While few go to the obsessive lengths of Max – which includes a self-administered trepanning, a disturbing scene that I’ve never forgotten – huge amounts of time and energy are spent attempting to explain and predict the workings of the stock market, as though there is indeed a key to unlocking its secrets. Pi was my first introduction to the world of Fibonacci sequences and golden spirals, which as Max discovers can be found everywhere in nature and the stock market, and which do in fact remain a staple of much of today’s technical analysis. These patterns are also, as the film explores, the basis of some religious mysticism – and indeed, many question whether such analysis is very much more than a belief system; as Michael Taylor notes on page 36, trading techniques work simply because everyone believes the same thing.
There are those, of course, who instead attempt to couch investment in a more rigorous analytical framework. And there are all sorts of fancy sounding theories and acronyms that suggest they have succeeded, not least the efficient markets hypothesis (EMH) but also related things such as modern portfolio theory (MPT), or equity risk premia, or asset correlations. Once again, it is all about the numbers, this time suggestive of a scientific process that can unlock investment success with complicated equations.
The problem, of course, is that markets are about much more than numbers. In fact, all those figures represent is the outcome of the individual decisions and actions of millions, if not billions of people – actions that can break correlations, distort risk premia, and are, among other factors, pushing MPT far beyond its limits. And it is partly why the EMH, the idea that asset prices always reflect all available information, remains just that: a theory, and one with many, many high-profile critics. Even Eugene Fama, whose work on EMH won him a Nobel prize, has conceded that “poorly informed investors could theoretically lead the market astray”.
And therein lies the rub – that attempting to codify investing into a science has largely failed to account for the often baffling behaviour of human beings in the real world, whether they’re running companies or investing in them. That’s why, as faith in the EMH fades, so more and more attention is being paid to the psychology of investing. But while that might explain the market madness we discuss in this week’s cover feature, it will never prevent naïve investors forgoing common sense in favour of hot stories that turn out to be little more than pie in the sky.
