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What is economics' missing link? Recent economic crises have had a devastating impact on society. Worryingly, they gravely risked a collapse of the financial system. These crises also painfully revealed economics' blind spots. Crucially, economics is not an innocent bystander but central to the problem.
In this pioneering book, Patrick Schotanus explains that economics' mechanical worldview is the ontological error which leads to flawed thinking and faulty practices. The Market Mind Hypothesis (MMH) thus calls it "mechanical economics": it not only erroneously views but also dangerously treats the economy as a machine, the market as an automaton, and its agents as robots. Inspired by heterodox economic and leading cognitive thinkers, this book offers an alternative paradigm. Central to MMH's psychophysical worldview is the fact that consumers, investors, and other participants are conscious beings and that their minds' extension makes consciousness a reality in markets, exemplified by market mood. Specifically, denial of the complex mind~matter exchanges as the essence of markets means the extended mind~body problem is economics' elephant in the room.
The book argues that if mechanical economics is the answer, we have been asking the wrong questions. Moreover, we will not solve our economic predicaments by doubling down on the assumption of rationality, nor by identifying yet another behavioural bias. Instead, scholars and students of economics and finance as well as finance practitioners need to investigate-through cognitive economics-the deep links between markets and minds to better understand both.
With a foreword by investment strategist Russell Napier, an intermezzo by neuroscientist and complexity pioneer Scott Kelso, and an afterword by 4E cognition philosopher Julian Kiverstein.
Patrick Schotanus is a visiting and independently funded pracademic at a growing number of universities, where he is further developing his Market Mind Hypothesis (MMH) together with interdisciplinary collaborators. His technical papers have been published in various peer-reviewed journals and he regularly presents his work at conferences and seminars.
Previously, Patrick worked for almost thirty years in investment management (including a few years in banking) in Edinburgh, London, New York, and Singapore, as well as the Netherlands (where he was born). During that time he was employed by various reputable firms in senior investment positions, most recently as a global multi-asset strategist and portfolio manager.
Patrick has a PhD (University of Essex), an MBA (University of Groningen), and an MFE (UC Berkeley; inaugural class, a.k.a. "Rubinstein's Guineapigs"). His professional investment qualifications include the VBA (Dutch version of CFA), the CEFA and the CMT designations.
Patrick Schotanus is a deep thinker and should be listened to.
Kiril Sokoloff
Founder and CEO 13D Research & Strategy
This book is a fascinating analysis of an area ignored in traditional economics: the interaction between the market and how people collectively learn and change their mind.
Mervyn King
Former Governor Bank of England
Author of The End of Alchemy and co-author of Radical Uncertainty
Do markets really have a mind? Do they have moods? What can this mean, and how might it impact the way we behave and manage risk? In this unique and compelling treatment, Patrick Schotanus weaves together theoretical economics and the science and philosophy of extended cognitive systems. Essential reading for anyone interested in markets - or minds!
Andy Clark FBA, FRSE
Professor of Cognitive Philosophy, University of Sussex
Author of Supersizing the Mind: Embodiment, Action, and Cognitive Extension,
and Surfing Uncertainty: Prediction, Action, and the Embodied Mind
This is a visionary book that sets the scene for a paradigm shift in economic thinking: namely, a shift from behavioural economics to cognitive economics. This move is motivated by an eclectic appeal to crosscutting themes in economics and cognitive (neuro) science. For example, the dialectic between brain and mind - and ensuing considerations of consciousness - and how this could frame a new way of thinking about the Market. Cognition and consciousness get into the game at two levels; namely, the fact that decisions and choices are made by conscious people, on the one hand. On the other hand, there is the intriguing notion of a collective consciousness that supervenes on individual decisions and transactions. This kind of collective (planning as) inference is now an important theme in many areas of neuroscience and ethology; for example, the notion of federated inference or distributed cognition and how it manifests in terms of (e.g., cultural) niche construction. This book offers a truly novel and compelling view of the Market - a view not only of how the Market works but a vision of how it could and should work in the future.
Karl Friston
Professor of Neuroscience, University College London
Co-author of Principles of Brain Dynamics
The research agenda suggested by this book provides a perspective to integrate the science of heuristics with economic theory. That is, to move from the bias-centered interpretation of behavioral economics to a more cognitive-oriented economics. For instance, agent-based models already assume that agents interact via adaptive rules, and this perspective can provide a formal basis for a revision of macroeconomic models that deal with heterogeneous behavior and uncertain environments. It is highly recommended reading.
Gerd Gigerenzer
Director of the Harding Center for Risk Literacy, University of Potsdam
Author of Gut Feelings and Reckoning With Risk
In this book, Patrick provides a deep and deeply challenging philosophical dive into the interaction of economics, markets and the human mind. The book is breathtakingly broad in the material and fields covered, a rarity in today's world of micro-orientated specialization. It is this breath that provides the power of the central concept - the market mind hypothesis - which is essentially an emergent property of a complex adaptive system. I urge you to read this book, expand your understanding and let Patrick be your guide on a fascinating journey of discovery.
James Montier
Partner GMO and member of its Asset Allocation team
Author of Behavioural Investing
The "physics-envy" of academic economics has led the discipline down an intellectual cul-de-sac. Messier but more accurate frameworks have been subordinated to cleaner but less accurate ones on the spurious grounds of mathematical tractability. Patrick Schotanus' 'big idea'-that markets exhibit characteristics and properties more similar to the human mind than to Newton's solar system-is an impressive and refreshing attempt to get things back on track. Inspiring stuff.
Dylan Grice
Co-founder Calderwood Capital
The Market Mind Hypothesis (MMH) from Patrick Schotanus helps us move financial market analysis from the simply mechanistic approaches such as CAPM, to well beyond the developments already established through the behavioural economics approach that has gained ground in recent years.
It has long been recognised that 'Mr Market' has a mind of its own-and one that often runs counter to/or in advance of what traditional economic and valuation analysis might suggest. This work begins to formalize a framework for thinking about how 'Mr Market' works.
Patrick Schotanus builds on his many years of practical investing with leading institutions to interweave a novel theoretical model of how markets function, combining the physical aka 'the economy' with the psychological financial economy aka 'the market', to show how we can start to better understand this 'market mind'.
Patrick helps us understand how the 'market mind' balances the well-recognized conflict between 'fear' and 'greed'. He shows how rather than markets being 'neutral observers' of the dramatic economic market events that have shaped the last three decades such as the LTCM crisis of 1998, and the subsequent blow-up of the Tech bubble, the GFC and the COVID crises, Mr Market is an active participant responding to, and often amplifying, both the risks and returns with its various 'market moods', at times shifting rapidly from despair to exuberance.
This is a valuable new insight into the way markets behave and an exciting new lens for both academics and practitioners to view markets and market developments.
Ian Harnett
Co-founder and Chief Investment Strategist Absolute Strategy Research
Every investor is the fruit of his or her own experiences; experiences that create habits, biases and blind-spots. And very rarely, a book comes around to challenge established patterns and encourages the reader to look at markets, the broader economy and even one's own life through a new lens. This is such a book. The Market Mind Hypothesis offers a different approach to financial markets and economics, one that goes beyond the breakthroughs accomplished by behavioural economists over recent decades, and fully embraces cognitive science, a new multidisciplinary field that includes Artificial Intelligence (AI), neuroscience, philosophy, psychology, and sociology. A must read!
Louis-Vincent Gave
Founding Partner and Chief Executive Officer Gavekal
In this interesting and original book, Dr. Patrick Schotanus takes dead seriously the everyday anthropomorphizing talk about what the market thinks and develops the idea that the market does have a mind, a personality, moods, that emerge collectively from its participants. And after all, what are markets, stock prices, interest rates, volatility, and default rates if not mental rather than physical phenomena?
Emanuel Derman
Professor, Columbia University, and Director of its Financial Engineering Program
Author of My Life as a Quant and Models. Behaving. Badly.
Patrick is an innovative and courageous thinker, rarely swayed by the 'received wisdom'. In this simultaneously well-researched and unorthodox book, he exposes the fault lines of classical decision-making theory and implores the profession to move beyond even behavioural economics and to consider how cognitive sciences can improve our understanding of economic decision-making.
Larry Hatheway
Co-founder Jackson Hole Economics and former Chief Economist UBS
A must read and a fascinating new way of understanding how economies - and markets - work. If the last few decades have taught us anything, it is that we don't really understand them. This important book offers new thinking that might help us do better. A deeply necessary addition to the debate.
The economy is all too often treated as a machine. But if all the actors in it have a consciousness, might it not have one of its own? This intriguing new book explains how that mind rules our world.
Merryn Somerset-Webb
Senior Columnist Bloomberg and former Editor in Chief of Moneyweek
As someone who has written about the need for new theories and understandings of cognitive economics I was delighted to read this book, which introduces the Market Mind Hypothesis and sets out an ambitious research agenda. I'm hopeful that we will see a stream of significant work in cognitive economics, not only from economics, but also drawing on insights from other fields, varying from biology and neuroscience to psychology and computer...
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