Counting on War, by James Sogi

January 22, 2007 |

Dr. Gerald Patterson's paper, "Contingency Models for Interstate Wars and for Individual Violence," proposed the key hypothesis that both individual and societal acts of violence can be predicted using a behavioral and statistical approach. Dr. Patterson has studied, quantified and predicted the variables that lead to aggression in individuals. The major issue in state warfare is whether there are models for predicting the behavior of groups that make war. The question is whether behaviorist principles work for the behavior of groups and can they be modeled and quantified. This reviewer proposed the query that behaviorist analysis of groups such as markets provide a workable model.

Take a smaller step first. Take a sports team dynamics. Does the reinforcement of the team win override such individual concerns that a star such as Reggie Bush may have? Will the individual give up his glory for the team win? What are the independent variables and the model. The team should be first, and the unit will be stronger with team considerations over the individuals. What are the variables that predict team wins? The jump to economics is hard because the capitalistic model of Adam Smith is that each individual who acts in his own interest, within limits, will ultimately benefit the society. In the broad markets under the law of large numbers, the large number of market participants and companies tends to the mean. A behavioristic model of markets or societies and war will use each individual and each transaction. The approach to individual stocks differs due to idiosyncratic behavior and small numbers.

A market model to test this is to test whether foreign markets behave differently than US markets due to differences in foreign culture, rules, attitudes, economies, time of day, weather, seasons, cross effects of other large global markets, national policies, interest rates … or do all humans behave similarly worldwide? Do the different currency pairs work differently? My father has noted that in Japan, they tend towards orderliness and everyone does the same thing. Does that cultural tendency create market trends as opposed to the contrariness typical of Americans that is reflected in the US markets? Are there model variables that govern the behavior of global markets that differ from the US? Given that we are at an inflection point in the interest rate cycles and the Austrian cycles, and the Presidential cycles, opportunities might arise in looking at group behavioral models.

Scott Brooks comments:

I have long believed in using demographic models to establish a macro-overview of investing. The study of demographics, as I use them, is to determine, based on births and immigration, what a group of people are likely to do over any given period of time. For instance, we know that in the US on average, people start working at around 20.5 years of age, get married at around 26, have kids at around 28, buy their first starter home at around 32, upgrade to a nice home at around 45, spend the most amount of money between the ages of 45 - 50 (it's 50 - 55 for the more affluent), and dramatically shift their spending as they age to a point where their spending decreases immensely, just to name a few characteristics.

Since young people buy different things than older people, spending patterns will be different over time as certain age groups dominate, or at least have a plurality of the spending for a given economy.

The dominant spending group in the US is the baby boom generation.

Different countries have different spending patterns than the US, which can be attributed, in many ways to demographics, but there are some cultural differences … and I am no expert on cultural differences, so I won't comment on that.

The study of demographics is quite fascinating and can give some key insights into the future.

However, it will only give a macro glimpse. And the unfortunate part of a macro glimpse is that it very rarely helps you make a good return today, i.e. since changes in spending cycles are not like a light switch, switching from "on" to "off" in the blink of an eye … they seem to be much more gradual … happening slowly so you don't notice until it's too late … kind of like the story of "how to boil a frog."

I strongly caution anyone using demographics not to use it as a replacement for micro-economic models. Demographics will not help you make a good return this year, let alone this quarter. For many in this group, making a good return in any given quarter is important and making a good return in a calendar year is absolutely vital!





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