UNCONSCIOUS ECONOMIC RATIONALITY

The extreme volatility of stock markets would be closely related to the over-use of Kahneman's fast system to process context information

Psychologists, from many decades ago, have been finding more and more mental operations that operate outside of consciousness. And while the historical tradition says that the unconscious is primarily the repository of repressed thoughts about violence and sex, modern neuro findings speak of a remarkable unconscious rationality, which would help us make quick decisions of a certain quality, being key to Economics and Finance.

Unconscious operations underlie many of our inferences and judgments, as well as a large number of decisions and problem solving, including monetary / financial. In fact, the unconscious mind can often do a better job of these things than the conscious mind, which is no small thing for an economic science traditionally thought of as hyper rational, or at least of rational expectations.

The story goes that the controversial Sigmund Freud held two initial views on the unconscious, cognitive vision and dynamic vision. The first would be what we now call unconscious rationality, increasingly accepted scientifically, while the second would be the famous vision of psychoanalytic repression, with various criticisms from current science. In this way, unconscious rationality would also be based on Freud, although it was not what made him famous.

This unconscious rationality, little studied even in Economics, is clearly connected with the theory of the emotional system 1 of Kahneman, Nobel in Economics, a fast system that allows us to decide on a day-to-day basis with enough survival success, although not necessarily great optimality. But it also connects with the hypothesis of the somatic marker of Damasio, which theorizes about the emotional traces in our long-term memory, putting together a triad of concepts with broad implications for our ideas on Economy and Finance, especially for everything that is known on problem solving, decision making and economic behavior in general. It turns out that our unconscious rationality would be key in the interaction between creativity and problem solving, and between intuition and analytical thinking, among other fundamental concepts to understand how current, highly volatile, globalized and complex financial markets work.

The moods of the market

Going to Economics, the humor or volatility of the markets is generally analyzed as a risk rate, in terms of decisions with random results, and is modeled mainly with statistical graphs that calculate means and deviations in time series. Volatility, in the background, is a measure of the frequency and intensity of changes in the price of an asset, and the greater the volatility, the greater the risk of losing, but also a greater opportunity for high profits.

However, the expected profits of the companies do not vary so much daily by their business models per se, but the volatility of the stock markets comes more than anything explained by the perceptions of their operators with respect to issues outside the contributing firms. , such as the public policies of the countries, electoral issues, exchange rates, etc. This volume of information, so changing and probabilistic, is ultimately the one that forces investors to re-analyze scenarios every day, quickly, appealing largely to intuition and everything called system 1 of Kahneman, much more than the definitive and long-term analyzes of Kahneman's system 2, the slow and sapient.

Neural patterns to decide quickly

Empirical evidence today shows that the unconscious mind, in volatile contexts, such as the financial one, is usually superior to the conscious mind, in order to survive, by learning some types of highly complex patterns, which the conscious mind cannot process quickly. In fact, the rational unconscious mind can learn really complicated patterns, without bothering to inform the conscious mind of its achievement. The important thing is to solve problems, get out of the way, remember the brain does not necessarily seek the truth, but to survive.

Let us not forget the unconscious consumes 90% of the total energy of the brain, which notably helps the total energy economy of the central nervous system, since it achieves fast and correct ways of many crucial day-to-day decisions, which if they are too rationalized consciously, they would spend much more energy. Basically it is a matter of neuronal productivity, it is cheaper in energetic terms to solve problems with system 1 (fast and rational unconscious) than with system 2 (slow and rational conscious), and in the world of high finance it shows even more.

Concluding

As volatility operators, investors / gamblers are notoriously influenced by brain determinants that operate below the threshold of consciousness (nucleus accumbens, amygdala, anterior insula), which in the end are the ones that pre-mold the final decision, under a luck of unconscious rationality quite useful for day to day, with an excess of use in very changing contexts, such as the stock market.

In this way, the 21st century would be giving revenge to the rational unconscious, since although since the twentieth century it had been proposing that most psychological processes are not conscious, the "unconscious" that reached the popular imagination and curricula university students was mainly the irrational and repressed Freudian unconscious, that of wild and sexual impulses, barely controlled by conscious and reflexive reason.

For Economics and Finances, the greatest advantage of understanding the rational unconscious will be to take full advantage of our inner emotional vision, to improve our decisions on investment projects, stock market portfolios, public policy design, among others.

Author: Sebastián Laza (*)

(*) Behavioral Economist, specialized in the interrelation between Cognitive Neuroscience and Decision Making.

He also is the Executive Director of the Applied Neurosciences to Management and Economics Program (National University of Cuyo, Argentine) and the Neuroeconomics's Coordinator of the  of ​​the Latin American Institute of Applied Neurosciences (http://neurociencias.online/).

Additionally, he is the author of NEUROECONOMICS: THE DISRUPTIVE PATH (2018): https://www.amazon.com/NEUROECONOMICS-DISRUPTIVE-PATH-Sebastian-Laza/dp/1718177844

Finally, he uses to write journal's research papers with the indian neuroeconomist Jyoti Satpathy: NEURO - EVIDENCE BASED MANAGERIAL JUDGEMENTS,  http://journalstd.com/gallery/44-sep2019.pdf