On Behavioural Finance and Freedom: When Reason Has Lost Its Logic
"To ordain the future in advance in this way, man must first have learned to distinguish necessary events from chance ones, to think causally, to see and anticipate distant eventualities as if they belonged to the present, to decide with certainty what is the goal and what the means to it, and in general be able to calculate and compute. Man himself must first of all have become calculable, regular, necessary, even in his own image of himself, if he is to be able to stand security for his own future, which is what one who promises does!" wrote Nietzsche in The Genealogy of Morals.
Here, Nietzsche takes a stab at mankind's ("man" i.e. man/woman) tendency to make futuristic promises as if they were a certainty, predict, as well as make life-altering and far-reaching socio-economic decisions such as capital investments, long-term debt acquisition, leverage, not to mention nuptial vows; merely based on man's pre-emptive anticipation of inherently unpredictable future eventualities.
Further, Nietzsche argues that not only it is not plausible to anticipate, with reliable accuracy, "distant eventualities as if they belonged to the present," it is unlikely for man to "become calculable, regular, necessary, even in his own image of himself" with utmost consistency.
In behavioural finance, we are taught of a wide range of real-life cases in which even the smartest, most rational and most calculating financiers have fallen victim to irrational, psychological, and emotional influences in their investment decision-making. Financial markets, for example, are inherently driven by an armada of market participants, armed with methodical computing prowess. However, these (sometimes dull) capitalist geniuses are, every once in a while, spoiled by a cocktail of their own inherent behavioural overconfidence, super optimism, greed, fear, panic, or pessimism. Therefore, if man is to fully engage in uncertain undertaking such as investments, man should embrace that he is also subject to such fate of occasional, emotion-driven, human lapse of judgement.
In fact, well beyond financial markets failures, humans have infamously made very regrettable judgement calls, in past history, all corrupted by errors and feelings. Some of the ever-memorable cases are; for example the condemnation of Socrates who was put to death by his countrymen for impiety, and for corrupting the youth by teaching them critical thinking. Today Socrates is worshipped as the mighty philosopher, thousands of years later. Also, as John Stuart Mill reminds us, we cannot forget "the event which took place on Calvary" where a man to whom we still do homage as the Almighty in Person "was ignominiously put to death, as what? As a blasphemer." I also like to mention the Salem witch trials from January 1692 to May 1693, where hundreds of people were accused of witchcraft, and put to trial, and nineteen of them were hung to death after being found guilty, while others died in prison. In these witch hunts and trials, guilty convictions were simply supported by testimonies based on dreams and visions. In 1957, over two hundred and fifty years later, the State of Massachusetts issued a public apology for what happened in Salem.
Personally, I do not think that the men who condemned to death Socrates or Jesus of Nazareth were bad men at all, at least not worse than you and me. They were just, at the time of acting, irrational and emotional fanatics of what they deemed to be honourable patriotic and religious acts of devotion. As Mill continues, he notes that "orthodox Christians who are tempted to think that those who stoned to death the first martyrs must have been worse men than they themselves are, ought to remember that one of those persecutors was Saint Paul."
In very recent history, I am a case study of irrational decisions which carried far-reaching consequences; for I have lost my way, during my time in investment management and hedge fund business. I owned and run a hybrid hedge fund and investment management of separately managed accounts. For a long time, my firm and I did well for our stakeholders. As managing partner and portfolio manager, I had absolute control of all decision-making; from investment selection to compliance, and fee structure. We had a plethora of 'savoir-faire', and sheer will.
Being at the helm, I understood very well the working of markets. I had trained with some of the best in investment management, behavioural finance, investment and securities law, compliance, actuarial methods, and life contingencies. However, there came a time when I fell prey to what Nietzsche calls unpredictable "distant eventualities." Our long winning streak stopped. Then we lost a lot of money for investors and our own. All bets and hedging positions were haemorrhaging money. Nothing in our books worked. We could have realised modest losses, taken a step back, and watched the market before we reconstructed our portfolios. All system indicators screamed red flags everywhere, calling for stopping the bleeding. It was my responsibility to make that call. I did not listen to my own system. As a result, losses were extended in a matter of a few months. Up to this point, these were legitimate market losses.
Since they were legitimate losses, then why am I writing this article from my prison computer? I say ego, overconfidence, insecurity, and fear sum up my answer. When everything I had relied on for years did not work, the rosy days of a principled, "cold, calculating" man were gone. As Nietzsche says, I stopped to "think causally" and was no longer "calculable even in my own image of myself." Instead of doing the right thing, which was to issue reports informing our investors of deep declines in their portfolios, my ego and overconfidence took over. I believed that only if I could buy myself a bit of time, we could beat the market and turn things around. So, I decided to withhold quarterly account statements from investors. That meant that moving forward, they were under the false belief that everything was great, while in fact, the truth was the opposite. This act of making false statements, and not allowing investors to decide for themselves whether or not they want to ride the wave or jump ship, violated U.S. Federal Laws (Wire Fraud, punishable from zero to twenty years in prison, and Investment Adviser Fraud, punishable for up to five years). I denied them choice by withholding truth. I lied to them by omission.
So, what was going on in my mind for me to engage in such folly? I was out of my right mind. As Thomas Carlyle puts it, I grew "the transcendent capacity for taking trouble." First, I was overconfident in my ability to recoup losses. Overconfidence can be a dangerous flaw. Then, fear kicked in. As losses kept growing, I saw myself losing the firm I had built. I saw myself losing everything I thought was of great value to me. Flashbacks of my post-genocide, poverty-stricken, early childhood resurfaced. I had finally become somebody. I thought I was about to lose my 'raison d’être'. I didn't want to become a nobody or be poor again, for I had been; and poverty makes even the most courageous men impotent. Consequently, my deep fear of loss led me to cross the lines between unethical and illegal. I made decisions a logical man shouldn't have made. I was incontinent. My reason had lost its logic.
In The Nicomachean Ethics, Aristotle says, "the incontinent man does things that he does not think he ought to do." And in The Iliad, Homer says Glaucus gave Diomede "Armour of gold for brazen, the price of hundred oxen for nine."
When I finally came back to my logical reasoning, it was too late. I had broken federal laws and other billing and compliance rules. The FBI and U.S. Government moved fast too. I was arrested in New York, entered a "Guilty" plea agreement, and was sentenced to prison. At one of the Court hearings in the Southern District of New York's Federal Court, the FBI and the U.S. Government described me as a "cold, calculating, conniving, and ruthless man." My take on that is that had I truly been "cold and calculating," I wouldn't have fallen prey to my own emotions. If anything I was red hot, deep in my feelings. And as a result, millions of dollars worth of investors' wealth and our own investment banking contracts were lost, and the firm. I lost very dear relationships. I lost the trust of my family and friends. I let down their confidence and sense of safety. I failed my reason, I blemished my name and my reputation.
Prison has been humbling. For a while, I was ashamed. My family and friends were ashamed of me too. Some of them did not mince words. For example, one told me to stop writing because "receiving your letters from prison is such a shame." I understood, and never wrote again. A few others blocked me from calling. Why wouldn't they be? I was ashamed of myself too. As I sank into an ugly depression, I remembered Nietzsche's story of Dante who, while in hell, placed above his gateway, an inscription that said, "I too was created by eternal love.” There were times I related to Dante. These were my darkest days.
Then I stopped resisting as I found meaning in punishment. Being in a minimum security camp, my time has been mostly about therapeutic and educational programs. I enrolled in therapeutic groups, as well as individual therapy sessions. I wanted to use this valuable time to address my untreated childhood trauma; for I understood that the past is past, and that clinging to it shall drive me down a darker path.
As Aristotle puts it, "It is to be noted that nothing that is past is an object of choice; e.g... no one chooses to have sacked Troy; for no one deliberates about the past, but about what is future and capable of being otherwise, while what is past is not capable of not having taken place."
And Agathon adds, "For this alone is lacking even to God, To make undone things that have once been done."
So, by giving up resistance and embracing the now, I found healing. I forgave myself, and reached out to those I had offended, for forgiveness and support. I wrote long letters. Some responded, others did not. But I did ask for their forgiveness for having caused them harm, from financial losses to emotional pain, and other far-reaching consequences. I also plan to make sure I make amends to those who suffered financial losses. I understand it will take great effort and time, but I am committed to it; for justice wouldn't be truly served until victims are made whole again. Having been a victim of injustice myself, I want to serve justice, fully; or rather atonement.
Today, I found meaning in this experience. All remorse and shame which had sank me into depression have yield positive life-changing drive. On remorse, Nietzsche says in The Wanderer and His Shadow, "never give way to remorse but immediately say to yourself: that would merely mean adding a second stupidity to the first. - If you have done harm, see how you can do good. - If you are punished for your actions, bear the punishment with the feeling that you are doing good - by deterring others from falling prey to the same folly. Every evildoer who is punished may feel that he is a benefactor of humanity."
On shame, once asked what he considers the most humane act, "to spare someone shame" Nietzsche answered. And on what is the seal of attained freedom, he continued: "no longer being ashamed in front of oneself."
That is the meaning I found in my suffering. In the confine of prison, I found healing, and the freedom to walk away from shame, insecurity, and feeling of inadequacy. And given the man I have become, there is no other man I would rather be.
My two years of prison therapy covered traumatic events of April 10, 1994, when, at five years old, I witnessed my father's death during the Genocide against the Tutsi in Rwanda. I also tackled, for the first time ever, my separation from my mother, shortly after my father's death. Knowing what I know now, nothing could have prepared her that one day she would have to choose which one of her sons to put in harm's way, for the survival of others. I was the chosen son. She handed me over, in tears, to the people who had hunted me down to kill me, while she held onto my two younger brothers — ages three and one — so that they can move on to safety. No historical models and predictions, no prayers, nor superstition could have preemptively warned my mother, when she had us, that she will face such "distant eventualities.” I say she had done everything she could, until she did what she had to do. And there is nothing I wouldn't do for her, because today I understand how she was feeling in that critical moment. My once hardened heart, now sympathises with hers, nearly thirty years later.
Delpeshe once wrote, "And yet […] the horrific nature of the story still continues to linger.”
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