The Behavioural Investor

Originally published in the Informanté newspaper on Thursday, July 30, 2015.

In a week where the world has seen major volatility in its major markets and commodities, with the Chinese stock market resuming its plunge despite herculean efforts by the People’s Bank of China to arrest the fall, including establishing a Plunge-Protection Team, as well as threats to arrest short-sellers, it is perhaps prudent to examine what motivates these markets. 

For a great swathe in the history of economic thought, most theories were based on “homo economicus”, a view that people were rational and narrowly self-centred in their decision making processes. According to this view, people would be ‘utility-maximizing’ as consumers, and ‘profit-chasing’ as producers. 

However, in 1994, noted neuroscientist António Damásio advanced his Somatic Marker Hypothesis in a book titled Descartes’ Error.  He observed that patients with damage in the brain’s frontal lobe had an impaired ability to organize and plan, resulting in socially unacceptable behaviours. Individuals such as Phineas Gage, who bizarrely lived after a tamping iron was blasted through his head in 1848, had remarkable personality changes with damage to their frontal lobes. 

Surprisingly, though, these individuals had a normal attention span, intellect, language comprehension and expression – the only change was in manifesting emotions. In fact, in patients that had lost the capability to feel emotion at all, also suffered from a sudden lack of any decision-making capability. Damásio had made a very unexpected discovery.

Emotions were always assumed to be irrational, and thus that a person without emotions would make better decisions. But Damásio’s findings showed that emotions are a crucial part of decision making – if you can’t feel, you can’t make up your mind. And so the myth of the rational actor was discarded, and new fields were born, ranging from cognitive science to behavioural finance. But perhaps the most important was the integration of our innate cognitive biases into economic theory.

These biases are mistakes we make in how we think and make choices, based on how we feel. Everyone believes they gather data and facts before coming to a conclusion, when in reality, we mostly already have our mind made up – and thus search only for data that confirms our conclusions. This is called confirmation bias. If no one is looking for information that disproves their conclusions, they’ll be caught flat-footed if reality disagrees with their conclusions.

Similarly, most people have an optimism bias. This is when our confidence in our judgement is greater than their accuracy. Generally, people tend to be correct only about 80% of the time when they are 99% sure of something. This effect can clearly be seen in the fact that 80% of drivers claim they are above average drivers! And yet 90% of people believe their future will be better and less painful than that of the average person. 

And there are many more. Herding bias – the tendency to believe things because many people believe them to be true. Recency bias – where we expect recent events to continue indefinitely. Self-serving bias – where we believe good events that happen is a result of your own actions, whereas the bad ones are someone else’s fault. 

And also, unfortunately, the bias blind-spot. Where, even though we know about all these biases and should factor them into our decision making, we lack the ability to recognize that we suffer from the same cognitive distortions as everyone else. 

When we take a look at the Chinese market crash this week, it is all too obvious that everyone missed the signs. Herding, optimism bias, and even self-serving bias in the case of the Chinese government threatening to arrest short-sellers. “This time it’s different!” -  the cry always heard at the top of a bull market just before the crash. In eight centuries those have always been the most dangerous words in investing. And it has never been different. 

We believe Africa, and Namibia, to be different. Africa has the philosophy of Ubuntu, an essentially Humanist philosophy of kindness towards others. And the cry “Harambee,” Swahili for ‘Let’s pull together,’ surely these differences will prevent Namibia from experiencing the same kind of upheaval? Or are we, too, experiencing a bias blind-spot?

The Vanishing Frontier

Originally published in the Informanté newspaper on Thursday, July 23, 2015.

46 Years and 3 days ago, Neil Armstrong and Edwin ‘Buzz’ Aldrin became the first two of only twelve individuals to achieve the most remarkable feat mankind has yet achieved: They set foot on another world. Just a week before, on July 14, the New Horizons space probe became the first spacecraft to explore the former ninth planet Pluto. 

The wealth of information and emotions that these events have stirred up are undeniable. Who amongst us have not gazed upon the stars at night, and experienced a profound sense of wonder at the majesty of the universe? Astronomy, after all, is the oldest of the natural sciences, and it has formed the basis of our culture for eons.

Our calendar bears testament to this history. One year, being the time the Earth takes to make one revolution around the sun. Months closely approximating the revolution of the Moon around Earth. A day, being a single revolution of the earth about its own axis of rotation, with the seasons being an artefact of the inclination of that same rotational axis relative to the plane of Earth’s orbit around the sun.

Space has memorably been called the ‘Final Frontier’ by science-fiction television shows such as Star Trek. Yet this frontier has been vanishing bit by bit. On December 13, 1972, Eugene Cernan became the last person to set foot on the moon. Apollo 17 was also the last manned spaceflight beyond Low-Earth Orbit. And in 2011, the United States retired its Space Shuttle program, losing manned spaceflight capability. Currently, only the Russian Federation and the People’s Republic of China retain the capability of human spaceflight.

But frontiers are in fact important to a civilized society. Frontiers have traditionally been the safety valve of civilization – drawing the discontented, the so-called outcasts, who have different ideas and those who wish to try something new. Or, in other words, the innovators. Like the Boers and Dorsland trekkers who chafed under European authority and spread into Africa. Like the Ovaherero, who spread from East Africa to become cattle herdsmen instead of remaining hunter-gatherers. In fact, like most of the tribes here in Namibia, who braved the harsh climate to make this country a new home.

Innovation is not called the ‘engine of wealth creation’ for no reason. While the United States was mostly a frontier, innovators like Cornelius Vanderbilt, John Rockefeller, Andrew Carnegie and Henry Ford built business empires that would catapult the United States to superpower status. And the Apollo program built on that, with dreams of space exploration encouraging interest in STEM (Science, Technology, Engineering, Mathematics) disciplines, thus allowing the United States to maintain its superpower status throughout the 1970’s to 1990’s.

The benefits derived from the Apollo program still reverberate through our lives today. From the obvious technological benefits, such as the rise of the computer industry, cordless tools, telemetry controlled devices and solar power panels, to the less visible, such as firefighting suits derived from space suits, medical pacemakers, MRI machines, and safety features in cars, to the absolutely mundane, such as chlorine-free pools and athletics footwear based on the boots of space suits, the benefits remain palpable.

But without a frontier, humanity’s discontent remains sown amongst us. We start squabbling over what we have currently, instead of dreaming about what we could achieve. Innovators feel ‘boxed-in’ and soon we start seeing elements of class struggles, between those who want change, and those who resist it.

With the Apollo program but a memory to the current generation, the American Dream appears to be coming apart at the seams. More students are studying business, law and other liberal arts degrees than STEM degrees, and with that comes the resultant loss of technological leadership.

In Namibia, by and large, our dream was to have an independent nation, to be a free people. But here as well, we achieved that dream, and are now squabbling amongst ourselves. Our economic growth, so dependent on innovation, shows signs of slowing. Namibia, as a nation, seems to find itself in need of a new frontier, a new dream towards which we can work. After all, as long as a single mind remembers, as long as a single heart still beats with passion, how can a dream die?

A Namibian Nuclear Option

Originally published in the Informanté newspaper on Thursday, July 16, 2015.

Just a few days ago, a remarkable event in international relations occurred – a Joint Comprehensive Plan of Action was signed at Vienna between the five permanent members of the UN Security Council, the European Union, Germany, and Iran. This marks the beginning of the end of 36 years of sanctions against the Islamic Republic of Iran, with far reaching consequences not only for the world as a whole, but for Namibia in particular. 

After all, Namibia has a long history with Iran. The government of Iran acquired a 15% stake in the Rössing uranium mine back in 1976 – and they have maintained this stake throughout the period of sanctions. And while Namibia will feel some relief from the up to 10% decline in long-term oil prices expected from Iran’s renewed oil exports, it might be that some of Iran’s US$ 100 billion in frozen assets and bank accounts that could be reinvested here would make a bigger difference.

The Iranian embassy re-opened its doors here in Namibia a scant two years ago, in July 2013, with the express intent to expand bilateral relations, and their foreign minister specifically noting Iran’s experience in infrastructure development. Yet it is perhaps ironic that it is the specific topic and application of the new agreement that could come to benefit Namibia the most.

In terms of the agreement, Iran’s nuclear stockpile will be reduced, and its nuclear enrichment programme’s significantly curtailed, with a concurrent reduction in the centrifuges and facilities currently in operation. 

At the same time, the Namibian Ministry of Mines and Energy is continuing on its quest to develop the nuclear industry in Namibia. In addition, the Namibian Government as a whole remains fully committed to developing local industries, with Export Processing Zone enterprise licenses being a powerful incentive. With the stated aim of these EPZ’s being the local processing of resources, developing local industry and training Namibian workers, it should come as no surprise that Namibia also intends to enrich Uranium locally. 

Since Namibia is already a signatory to the Treaty on the Non-Proliferation of Nuclear Weapons, with our own established Atomic Energy Board, and supervised by the International Atomic Energy Agency, it is in a rather unique position to benefit from these recent developments. As Namibia is the world’s fourth-largest producer of uranium, it is only natural that Namibia take its place as an energy hub for Africa. And the Namibian people remain protected by its highest law: The Constitution of the Republic of Namibia. After all, paragraph L of Article 95 of the Namibian constitution expressly states: “in particular, the Government shall provide measures against the dumping or recycling of foreign nuclear and toxic waste on Namibian territory.”

And yet, it is the very next article of the constitution that has enabled this opportunity. Article 96 of the Constitution reads as follows: “The State shall endeavour to ensure that in its international relations it: a. adopts and maintains a policy of non-alignment; b. promotes international cooperation, peace and security; c. creates and maintains just and mutually beneficial relations among nations; d. fosters respect for international law and treaty obligations; e. encourages the settlement of international disputes by peaceful means.”

With the international community first relaxing its stance towards Cuba, and now following with Iran, it seems Namibia has always lead the way in establishing peaceful relations with what could be termed ‘belligerent’ nations. With President Geingob’s already established expertise in international relations, perhaps the time has come for Namibia to step into the spotlight, and lead the way in reintegrating Iran with the global community.