In light of the French election over the weekend and with global stocks up bigly, we’re no doubt in for a tidal wave of narratives connecting fundamentals to price. Sharing stories is in the fabric of our DNA as human beings and as investors. Andrew Lo has a great example of the biological reasons for why this is the case, in his new book, Adaptive Markets (emphasis mine).
In his fascinating book Human, Michael Gazzaniga describes an experiment with a split-brain patient referred to as “P.S.,” whom Gazzaniga studied in the 1970s with Joseph LeDoux, Gazzaniga’s graduate student at the time, and the same researcher who later discovered the “road map to fear.” In a snowy trailer park in Burlington, Vermont, patient P.S. was shown a picture of a chicken claw on the right and a picture of a snow bank on the left. They then asked P.S. to choose the most appropriate picture related to these images from an array of additional pictures placed in front of him. With his left hand the patient selected a picture of a shovel, and with his right hand, he selected a picture of a chicken. This outcome was expected because each hemisphere processed the particular picture in its visual field and selected the appropriate matching picture- the shovel for the snow bank and the chicken for the chicken claw.
But when Gazzaniga asked the patient why he selected these two pictures, he received a totally unexpected response. P.S. replied “Oh, that’s simple. The chicken claw goes with the chicken, and you need a shovel to clean out the chicken shed.” This is superficially plausible, but it’s not the connection most people would make, and Gazzaniga knew the real reason. When asked to explain his choices, the patient’s left hemisphere responded by constructing a plausible but incorrect explanation for what the left hand did, rather than replying “I don’t know.” Language and intelligence are usually functions of the left hemisphere. Because of the split-brain surgery, this patient’s left hemisphere was completely unaware of the picture of the snow bank that caused his left hand to pick the picture of the shovel. It was only able to see the picture of the chicken claw. Nevertheless, when asked why, the left hemisphere provided a narrative for this otherwise inexplicable action, one that was consistent with what it did observe. The “intelligent” part of the brain was also part of the brain that generated narratives.
It’s unsettling to not have the reasons, which is why we’ll hear all sorts of explanations for why stock markets around the world are up so much today. Anyway, if you’re interested in listening to a great interview, check out Barry’s recent talk with Professor Andrew Lo.