Here is an exercise in altered reality. I recommend to financial professionals, in an effort to expand perspectives, to assume the mindsets of Smith, Keynes, and Marx and then execute hypothetical investment scenarios through the mindset of these extraordinary thinkers. Focus on what companies these intellectuals would have invested in, what trends they would be sensitive to, what decisions would they make. This is a fascinating challenge which focuses retail brokers, portfolio managers, and ... Continue Reading

I have highlighted two giants in the field, Adam Smith and John Maynard Keynes. But there are many different schools of economic theory, and many derivatives of those schools. There are even some capitalists wish never existed, some about as different as Smith as you can imagine. Karl Heinrich Marx (May 5, 1818 – March 14, 1883) was a German philosopher, political economist, historian and political theorist, sociologist, communist, and revolutionary, whose ideas are credited as the ... Continue Reading

John Maynard Keynes (June 5, 1883 – April 21, 1946) is another master of economic theory that has relevance for the Wall Street Psychologist’s Gyroscope. More than a half century prior to the “Too-Big-to-Fail” bank bailouts of the US banking industry in the early 21st century, Keynes advocated interventionist economic policy, encouraging governments to leverage fiscal and monetary policies to allay the adverse consequences of downturns in business cycles, economic recessions, and depressions. ... Continue Reading

Cycles of greed are based on illusions of value, driven by natural market progressions. In hindsight, it is easy for some to say the events in question should have been anticipated and foreknown, but the fact is that no one was able to halt this juggernaut (LTCM, Lehman, AIG) from nearly destroying our financial markets. Again, we have the Fatal Flaw Theory I previously discussed: “If something seems too good to be true, it probably is.” Why are so many people willing to perpetuate such ... Continue Reading

I wonder how Smith would apply his theories in addressing this latest debacle (from 2008 on). In actuality, there are elements of Smith’s argument that are applicable, especially when it comes to limiting excessive government intrusion into the markets. Again, I do not intend to debate the merits of Smith’s theories, or any other philosopher’s tenets, for that matter. Rather, my point is that every link in the chain that was wrapped around the throat of the global economy during the ... Continue Reading

I wonder what Adam Smith would say regarding Credit Default Swaps? A Credit Default Swap (CDS), on the surface, appears to be a reasonable financial instrument, as it essentially represents insurance on bonds. Think of it like this: an investor purchases bonds issued by Acme Corp., with the expectation to receive periodic payments, every six months. However, there is a likelihood that Acme Corp. may go bankrupt and default on those bonds. This may represent a minimal risk; still, if it ... Continue Reading

In his essay (“Beyond the Pleasure Principle,” 1920) Sigmund Freud contended that people repeat traumatic events over and over again. This type of re-living represents an attempt at mastery and control. According to neo-Freudians, corrective emotional experiences can repair the trauma. History keeps repeating itself in an effort to learn from mistakes and correct events in order to achieve stability and security. And yet, if we do not learn from our mistakes, there is obviously a masochistic ... Continue Reading

No book that broaches the subjects of the intersection of economics and psychology would be complete without a discussion of Adam Smith, hailed as the father of modern economics. Smith (1723-1790), a philosopher and Scot is considered the founder of modern economic theory. Smith had infinite faith in humanity; he believed that people would act in their own self-interest and produce the goods/services that would be required by society as a whole. Somewhat of a poet, Smith contended that an ... Continue Reading

In his book, "The Ascent of Money", Niall Ferguson documents a financial history of the world. Ferguson contends that finance is the foundation of human progress and maintains that financial history is the “essential back-story behind all history.” “The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to the silver mines of Bolivia,” Ferguson states. “Banks provided the material basis for the splendor of the ... Continue Reading

In the financial services industry, ignorance is far from bliss. When you are uninformed, you are at the mercy of others. When you regurgitate the opinions of others, you accept subservience. Enlightenment is empowerment. Thinking for yourself is empowerment. You know yourself from the inside out better than anyone else can, or ever will. More precisely, Psychological Enlightenment through Intellectual and Emotional Empowerment is a technique I practice to sooth the anxiety and ... Continue Reading

In the previous section, we established some of the more relevant historical context, as it relates to the development of the financial markets and their influence on our culture and values. The intention is not so much to reiterate financial history, as there are other writers have done this more comprehensively and more effectively. Rather, the objective in selecting these historical milestones is to provide a backdrop for a more robust exploration of the psychology of money. Because ... Continue Reading

My recommendation is to make a list of everything in your life to which the Fatal Flaw Theory may even remotely apply, where your return on your financial or emotional investment far exceeds expectations. This is an exercise in realism, not pessimism. As you review this list, ask yourself if you have really done your due diligence? This will force you to make some honest revelations or underscore your vigilance. It also serves a way to condition you to act more responsibly towards ... Continue Reading

The Ponzi scheme is named for Italian immigrant Charles Ponzi who gained notoriety in the 1920s, who enticed unsuspecting investors by the promise of amazing returns for arbitraging international reply coupons for postage stamps. Ponzi’s pledge that he could return a 50 percent profit within 45 days (or 100 percent profit within 90 days), just by exchanging international postal reply coupons, snared 40,000 people for the then-stunning amount of $15 million. In actuality, he quickly began ... Continue Reading

Why are these financial criminals able to perpetrate such outlandish frauds? The answer lies deeply rooted in our psychological relationship with money. Basically, we are all genetically predisposed toward aspirations of survival and dominance. I am no longer surprised to see even the most astute professionals fall prey to psychopathic predators. Deep down, we all feel entitled. We all believe that someday our ship will come in, the brass ring will present itself, and we will have our 15 ... Continue Reading

The Fatal Flaw Theory is a key element of the Wall Street Psychologist’s Gyroscope. The Fatal Flaw is nothing new. It posits that: “If something seems too good to be true, it is too good to be true.” In my practice, I urge my patients to embrace that simple maxim and incorporate it into their due diligence. There are few absolutes in the financial services arena. Unfortunately, that shortlist includes the historical persistence of Financial Psychopaths that wreak severe havoc on the ... Continue Reading

Over the years there have been many interpretations of the various themes that course through this work. It is surely a well-scripted account of a descent into depression and madness. It is a powerful example of how one person’s mental illness can paralyze themselves as well as an entire business operation. I do not pretend to have access to the inner sanctums of Wall Street, nor can I peer within the minds of the masterminds. When it comes to the Wall Street debacle du jour, the media ... Continue Reading

In 1853, famed American novelist Herman Melville penned a novella entitled “Bartleby, the Scrivener: A Story of Wall Street.” It is the story of Bartleby, the third scrivener hired by a wealthy Manhattan lawyer (the narrator) to copy legal documents and also run his office effectively. From the outset, Bartleby appears to be an asset to the practice, but one day he snaps, and when asked by his employer to proofread a copied document, Bartleby retorts, “I’d prefer not to.” This soon becomes ... Continue Reading

To emphasize my point, consider the timeline below that led up to the destruction of Lehman Brothers—the event that ushered in the most-recent market debacle and subsequent recession. February 27, 2007 Freddie Mac (Federal Home Loan Mortgage Corp.) announces that it will stop buying the most risky subprime mortgages/ mortgage-related securities   April 2, 2007 Major subprime lender New Century Financial Corp. files for Chapter 11 bankruptcy. June 1, 2007 More than 100 bonds ... Continue Reading

Again, the Wall Street Psychologist’s Gyroscope is not an investment philosophy. In treatment, I do not review my patients’ portfolios with them. I do not look at what they invest in, but rather what drives their decision-making processes, and their inner emotional life. And how they act in or out of tandem. Ultimately, when you make the right decisions for the right reasons—or even the wrong decisions for the right reasons—you temper insecurity and you build self-assuredness. You enhance ... Continue Reading

Let me make an important distinction. The Wall Street Psychologist’s Gyroscope is not an investment philosophy. I am not an investment adviser, nor am I some financial guru. I do not even preach caution in investment practices for the sole sake of being conservative. Risk is good, when applied for the right reasons. Risk based on the right interpretation of market fundamentals can make you successful. Risk driven by insecurity and a willingness to succumb to herd mentality to catch the latest ... Continue Reading

Hindsight may be 20/20, but does foresight in the financial services industry need to be nearly blind? It's "upon us" before we can blink. We are often blind sided and left hanging. Today trading is electronic-lightening fast and really, really furious. None of it is for the faint hearted, or timid. Being an FP requires courage, judgment, a quick mind and integrity. And a penchant and need for clarity, clarity, clarity in a murky Street universe. FPs must make sense out of what is often ... Continue Reading

Today, LTCM principals alerts audiences that “it makes sense to be transparent” and that trades should be paired now to control risk. But, when it counted, LTCM was not doing this, especially with regards to those lethal Russian bonds. Risk management is critical. You have to be able to manage in the bad days as well as good days. Market fact of life. You can run, but you can't hide in today's supersonic internet world. The average share in this country is held for 22 seconds. Wonderful ... Continue Reading

After the bailout, LTCM continued operations. In the year following the bailout, it earned 10 percent. By early 2000, the fund had been liquidated, and the consortium of banks that financed the bailout had been paid back. But the collapse was devastating for many involved. Goldman Sachs CEO Jon Corzine, who had been closely involved with LTCM, was forced out in a boardroom coup led by Henry Paulson. Mullins, once considered a possible successor to Alan Greenspan, saw his future with the ... Continue Reading

This is genius? FPs who are wealthy and successful beyond imagination can start to think of themselves as wizards. It is easy to be seduced and blinded by huge sums of money. Genius is a body of work, not a portfolio value, or one's net-worth. LTCM management talked about the prisoner’s dilemma, an interesting reference given the situation. They claimed that the solution for LTCM was to minimize their loss, but it all happened so quickly and they sped down the slope like greased ... Continue Reading