Introduction

“Experience teaches us no less clearly than reason, that men believe themselves free, simply because they are conscious of their actions, and unconscious of the causes whereby those actions are determined.”

—Baruch Spinoza, “Part III: On the Origin and Nature of the Emotions; Postulates (Proposition II, Note)” from R. H. M. Elwes, trans., The Ethics, 1955, p. 54 (original work published 1677)

In the wake of the dot-com crash and the collapse of the US housing bubble, it is clear that non-rational impulses, such as the mania at the height of these bubbles and the subsequent panics that followed in the downturns, play a major part in collective human investment behaviour. These irrational sentiments, which have the capacity to greatly influence asset prices and at times feed financial bubbles that threaten to trigger great social unrest, have been given many names. The founding father of fundamental analysis, Ben Graham, and later his most famous disciple, the investor Warren Buffett, named them the manic-depressive Mr. Market; the economist J. M. Keynes referred to animal spirits; and the former US Federal Reserve chairman Alan Greenspan talked about irrational exuberance.

The inability of conventional economics to account for human irrationality renders the commonly accepted economic and financial theories void. Economists adhering to these conformist thoughts are at a loss as to how to adapt their theories to account for collective human behaviour that does not follow the “rational man” assumption. To date no one has been able to pinpoint and explain the mechanics of these forces, other than relating to them in anecdotal fashion or quickly glossing them over as an unknown variable. Consequently, interest is, and has been, growing in developing alternative approaches to economic theory, such as behavioural finance. However, these newer concepts have proved uneven at best in predicting and explaining financial bubbles. They all fail to answer the two key questions: When and why are financial bubbles likely to form?

Given the dramatic impact such irrational fluctuations can have on asset prices, and on society at large, and the recognised, but generally overlooked, inability of fundamental valuation models to factor them in, it is vital that we identify the underlying drivers. Existing theory has proved incapable of doing so, but there is a way. However, to understand it, we must first delve into psychology and explore the collective unconscious and its archetypes—innate mental images that exist unconsciously in us all and affect our behaviour and judgment without our being consciously aware of it.

Recent developments in neuroscience have brought greater understanding of the workings of the brain and how it relates to the much more elusive concept of the mind. There has been a fundamental shift from the position that nurture is basically responsible for human development and behaviour, in other words, everyone is starting with a blank slate, to an acceptance and understanding of the powerful influence nature holds. Modern research supports the existence of an unconscious, with a part operating at a collective level, impacting societal movements, whether in fashion, political trends, even social unrest and revolutions—and the financial markets. Individually or collectively, human choices, including investment decisions, are affected to a large degree by the prevailing social mood or zeitgeist. The collective unconscious plays an important role in creating and directing these social mood swings.

The term collective unconscious was coined by the Swiss psychologist Carl Gustav Jung (1875–1961) early in the twentieth century during a period in which he was collaborating with his Austrian contemporary Sigmund Freud (1856–1939). Jung's thinking on the collective unconscious and its archetypes came over time to gain broad acceptance among the psychology profession and academics. Jung incorporated Freud's model of the unconscious, what Jung called the personal unconscious, but he proposed the existence of a second, far deeper form of the unconscious lying under the personal—the collective unconscious, where the archetypes reside. The personal unconscious comprises an individual's experiences that have been forgotten or suppressed into the unconscious. It is unique to each person. The collective unconscious, on the other hand, contains psychic material—the archetypes—common to mankind and therefore universal and impersonal throughout time and regardless of cultural context.

Archetypes can be seen as mental structures or thought patterns that through mankind's history have become hard-coded into our DNA. The purpose of archetypes is to support the mind's objective to maintain a holistic equilibrium in order to avoid the risk of neurotic collective behaviour; in a sense, it is a psychological survival instinct functioning on an all-encompassing human level. When activated by events or emotions that disturb the balance of the mind, such as pent-up aggressions not allowed by the conscious due to prevailing norms or moral conventions in society or the need for a release of self-reflection, archetypal forces begin to well up into the conscious in order to restore the mind's equilibrium.

There are many different archetypes, although not an infinite number. Some archetypes have the nature of a character, such as The Great Mother or The Warrior; others are related to situations typical to mankind, such as Birth or Death, or to an object, such as the Moon, the Sword, or Fire. Archetypes are comprehensive, timeless, and static, and appear in all cultures, though their manifestations can vary in different settings and time epochs. They are innate and as such are passed genetically from generation to generation.

As archetypes reside in the collective unconscious, the only tangible footprints from which they can be observed are in the form of symbols. These symbols could be specific words or expressions that seemingly spontaneously appear in our dialogue, or images that appear in our dreams. The level of frequency of their appearance indicates the urgency, the need, for the archetype to be expressed and begin to impact our thinking.

The triggering of an archetype such as The Warrior, by the suppression in the conscious of aggressive tendencies, for example, could give rise to the use of war-like metaphors in non-war-like contexts. War-related words could emerge in descriptions of sport—they invaded the pitch, the home team massacred the opposition—or as cultural trends, such as a sudden crop of war-related movies, or a fad for uniforms in fashion. At first, such metaphors are adapted and used by the collective community without awareness of the activation of a war-like archetype and the need by the mind to increase aggressive thinking to restore a holistic mind. The spread of such language and worldview can trigger heightened levels of aggression in society which increase the likelihood for riots and even wars, and would in the financial markets lead to excessive risk taking. And when such actions manifest, The Warrior archetype has fulfilled its purpose because it has helped restore the equilibrium in the mind, and it starts to recede and eventually becomes dormant again in the unconscious. Other societal examples of archetypes at work include the sexual repression of the Victorian era, which emerged as the hysteria and neurotic behaviour commonly displayed by women of the era. This of course flowed through into fashion, with even grand pianos affected—dressed with curtains to hide the curvaceous legs so scandalously suggestive of womanly contours and likely to inspire impure thoughts. In the 1950s, the witch hunts and reds-under-the-bed paranoia of McCarthyism was another archetypal expression. As a simple rule of thumb, to identify the types of archetypes likely to be at work is to understand and pin down the existing taboos of the era.

When studying archetypal activation through its tangible manifestations, symbols, it is important to distinguish symbols from signs. Whereas a symbol contains an unconscious element of meaning, a sign just has the one meaning, like a stop sign means stop and nothing else. Through the study of symbols we see that people often say or write one thing and do or mean something completely different; this is what happens when the archetype is beginning to move from the unconscious into the conscious, without the person being aware of its impact on their thoughts and behaviour, or its wider, collective effect in altering the mood of society, or zeitgeist.

The emergence of the language of the archetypes and through its shifts, the symbols, whether in speech, literature, dreams, art, or photography, signals when the zeitgeist is about to change. They appear before the thought pattern leads to a change in behaviour. So by watching for these direct pipelines into the collective unconscious, one is able to tap into the developing zeitgeist and predict future trends, be they cultural or political—or investment behaviour. Whereas influences of archetypes and the unconscious have been studied on a number of mainly individual but also some collective human endeavours, very little, if any, research has been conducted on the potential impact of the collective unconscious on trends in the financial markets.

Recent advances in text analysis and text-mining techniques have been a boon for the advancement of the study of archetype-related symbols. Huge banks of global information, or Big Data, are now easily...