For generations, U.F.O.s have been in the purview of late-night call-in radio shows and supermarket tabloids, not the Department of Defense. Now the government is publicly acknowledging that mysterious sightings can no longer be dismissed, and a major report is due in June.
~ “Are U.F.O.s a National-Security Threat?” April 30, 2021. David Remnick. The New Yorker Radio Hour.

In December 1998, on a dark snowy road in southern Sweden, I glanced above the trees and saw a small glowing oval object moving in parallel to our car. The road was straight, the sky was cloudy and black.

I pointed it out to my girlfriend, who was driving. We stared at it silently for about 10 seconds. The object moved in front of the car, hovering over the road a few hundred meters ahead. It maneuvered in perfectly straight lines – vertical then horizontal, far then near, side to side. I looked around for an explanation – was it a reflected dashboard light, a helicopter?

After a minute of silence I reluctantly asked, “Are you seeing this? What is it?”
She nodded but stayed silent.
I offered, “Is that what they call ... um ... a UFO?”
She peered at it thoughtfully, shrugged, “Mmmm, yeah, I guess so ...”

After another minute of hovering and a few perfectly straight sideways and vertical movements, and it darted away. I filed it under "Head Scratchers."

The impending June 2021 U.S. government report on UFO’s (UAP, Unidentified Aerial Phenomenon) is flikely to be accompanied by many reproted sightings. Most, probably including mine, are objectively explainable by investigators. However, there is a sizable contingent of unexplainable observations - backed by eyewitness, radar, and camera recordings - summarized well in this 60 Minutes news report.

However, humans have trouble remaining objective around the unexplained. In 1958, following a serious study into the UFO phenomenon, psychologst Carl Jung concluded that UFOs are "a living myth" that evolves as people seek new meaning in their ives during times of societal crisis (e.g., most recently COVID-19). The struggle for rationality is buffetted by powerful emotions – mistrust, fear, and uncertainty among others – emotions especially prevalent in 2020-2021.

In both UFO sightings and financial markets, it is especially easy to overfit an emotionally-compelling narrative to the observed data. Sometimes these overfit stories shape behavior. At MarketPsych we believe they help us predict the future. Today's newsletter looks at advancements in our observations of the unknown, the stories we use to make sense of it, and the predictive power that may result.

LACK OF TRUST

30 percent of Americans who believe that the government has covered up evidence of alien visitation, according to a 2015 YouGov poll.
~ “Why alien abductions are down dramatically.” June 12, 2016. Linda Rodriguez McRobbie. The Boston Globe.

We’ve written about the decline in social Trust in developed countries in newsletters in 2010, 2012, and 2020. Recent examples of (deservedly) low-trust include high-profile deceptions such as the “lab leak” theory of COVID’s origins, the CDC’s lack of evidence-based COVID advice, and the U.S. President’s (Trump) ongoing claims he won the 2020 U.S. election. Given the prevalence of paranoia across societies, one could say mistrust of authorities is a human psychological norm. This is especially in the U.S. and in some religions, where fighting against wayward authorities is part of the founding narrative.

[M]ore people believe that the US government is covering up evidence of alien life than believe that Jesus is the son of God.
~ “Why alien abductions are down dramatically.” June 12, 2016. Linda Rodriguez McRobbie. The Boston Globe.

Government control of messaging is not possible in a world of citizens with access to freely circulating data. Transparency wins out, unless authorities stoop lower. They can now use deep fakes or misinformation to undermine source credibility. Malicious actors/authorities can call into doubt the credibility of objective sources, leading to a diminishment in general trust, as we are seeing globally.

We see a few examples of social and technological movements springing up from a lack of trust in authorities. Since traditional financial institutions benefit from government regulations (or at least have the resources to work the loopholes), they can charge excessive fees and extract rents from the “little guy” without consequences. Mistrust of these institutions fueled the Occupy movement and the rise of social communities (e.g., on Reddit) organized to challenge the establishment (e.g. shorts). It also fueled the rise of brokerages-of-the-people like eToro and Robinhood and DeFi protocols.

A popular financial narrative is the idea that the government is incentivized to debase the currency. This narrative has fueled the development and rise of Bitcoin, smart contracts (e.g., Ethereum & Solana), and DeFi more broadly. Pervasive mistrust is fertile psychological ground for social transformation. But if it is not supported by evidence, or if the establishment moves to co-opt the leadership, then such mistrust-driven protests are easily lost to history.

WE NEED GOOD DATA

Novelists and historians have known for centuries that people do not deploy the powerful human intellect to dispassionately analyze the world, but rather to rationalize how the facts conform to their emotionally derived preconceptions.
~ William J. Bernstein. 2021. The Delusions Of Crowds: Why People Go Mad in Groups.

I never told anyone about my Swedish “UFO sighting.” It was unexplainable. What was there to tell?

In most cases a root physical cause of Unidentified Aerial Phenomenon (UAPs) can be identified – weather events, balloons, stealth bombers, drones, etc… Yet UAPs have been recorded by pilots, radar, tracking cameras, and group observers. Some data suggests UAPs move in ways impossible with current technology: flying at extreme elevations, maneuvering through massive G-forces, and operating without notable propulsion.

We can't explain how they move, their trajectory. They did not have an easily explainable pattern. And so I think that people still take seriously, trying to investigate and figure out what that is.
~ Barack Obama, “The Late Late Show with James Corden” on CBS. May 17, 2021. Reggie Watts to Barack Obama: What's w/ Dem Aliens? - YouTube

Skeptics have been quick to point out that the human mind is capable of fantasy, psychosis, false beliefs – all true. As such, the only recourse is to objectively examine data. The increased interest in UAPs by serious people may be due to the improved availability of obervational data.

DATA IMPROVES OVER TIME

[W]e are hardwired to detect relationships where often none exist, a tendency science writer Michael Shermer has labeled “patternicity.
~ William J. Bernstein. 2021. The Delusions Of Crowds: Why People Go Mad in Groups.

In the early 2000’s, among academic economists, it was considered a career-killer to suggest that market prices might reflect irrational human behavior. On the contrary, among investors it was widely accepted that psychology was important in markets, but the evidence was often vague and anecdotal. Fortunately, as the data from brokerage trading accounts and media became available, the links between investment behavior and market prices grew clearer.

Natural language processing (NLP) technologies allow us to convert the sentiments, themes, and tones in media into data streams. The incredible advancements in NLP over the past few years allow us to see how information flow impacts market prices much more clearly.

At MarketPsych we see that media sentiment levels consistently predict relative global stock returns. We've seen this effect for several years, and it has persisted. It even feeds our successful StarMine MarketPsych predictive model and our Balanced Fund (internal). Higher resolution in sentiment data also improves our predictive results, as seen below. Each plot represets one version of our NLP technology, from version 2 in 2014, to version 3 in 2017 to version 4 in 2020. As the spread between green and red widens, it indicates greater predictive power from stock media sentiment.

More specifically, each month global stocks were ranked by their past one-month average media sentiment and binned into deciles (10% tranches). In the plots above we track the future performance of the decile groups over the following 90 days. As you can see, the green (more positive stocks) outperform the red (more negative) in the future. This effect is improved - as evidenced by the spread widening between green and red - after each 3-year NLP major version update. For version 2 it was around 0.50% between the extreme positive and negative deciles, and for version 4 it is around 1.1%.

Please note: our NLP tech is not calibrated to predict stocks, but rather to identify the positive or negative tone of the source text. The predictive effect identified above is a fortunate coincidence of more accurate positive and negative tone detection. The tone of the media – simply the positive and negative meaning – appears to drive investor behavior in global stocks.

The public reaction and stories that follow the UAP report will reflect the public's general sentiment. A greater balance of positivity may predict good developments, but there is also the risk of negative interpretations and hysteria including doomsday cults, religions frenzies, and political exploitation.

HOUSEKEEPING

How much data do we have, and can they help us distinguish between UAPs and what I call Completely Ridiculous Alien Piffle (CRAP), such as crop circles and cattle mutilations, alien abductions and anal probes, and human-alien hybrids?
~ "UFOs, UAPs and CRAPs: Unidentified aerial phenomena offer a lesson on the residue problem in science." April 1, 2011. Michael Shermer. Scientific American.

An early leak of the anticipated U.S. government report indicates there is no evidence U.F.O.s were alien spacecraft. But they still remain unexplained.

After my UFO sighting, I occasionally wondered, “That light I saw - what could it possibly have been?” At its core, it reminded me that we still don’t know everything about how the universe works.

The contemplation of UAPs can changes our sense of place in the universe. But whether we remain objective and data-driven, or fall down a spiral of hype and misinformation, depends on our clear-mindedness in the face of the unexplainable. Clear-mindedness is useful tool not only for UAP watchers, but also for investors in often-unexplainable financial markets.

Since I run a data company, I’m perhaps too sanguine that people will come to think in a more evidence-based, open, and data-driven way following the upheavals of 2020-2021, but it remains my hope.

Happy Investing!

Richard Peterson and the MarketPsych Team

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