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Costly conditioning: Crypto, Pavlov’s dogs and celebrity bellringers

 

In modern life, we are subconsciously conditioned to behave in certain ways. Without knowing it, emotions (both good and bad) are often influenced by learned association – whether fear of heights because of a past traumatic experience, or instinctively reaching for your smartphone when you hear a ringtone – writes Charles White-Thompson 

 

Conditioning is a powerful and long-established tool used by advertisers, marketers and celebrities, seeking to use triggers to elicit a specific emotive response to make someone behave in a certain way. While an effective tool, made more powerful by a constant stream of information beamed into our pockets through our mobile phones, the theory of classical conditioning is nothing new. It harks back to Russian physiologist Ivan Pavlov’s famous work, in which he discovered that by consistently ringing a bell ahead of feeding his dogs he conditioned them to associate food time and eating with the bell, rather than sight or smell.

 

The rise of the financial influencer

 

In financial markets, the potential danger of conditioning is an important subject we, as an investment platform, have sought to draw attention to. Over the past two years, there has been a surge in interest from retail investors looking to make returns on their portfolios. However, with increasing participation has been a rise in firms trying to capture novice investors’ capital by luring them to use their products or invest in certain assets. Companies have been quick to vie for attention, enlisting famous faces for endorsements to lend credibility and evoke feelings of aspiration and security.

The role of influencers, including Kim Kardashian, has rightly drawn the attention of regulators. In 2021, Charles Randell, the FCA chair, called for greater powers against risky crypto ventures to stem the influx of influencers appealing to their millions of followers. A class action lawsuit was even filed against Kim Kardashian and Floyd Mayweather in what was allegedly a ‘pump and dump case’ in EthereumMax cryptocurrency.

Informed, objective decisions are at the heart of good investments. While regulators have fired a warning shot at celebrities looking to throw their weight behind the latest investment trend, there are still many actively promoting complex and risky instruments. While often well-meaning, endorsements are conditional stimuli, bypassing the seemingly boring complexity and risk of an instrument and encouraging the audience to think positively by association with status, wealth and success.

A critical message for investors, new and experienced, is that successful investing is not just about managing your actual capital or money, it is about protecting your emotions or mental capital. It is not necessarily a bad thing to be one of Pavlov’s dogs, the key however is to recognise and be aware of influence – knowing the bellringers – but also to always be critical of the information presented to you. Behind the Hollywood smile presenting the latest market opportunity is a sophisticated and potentially risky instrument that could have a real-world impact on your savings. Do not be distracted – there is no substitute for thought and due diligence.

 

Critical thinking in a new market

 

This year has been very challenging for financial markets, with a collapse in different financial instruments including many technology names, cryptocurrencies and even the bond market. Careful consideration is therefore more important than ever, as we cautiously navigate a market laden with risk.

In a difficult new environment, investors should look beyond the obvious bellringers in cryptocurrency. Traditional wisdom tailored to a past age of relative financial stability – with consistently low interest rates, steady inflation and booming stock markets – different to the stormy markets we see today.

Those that seek to influence – whether that be YouTubers, celebrities or even traditionally revered institutions like the Federal Reserve – do so based on their experience of the past rather than knowledge of the future. But we are in a new territory now, which is challenging the status quo, and the perceived wisdom of even the most revered institutions is not guaranteed to hold indefinitely.

“Buy the dip”, “stocks only go up”, “60/40 portfolio construction is best” are all examples of common phrases designed to influence investors to invest in a certain way. Critical thinking is one of the most powerful tools in an investors’ inventory and is more important than ever. Decisions should be informed by considered research and the core academic principles of proper risk management and diversification.

As markets become more unpredictable, there will continue to be more casualties – both amateur and professional. How investors make investment decisions and who they listen to for advice and inspiration is up to the individual – just be careful to listen for the quiet ringing of bells.

 

Charles White-Thomson is CEO at Saxo Markets

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DIY Investor Magazine Issue 34

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