Emotional Manipulation in Markets

“All the incentives point to continuing this sort of self-extraction….Why would we stop scooping the attention out of ourselves, destroying democracy, and debasing our mental health when that’s the thing that makes the most money and Wall Street’s not going to stop funding it?”
Tristan Harris. Sep 19, 2019. “Fighting Skynet and Firewalling Attention.” Tim Ferris podcast, Minute 1:11.

In August my wife and I moved our family of five from Bali to Amsterdam. Some of our lifetime peak experiences took place in Bali, and the decision to move wasn’t easy.

In Bali we met amazing and dynamic people, my children had a wonderful life-changing school, and the weather is almost always perfect.  But at times Bali is challenging: heat, traffic, erratic internet, trash, mosquito-borne diseases, bad air quality (those last two really triggered my health neuroses). But what it lacks in organization and infrastructure, it makes up for in soul.

Amsterdam is an easy place to live. Amsterdam has fast internet, clean food, nice happy people, and easy flight connections. It’s a good city for living. The Netherlands is a rational and logical place, moreso than anywhere we've lived. For tending your soul? Amsterdam is also good, but Bali is tops. 

From Amsterdam, I’ve been traveling a lot, visiting 12 major global cities in November/December 2019 alone: Geneva, Zurich, London, Lisbon, Milan, Tokyo, Hong Kong, Singapore, Dubai, Miami, Tampa, New York City. In fact I’m writing this newsletter on a dark sleepless airplane 10 km over somewhere black while hoping to slow it down in 2020. It's just that our business is so fun and relevant right now, as you may see below. It’s hard to keep still. 

Today's newsletter reflects on the role of tech (including our own) in behavioral manipulation.

BEHAVIORAL MANIPULATION

"... I see people I have known my whole life slip away from me on social media, reposting conspiracies from sources I have never heard of, some sort of internet undercurrent pulling whole families apart, as if we never really knew each other, as if the algorithms know more about us than we do, as if we are becoming subsets of our own data, which is rearranging our relations and identities with its own logic, or in the cause of someone else's interests we can't even see ..."
Peter Pomerantsev. (2019). "This is Not Propaganda: Adventures in the War Against Reality."

RECAP: In April’s newsletter we described behavioral manipulation by tech giants. Their free services exist because of ads. Ads on their networks measurably influence our spending and voting behavior. In exchange for the free services provided by Facebook, Google, Twitter, and others, we are mortgaging important aspects of our mental real estate. Our motivations, desires, interests, and pursuits are being gradually hijacked by those with a vested interest in altering our behavior.

I don't mean to be too alarmist - manipulation has always occurred through the mediums of politics and advertising. Yet with the advent of internet and personalized data collection, the precision, sophistication, and effectiveness of targeting has grown exponentially. Using sophisticated analytics, we can see how effective advertising actually is, and how we remain generally unconscious of its influence on our lives - mistaking our shopping and voting behavior for freely made decisions. The immense stock market valuations of Facebook and Google (and to some extent Amazon) far surpass other advertising firms and are a gauge of the value placed on their influence.

In the financial markets behavioral manipulation - e.g. by stock promoters - is directly lucrative for its practitioners and is outlawed as a consequence. In fact, the first government to legislate against behavioral manipulation (rumor-spreading) in financial markets was my current home - Amsterdam.
 
RUMOR MONGERING

“In the Banda Islands, ten pounds of nutmeg cost less than one English penny. In London, that same spice sold for more than £2.10s. – a mark-up of a staggering 60,000 per cent. A small sackful was enough to set a man up for life, buying him a gabled dwelling in Holborn and a servant to attend to his needs”
― Giles Milton, Nathaniel's Nutmeg: How One Man's Courage Changed the Course of History

The Dutch VOC company was the first public corporation in history, trading shares as early at 1608.  The VOC raised capital from investors to build ships and send them to India and the Indonesian Archipelago to engage in trade (cloth, spices, slaves, etc...). The voyages could be immensely profitable - selling one small sack filled with nutmeg would provide a returning sailor with a nice house and a servant for life. (Many believed nutmeg could cure the Plague, hence its value). The VOC company at its peak may have been the most valuable company in history, with a market cap of $7.8 trillion in today's USD.

In the first VOC expedition 3 ships went out with 249 sailors, and only 1 ship returned with 80 crew remaining. They were forbidden from trading for spices by the local sultans, and the one surviving ship returned to Amsterdam with only spice samples. Yet that small quantity of spices created a profit for the VOC shareholders.


SOURCE: Christiaan Lodewijk Willem Dreibholtz, Een schipbreuk op de Engelse kust. Olieverf op doek, ca. 1839. Teylers Museum.

The VOC employees were real risk-takers. 60% of the ships never returned due to wrecks, attacks, and piracy. If they didn’t die of scurvy on the long voyages, 50% of the Dutch died of disease in their first year living in Batavia (now Jakarta). The sailors could earn a lifetime of comfort if they returned with spices, but they had a greater than 50% chance of death when they set out on the voyage.

Some unscrupulous speculators, in order to buy shares at a low price, would spread rumors that ships had wrecked. They would then buy up VOC shares cheaply before the intact ships arrived back in port. VOC shares were then owned by a surprisingly large percentage of Amsterdamers, and the citizens didn't like being frightened out of their valuable shares for low prices, so they cooperated to create the first securities legislation - a law against securities rumor-mongering, on pain of death.
 
Modern securities laws also prohibit spreading false information and rumors as manipulation.  But what if firms are not spreading factual misinformation or rumors, but rather contagious emotions or conspiracy theories which are difficult to fact-check but nonetheless create a desired behavioral influence? This is a charge made against many authoritarian governments (Pomerantsev, 2019) and it is a common tactic for new media startups in the US, as divisive content generates traffic and ad revenue. To not only survive, but also to thrive online, media outlets use conspiracy theories to obscure facts and push emotional buttons.

At MarketPsych we've also seen the power of triggering investors' emotions through our (now disabled) PsychTrade bot.
 
HOW WE (INADVERTENTLY) PUSHED INVESTORS' EMOTIONAL BUTTONS

"You need to build a fairytale that will be common to all of them.... The disparate groups needed to be unified around a central emotion, a feeling powerful enough to unite them yet vague enough mean anything to anyone."
Peter Pomerantsev. (2019). "This is Not Propaganda: Adventures in the War Against Reality"

Investors generally thought to be sophisticated people, able to discern good from bad decisions.  But investors are also emotional people, and our research has shown us that emotions can lead to powerful patterns in markets.
 
We can sow panic among investors without actually spreading any rumors - simply by amplifying the fear they already feel.  Calling attention to that fear creates more unease and worry, leading to further price declines.  If we were unscrupulous, we could then buy low and sell on the bounce. In this case, it would not be illegal, because we would not be spreading false information or rumors.
 
Our Chief Data Scientist at the time - Aleksander Fafula PhD - set up an account at Stocktwits.com called PsychTrade. The account robotically posted emotional and thematic charts of various stocks every day along with a comment on its emotional state. We used our MarketPsych Indices from Refinitiv to populate the charts. We turned on the bot and let it run as a service to the trading community. Below is one of the more dramatic tweet templates, which sometimes prompted investors to react with dismay (and fear).


 
Here is a tweet we saved from one investor. We didn’t save some of the better ones unfortunately.
 


Over the next 12 months the unmonitored account accumulated 20,000+ followers and had many traders sending it direct messages. Perhaps proving that emotional content is popular. It certainly generated lots of viewership and reactions, despite being generated by an unmonitored bot.

We didn’t save (or even read) most of the direct messages to the bot, but I recall several investors who saw our fear charts and asked with concern if they should sell (we didn’t provide advice, only reporting on the current fear level). Others told the bot to stop messing with their minds. It became clear to me that the bot’s output was, at times, worsening others’ nervousness or exaggerating their confidence. The bot had the potential to trigger panic simply by reporting on others’ fear, creating a downwards spiral as the scared investors sold based on the intensifying fear we reported. Not wanting to unduly influence traders emotionally, we took it offline after a year.

Many others - including governments, political parties, and large PR firms - have tools and techniques for triggering emotional reactions. One favorite tactic is to fire up one's supporters with anger (a motivating emotion) and demotivate one's opponents with confusion (generated by conspiracy theories which are difficult to fact-check).
 
SOCIAL ANGER
 
As political polarization has increased, public mental health has been deteriorating. These phenomena may be related - one is a cause of, and one is a reaction to, emotional manipulation. On a large scale, we see global frustration boiling over into behavioral action via our social unrest index. Below is a heatmap of social unrest globally, as mentioned in the media from October to December 2019. Note the many countries shaded bright red are experiencing significant social unrest including violent demonstrations and protests.
 

 
We also see rising anger expressed at government leaders and institutions. Below is an image of our government anger index from 2016 to 2019 in the US (top orange line), UK (purple line, rising since the Brexit vote), and China (green line, note the hockey stick rise since the Hong Kong protests began).



To create the social unrest and government anger indexes, we monitor news and social media using natural language processing. We track expressions of anger towards government bodies, agencies, offices, and institutions expressed in and about every country. The numerical output is taken from visualization tools in our free MarketPsych Data Eikon App (in Refinitiv's Eikon App Studio)

BREXIT
 
Since we mentioned Brexit above, and there is a significant election on December 12th, it's worth a mention. Our LinkedIn commentary covers our thoughts on Brexit and includes a couple charts. Big picture, there’s likely to be a 2 week GBP selloff following the elections as a consequence of the buy on the rumor and sell on the news price pattern.  The positive sentiment below will likely reverse once the anticipation of the election is over.



Longer-term, GBP is likely to strengthen following the decrease in the risk premium (due to the uncertainty collapse as Brexit gets underway).

HOUSEKEEPING AND CLOSING
 
The social anger we see didn’t arise immediately following the financial crisis, but, in my opinion, in response to targeted emotional manipulation. Tech companies are easy to blame, but they have been around for 20 years, and the manipulation is also evident in talk radio, television, and among government officials. It is the rise of data scientists with psychological saavy, the available of very specific personality data, the effectiveness of algorithmic analytic techniques, and the funding from interested firms and governments that has led to the current state of affairs. The 2019 movie “The Great Hack” (Netflix) provides eye-opening insight into the evolution of this process.
 
Perhaps because behavioral influence techniques are less direct, and our institutions (and democracy) were established based on the notion of free will (which must be doubted if unconscious influence techniques are effective), it remains un-policed for now. Also at play is the impossibilty of fact-checking many emotionally impactful claims (just as 17th century Europeans could not fact-check whether nutmeg actually cured the Plague and so poured everything of value into securing the spice). Upcoming elections are likely to be battlegrounds in which emotional memes, conspiracy theories, and unverifiable claims are the weapons of choice.
 
I’ll try to keep it more positive and investment-related in the next newsletter :)
 
Our MarketPsych Indices from Refinitiv (RMI) data feed measures and delivers real-time market psychology and macroeconomic trends from thousands of news and social media sites. The commercial dataset includes granular themes and sentiments for 45 currencies, 62 sovereign bonds and stock indexes, 15,000+ companies and stocks, 36 commodities, 187 countries, and 150+ cryptocurrencies back to 1998 (2009 for crypto). If you're an academic interested in data for research, please reach out for access.  If you represent an institution, please contact your Refinitiv account manager for a trial or contact us to get set up with an account manager. 
 
Happy Investing!
Richard Peterson M.D. and the MarketPsych Team

A FEW REFERENCES

• Acemoglu, D., & Robinson, J. A. (2019). The Narrow Corridor: States, Societies, and the Fate of Liberty. Penguin Press.
• Halpern, D. (2015). Inside the nudge unit: How small changes can make a big difference. Random House.
• Harris, Tristan. Sep 19, 2019. “Fighting Skynet and Firewalling Attention.” Tim Ferris podcast.
• Milton, G. (1999). Nathaniel's Nutmeg, Or, The True and Incredible Adventures of the Spice Trader who Changed the Course of History. Macmillan.
• Pomerantsev, P. (2019). This Is Not Propaganda: Adventures in the War Against Reality. New York: Public Affairs.
• "The Great Hack." (2019). Netflix. Produced and Directed by‎: ‎Karim Amer‎; ‎Jehane Noujaim.