Metaphorically speaking – Behavioural finance has become embedded in investors’ language
Here on The Value Perspective, the books we read may broadly be divided into two categories – those with an obvious connection to value investing and those with no obvious connection to value investing but in which you can be fairly certain we will find one anyway. Animal freaks, for example, introduced us to the rise and fall of ‘The Learned Pig’, on which we mused in Behavioural swine-ance.
To be honest, I is an other – The secret life of metaphor and how it shapes the way we see the world, by James Geary, has entailed somewhat less of a leap, not least because it contains a chapter on ‘Metaphor and money’. Among many other things, the chapter covers a 2006 paper, Metaphors and the market written by US psychology professor Michael W Morris and others.
From this discussion of the use of metaphors in stockmarket commentary, we learn there are two types of commonly-used financial metaphor – what are known as ‘agent metaphors’ and object metaphors’. The former describe situations in terms of the deliberate actions of living things – you will often hear, for instance, of a market “climbing upwards” – whereas the latter describe situations in terms of inanimate objects subject to external forces. The obvious examples here would be the ones so beloved of any nascent financial commentator, where the market “falls off a cliff” or “drops like a stone.”
When Morris and his team looked more closely into how metaphors are used in financial matters, they found that – as in the examples above – the ones that were used to describe rising markets were disproportionately agent metaphors while the ones used to describe falling markets were disproportionately object metaphors.
The researchers rationalised these results using prior work in behavioural psychology that found people associate agent metaphors with “a living thing pursuing a goal – after all, only something that is alive and determined can climb” whereas object metaphors conjure up a different idea. “When something drops off a cliff, it tends to keep falling,” the book observes, “And when it hits the bottom, it usually remains exactly where it has landed.”
So when agent metaphors are used in relation to an upward trend, they contain an inherent suggestion this trend will continue while object metaphors imply a decline is irreversible – and of course this reflects how bull and bear markets gain their momentum. When a market is climbing upwards, many investors will conclude it can continue to do so indefinitely and may well buy in at elevated levels.
When a market is falling like the proverbial stone, however, many people will be unable to see this as a temporary period of discomfort that will ultimately pass as the economy grows and valuations normalise. Instead, seeing it as an event that will leave them permanently worse-off, they may well sell out at precisely the time when more disciplined investors are considering buying back in.
Here on The Value Perspective, we have often discussed the behavioural finance sin of extrapolating the future from how things currently are rather than recognising there could be a different environment at some point down the line. This is the first time, however, that we have consciously realised the idea is so strong and hard-wired into us that it has become embedded in the language used by journalists, commentators and investors in general to describe market behaviour.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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