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Robert Abbott
Robert Abbott
Articles (799)  | Author's Website |

Book of Value: The Visceral Market Hypothesis

A professor from Columbia Business School takes on academic finance and the Efficient Market Hypothesis

March 09, 2020 | About:

When Anurag Sharma went looking for key moments to illustrate his case that investing is fundamentally driven by human emotion, he had no shortage of examples.

In chapter two of “Book of Value: The Fine Art of Investing Wisely,” Sharma began with the stock market panic of Oct. 24, 2008. This one was notable because for the first time, a serious slide in stock prices went global.

As the author pointed out, many have sought explanations for such events and too often brought forward mechanistic answers. They came up with technical rationales such as aggregate demand, money supply and other economic or financial numbers. Sharma says these theories imagine an economy as a machine, and solutions to problems as things that come from pushing buttons or pulling levers.

What these theories fail to include are human elements - i.e. mass or collective behaviors that periodically emerge. We see this behavior whenever financial bubbles pop up and then burst, as one did in 2008. But Sharma wanted us to know that financial events are just one manifestation of “multitudes acting as though in unison.” To illustrate, he pointed to two very different examples: the Atkins diet fad and the genocide in Bosnia.

These “behavioral storms,” as he called them, occur when “Large numbers of people on occasion become highly energized about a narrow set of issues, feeling and acting as if in unison, creating a mass that erupts seemingly unannounced. Having done its work, the mass then dissolves, leaving dispersed individuals and residues of their collective action deposited as fresh layers on the scale of time, only to be followed by yet another surge of a different variety in another place.”

He added that these storms arise out of our shared dreams and anxieties. That is, individual choices aren’t just determined by rational facts; instead, our storms come out of facts framed within narratives buried deep within our minds.

All of this has led to what Sharma referred to as “The Visceral Market Hypothesis.” If that name sounds at least vaguely familiar, it shouldn’t be a surprise. It is no doubt meant to challenge the efficient market hypothesis, one of the key models of contemporary academic finance and one of the repositories of the market and economy as machine concepts.

In the preface and prologue of the "Book of Value," the author writes that academic finance took off in a deeply mathematical direction after the publication of Harry Markowitz’s paper “Portfolio Selection” in the early 1950s. That, in turn, led to the Modern Portfolio Theory and the efficient market hypothesis. Sharma lamented that these theories are unrealistic because they are “the atomistic, asocial, and undifferentiated individual; fixed preferences; and utility maximization.” They chase the hard sciences at the expense of real human experience. Investing, which had been a thoroughly human experience, was made into something like physics.

Out of that has come the idea of market efficiency, or a market that behaves like a machine. Sharma, though, asserts that markets can be better understood using “the smudgy lens of crowd psychology” than the “precision of high-order mathematics.” In taking that stance, he puts himself at odds with the finance departments of many business schools and academic journals.

As he winds up the chapter, he remarks that he not only sees himself as a contrarian, but as someone who hopes to “reconceive” investment education. This approach would be based on a new decision-making framework that responds to the inherent unpredictability of financial markets.

I believe it significant that Sharma is proposing a counter-theory to the efficient market theory. Many critics of academic finance have attacked it on similar grounds—that it does not capture important aspects of investing—but I don’t recall reading any challenges based on a comprehensive theoretical position.

The important thing about a theory is that it can be tested. Other researchers can try to prove it false, and that matters because a theory’s legitimacy is based in part on surviving challenges posed by other scientists.

As Sharma has written, the hard sciences essentially took over investing education in most business schools. That means thousands of students come out of business schools and other institutions believing in a defective approach to investing. The author would, in his words, "reconceive" investing education by adding the soft sciences to the hard sciences, including subjects such as psychology, sociology and history.

Charlie Munger (Trades, Portfolio)’s name doesn’t come up in this book, but I often thought of him as I read “Book of Value.” Munger, the Vice-Chairman of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), is as well known for the way he thinks as for his superior investing record. Among the ideas he advocates is the latticework of mental models, which refers to Munger's practice of learning about the core principles of many different disciplines. He has said before that you didn’t need to know everything about every subject, just the core ideas.

Like Sharma, both Munger and Warren Buffett they believe investing is more than just the numbers. As Munger once said, “People calculate too much and think too little.”


In chapter two of “Book of Value: The Fine Art of Investing Wisely,” Anurag Sharma continued to build a case for a more holistic view of investing. He argued that academic finance is too sterile because it lacks a realistic view of investors as humans, who have all kinds of emotions and psychological baggage.

To reconceive the idea of management education, he proposed a Visceral Market Hypothesis as a counter to the efficient market hypothesis from academia.

Disclaimer: This review is based on the book, “Book of Value: The Fine Art of Investing Wisely”, by Anurag Sharma, and published in 2016 by Columbia Business School Publishing. Unless otherwise noted, all ideas and opinions in this review are those of the author.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website

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