zombie.’ David Chalmers
‘[An economist is] a man who knows 364 ways of making love, but doesn’t know any women.’ Geoffrey Howe

This article is dedicated to all philosophers of mind, in particular David Chalmers, Jaegwon Kim, and Max Velmans. Unfortunately their insights are largely ignored by contemporary finance.

zombieEarlier this month the Bank of England warned of the dangers to the economy of ‘zombie’ households, companies and banks.1 Let’s consider a zombie bank. It is an ‘undead’ bank, a corporate corpse allowed to walk but without free will. A zombie bank continues to function like a bank, showing similar responses to external events, but it doesn’t register ‘what it feels like’ to be one, e.g. it no longer ‘enjoys’ banking. Specifically, it doesn’t feel any pain because others have taken on that pain. In fact, zombie banks often inflict more pain by infecting other banks or even threatening the survival of the broader economy. Apart from the UK, Japan has tolerated its zombie banks, stumbling along after the bursting of the real estate bubble in 1989. Their ranks probably also include a number of Chinese banks, past and present.

In this article I will slightly adjust the zombie metaphor to examine the capital markets. This thought-experiment should be viewed in the broader context of evolution, in particular the survival of complex systems which are able to endogenously generate internal surprises (e.g. our ‘A-ha’ experiences) in order to adapt to external ones (e.g. ‘black swans’). In short, a complex system discovers. That discovery requires freedom to explore the unknown, accepting the exposure to both the pleasant and painful experiences this entails.

My zombie is different from the Hollywood version we know from horror movies. Specifically, I apply the so-called phenomenal zombie, a concept from philosophy, to the market and its mind. A zombie market, according to this view, would be a market where the physical and cognitive processes involved in investing (e.g. trading and thinking) are identical to those in a living market but there are no conscious experiences accompanying those processes. In general, conscious experiences are mental occurrences or states that possess phenomenal properties which are conveyed (inter)subjectively. These are known as qualia, emphasizing the intrinsic, ineffable qualities of ‘raw feels’ which complement underlying ‘objective’ physical and cognitive processes. Specifically, sensations and feelings are those mental overlays which are largely (and sometimes wholly) constituted by these characteristics. Examples include the sensations of pain, pleasure, color and taste. Again, they are distinct from thoughts, memories and other intentional cognitive functions, but together they give rise to our overall mental state. Specifically, ‘price qualia’ refers to the qualitative properties which we experience in the market, varying from the market’s mood to the hurt of a loss in an individual trade.

For example, a zombie market means that the internet bubble would not be accompanied by the feeling of ‘irrational exuberance’, nor would the Lehman collapse give rise to the feeling of ‘fatalistic despair’. In general, price rises (i.e. profits) would not equate to pleasure, nor would price drops (i.e. losses) equate to pain. In such a market all investors are zombies, including ‘humanoid’ zombie investors. The latter are not only physically identical to us but also functionally. That is to say, they will similarly process the same information, leading to identical investment behavior in general, and decisions in particular. Moreover, they are able to reflect and report on these processes. However, their reports are functionally based, not phenomenally. In the words of Sartre, there is “phenomenal absence”. Like a zombie sommelier who is not able to enjoy its qualities but convincingly describes the taste of a Bordeaux wine in functional terms like ‘nice bouquet’ and ‘rich aftertaste’, the zombie investor participates in booms and busts but doesn’t have any sense of mood, the overarching phenomenal state of the market. It is important to emphasize the elusive nature of market moods. The way these are experienced in our world is intersubjectively. That is to say, even though my experience of, for example, irrational exuberance is very intimate and personal, it is not exclusively “my sensation”. This shared property makes the market’s mood spatial, a collective projection if you will (ultimately reflected in prices), whereby my awareness is merged with yours into this phenomenal space “out there” with no fixed location. This is something pure physicalism fails to address.2

Currently ‘humanoid’ zombies are unrealistic because it would mean a failure of, what I like to call, ‘the reverse Turing test’, i.e. humans would not be able to distinguish between themselves and zombies. Still, I believe the zombie market is conceptually coherent (i.e. conceivable as a thought-experiment) and a future possibility. Specifically, if we agree that computers are insentient entities (let’s call them ‘cyber zombies’3) then purely electronic exchanges, where algorithms execute orders, become close proxies for zombie markets.4

What is the relevance of a zombie market for investors? First, it brings into stark contrast the three domains involved in our investment world: the physical, cognitive, and phenomenal. Although most debates in finance center on epistemological issues (i.e. the understanding of knowing), the real problem is ontological (i.e. the understanding of being). I call it the market’s mind-body problem and among other things it raises the issue of causation, in particular between the ‘real’ physical economy and the ‘perceiving’ mental markets. This problem is ignored, or rather conveniently avoided, by modern finance because it is making an implicit assumption regarding the nature of the market. Inspired by physics5, modern finance is based on its own version of physicalism whereby it assumes the market to be an automaton, a purely mechanical insentient entity. Although implicit, this assumption is required for and reflected in all its models, both rational and behavioral, which are predetermined.6 But advocates of modern finance’s physicalism have to explain the conflict with evolution if the novelty which the mind generates endogenously in the form of intuitive insights, can functionally be reduced. How will humanity survive if mental innovations are no longer surprises (to those minds themselves, let alone other minds)? This assumption of the ‘a priori’ entailment from physical events to mental events, which leaves no room for novelty and other creative processes, is an increasingly expensive ontological commitment.

Instead, the Archetypal Market Hypothesis (AMH) argues that discovery is the result of the dynamics, in particular the natural tension, between the opposing conscious and unconscious forces of the mind. Their competition, in a healthy mind, produces insights which are experienced, i.e. realized, phenomenally. From a survival point-of-view it makes sense that, together with the unconscious origin, the phenomenal culmination of our investment insights, in particular its intersubjectivity, escapes the axiomatic capture by mechanical tools and models. AMH suggests a different investment research method to better ‘understand’ the market, a complementary approach similar to what the wave explanation is to that of the particle in quantum physics.7

There is a sad irony here: although the Efficient Market Hypothesis (EMH) suggests ‘leaving the market alone’, to both regulators and active investors, it simultaneously provides them the excuse to interfere, respectively to capture it in a mechanical way. This excuse is now being leveraged up, not only via increased automation, e.g. algorithmic trading, but also by government and central bank policies, which tolerate and create zombies at all levels of the system. The relevance of the zombie-thesis also extends to the elusive mental conditions which characterize our modern fiat (‘immaterial’) currency system. Such a system is based on trust, faith and beliefs, rather than physical collateral like gold. Let’s consider the intuitions and emotions people experience when confronted with issues such as uncertainty about the dollar, euro or yen, as well as the ‘risk free’ debts denominated in those currencies. For example, to many it does not make sense intuitively to lend 30-year money at 2.5% to a heavily indebted country whose reserve currency is slowly being eroded, or respectively at 2% to an even more indebted nation whose growth prospects (i.e. demographics) are abysmal. But according to the EMH these decisions are correct and the intuition is irrelevant (“we are rational”), behavioral finance considers the intuition wrong (“like all heuristics”8), and the political establishment simply wants to “protect” their constituents by repression (“not now”, i.e. ‘keep kicking the can’)9. Combined, they argue to treat the market as an entity whose feelings do not matter, are no good, and should be numbed.10 If, instead, we accept the premise of the market’s mind it is a small step to realize that such “treatment” is wholly irresponsible from a mental-health point-of-view. Moreover, the consequences of this treatment are akin to those of neglect (i.e. repressed emotions), drug addiction (i.e. cheap money) and psychological dependency (i.e. government support). Whereas empathy suggests ‘I feel your pain’, subsidy suggests ‘I’ll pass on your pain’.

In my articles I try to make clear that imbalances are not limited to the real economy but extend to the market’s mind. Misguided theories and policies promote “consciousness blockers” and we are progressively being deprived of price qualia in one sense modality after another: the pain of loss (i.e. Bernanke put), the feeling of fairness (i.e. bailouts), and the sense of safety (i.e. risk-free). Complex psychology promotes a healthy mind by emphasising the balance between its conscious and unconscious forces. For example, to compensate for the ego-driven illusion of control and over-rationalization, Carl Jung urged to “invite the unconscious”:

[Instinct does not rebel] of itself against firmly established order . . . it is . . . in addition, the creative foundation of all binding order. But just because this foundation is creative, all order which proceeds from it . . . is a phase, a stepping-stone. Despite appearances to the contrary, the establishment of order and the dissolution of what has been established are at bottom beyond human control. The secret is that only that which can destroy itself is truly alive. (Collected Works 12, 1953, p. 73-74)

The economic variant of such ‘letting go’ is often viewed in Austrian/Schumpeterian terms, i.e. creative destruction. However, what is actually feared under such a scenario of events taking their course is not the physical part of destruction but the creative phenomena: the effective impact on faith, trust, and existing beliefs. Rather cynically Jung concludes, “It is well that these things are difficult to understand and thus enjoy a wholesome concealment, for weak heads are only too easily addled by them and thrown into confusion. From all these dangers dogma―whether ecclesiastical, philosophical, or scientific―offers effective protection. “

The zombie theme adds another meaning to the terms ‘black box’ and ‘dark pools’: it is indeed very ‘dark inside’ for zombie investors when they see prices light up in green and red on their monitors. In the final analysis, zombies lack animal spirits and do not discover. In particular, they never experience intuition, the ‘A-ha’ sensation of an insight. The lack of true price discovery is thus the most worrying aspect of the slow descent of the market into a zombie state.


1 Financial Times, 14 November 2012, p.2 and 19 November 2012, p.3

2 In general, the phenomenal zombie thesis argues that sensations have no causal physical powers, but consequently neither can they physically or functionally be reduced.

3 The Borg, well-known among Star Trek fans, could be considered a mutant species between ‘humanoid’ and ‘cyber’ zombies.

4 I do not want to specifically address here the related issue of the nature of (the role of) computers in general, and artificial intelligence in particular in the market. I hope to address this in future articles, dealing with topics like Turing machines, Gödel’s theorems, and algorithmic information theory, as well as supervenience, neuronal correlates, observer independence, etc.

5 Both George Soros and Andrew Lo have pointed to this inspiration as bordering on the obsessive, i.e. a physics envy.

6 See, for example, Frydman and Goldberg (2007).

7 Complementarity should not be confused with dualism but rather clarifies dual-aspect theories like those ofJung, Spinoza and James, for example.

8 This is the dominant view expressed, for example, by Kahneman. Others, like Damasio and Gigerenzer, dispute this claim.

9 In the words of Warren Buffett “politicians flinch from inflicting . . . pain, given the problems will only become apparent long after these officials have departed.” (Berkshire Hathaway, letter to shareholders, 2007).

10 Former German President Horst Köhler is on record as having described the financial markets as a "monster." Other politicians have expressed similar sentiments.

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About Patrick Schotanus

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