The powerful emotions of fear and greed have played havoc with markets throughout history–helping to create bubbles and crashes. Spurred by strong feelings that often trump rationality, individual investors too often buy high and sell low. And, since people also fall prey to the herd instinct, millions of individual emotional reactions combine to create massive market phenomena capable of destroying many trillions of dollars in wealth and crippling economies. The global economic crisis of 2008/2009 is a dramatic and still hurtful example of fear and greed at work.
So how can we humans get smarter about investing? Through a combination of analytics and data visualization. Marco Monti, an Italian scientist who was hired by IBM in July, is developing methods that investment advisers can use to help investors make wiser long-term decisions. “Technology will allow us to develop a better understanding of behaviors and the role of emotions like greed and fear,” says Monti. “I hope we’ll be able to help common people who are not experts understand that those emotions should be considered over a long perspective. They shouldn’t be a cause for impulsive action.”
Monti does applied research for IBM’s analytics consulting business. He’s a specialist in cognitive sciences and the psychology of decision making with a Ph.D in economics from Bocconi University, in Milan. Through a pre-IBM project, Cognitive Banking, which he led as a post-doc for the Max Planck Institute in Germany, Monti established that if investment advisors had a better understanding of the needs of different kinds of investors and the most effective ways of communicating with them, they could improve decision making and investment outcomes.
Now he’s combining data visualization techniques with other analytical tools to come up with ways of using visualization to get through to people with different levels of financial sophistication. “You can use a more metaphorical language for people with low skills and more statistical visualization techniques for more sophisticated people,” he says.
It’s interesting–and encouraging–that the the power of vision can be used to overcome the powerful motivators of greed and fear.