Dawn of Behavioural Finance, 1688
- Title: Dawn of Behavioural Finance, 1688
- Author: Dr Vasileios “Bill” Kallinterakis – Associate Professor in Finance, Durham University Business School
- Published by: Cambridge Scholars Publishing, November 2024
- Where to find it: https://www.cambridgescholars.com/product/978-1-0364-1340-8
It’s common for the artists of the world to be inspired by the actions and ideas past. Architects might look to recapture the majesty of Roman pillars in their building designs, painters and poets may seek to recapture the magic of the Pre-Raphaelite Brotherhood, fashion designers might take their lead from Elizabethan collars or Grecian tunics when sketching out their Fall fashion lines.
A wonderful tribute to times gone by? A homage to those admired souls who sought to leave their mark on this world? Certainly. But it also reminds us that, perhaps, there are no new ideas anymore.
Whilst it’s acceptable, even applauded, in artistic spheres to use the past to inspire the future, in other industries the opposite is more likely to be true. The past is to be learned from, improved upon and, in many cases, never to be repeated.
So, when it comes to international business relations, trade, finance, deal-making and economics, there are few business leaders seeking to model their actions on those of civilizations gone by.
…Or so you’d think.
Apparently, when it comes to the art of behavioural finance, it seems the ways in which we operate today aren’t too dissimilar to how policymakers and regulators made their decisions many years ago – at least, according to the latest release by Dr Vasileios “Bill” Kallinterakis of Durham University Business School.
In exploring this notion, Bill certainly has the experience – both industrial and academic – to back it up. An Associate Professor in Finance, Bill has published over 40 papers in leading international peer-reviewed academic journals, and has edited several more since 2010. In industry, his work and insights have been presented to and used by global regulatory bodies. His focus lies in behavioural finance, emerging markets investment and finance volatility.
His new book “Dawn of Behavioural Finance, 1688” traces the origins of behavioural finance as far back as the 17th century and reveals how financial decision-making is wrought with the same biases as those experienced some 400 years ago. His work offers up a startling, sobering conclusion to readers; “Although humans have the capacity to learn from their mistakes, the fact that the same biased behaviours persist over the centuries denotes that we either fail to learn, or are not bothered to.”
So how do we break the habit of a lifetime – or several lifetimes for that matter? We sat down with Bill to find out more…
Can you tell us about the inspiration behind your new book? What motivated you to write it?
I first came across Joseph de la Vega’s “Confusion of Confusions” (1688) some years ago, while researching for historical evidence on behavioural finance. What struck me immediately upon reading the book, was how detailed a description he provided of investors’ behaviour.
The more I went through it, the more I began to realize that key behavioural concepts developed in the 20th century that we research on, and teach in behavioural finance courses (such as e.g., herding, investors’ disagreement, disposition effect and sentiment) were present in capital markets since the 17th century. This made me realize that behavioural finance needs to be backdated, and that a scholarly analysis of Vega’s book based on the behavioural finance paradigm was necessary.
This analysis culminated in the “Dawn of Behavioural Finance, 1688”, whereby I demonstrate for the first time that Vega constitutes the precursor to behavioural finance – whose roots, thus need to be traced to the 17th century.
What are the key takeaways or main ideas that readers can expect to find in your book?
The key takeaway from my book is that we are not as evolved as we think. Vega describes investment behaviours from 17th century’s Amsterdam that are remarkably similar to those encountered in modern stock markets. Since Dutch investors in the 1680s are shown to be subject to the same biases in their decisions as 21st century ones, this suggests that we keep making the same mistakes.
Although humans have the capacity to learn from their mistakes, the fact that the same biased behaviours persist over the centuries denotes that we either fail to learn, or are not bothered to. This is particularly interesting, considering that investors nowadays have immensely advanced (compared to Vega’s era) technological tools at their disposal – tools, which would be expected to render them more sophisticated than their 17th century peers.
The fact that investors’ behaviour reveals remarkable similarities over so many centuries, only helps confirm that “nothing is new under the sun”.
Who is the target audience for your book, and how do you believe it will benefit them?
The book is geared toward several audiences. First, it appeals to researchers in behavioural finance/economics, as it offers novel historical insights into the persistence of behavioural patterns; for those teaching behavioural finance/economics courses, it would further serve as a useful recommended reading for their students.
Second, the burgeoning self-help literature in popular finance suggests that there exists a large enough audience of non-experts who wish to educate themselves about human behaviour in the investment domain. This book will be of interest to them too, since it will reveal to them how persistent human errors in investing can be (even across several centuries).
Third, it would be relevant to financial advisors/psychologists, as it would contribute to their interactions with their clients by helping the latter view their investment errors less negatively (given how recurrent they appear over the centuries), and, hence engage with them in more constructive ways.
What do you think makes this topic particularly relevant or timely in today’s business world, or for the years ahead?
Recent decades have witnessed the push for democratization of investing, by focusing on aspects including financial education/literacy (e.g,, via social media or apps), accessibility to investment products (e.g., via commission-free online platforms or fractional trading) and fintech tools (e.g., robo-advisers).
“The fact that the mistakes we make in trading in the 2020s are the same our ancestors made in the 1680s denotes the need for a shift in the behavioural finance debate. What good is it arguing that bias X or heuristic Y exists in one’s behaviour, when the same bias/heuristic was recorded over 300 years ago?”
– Dr Vasileios “Bill” Kallinterakis
Nowadays, more than ever before in history, individuals have unprecedented access to a host of investment options; although this opens unlimited opportunities for them, it also comes with risks, given the role of biases in their decisions. This raises the need for educating investors on how to treat their mistakes.
Much of the financial self-help popular finance literature focuses on pinpointing human errors as “irrational,” thus creating a sense of regret/guilt about them. A more constructive approach would be to demonstrate to investors that errors are normal, and help them discover/experiment with different ways to learn from them. Dawn of Behavioural Finance, 1688 contributes to this by showing that investment errors are normal, simply because we keep reproducing them over the centuries (which suggests the need for improvements in our learning).
Can you discuss any specific case studies or real-world examples from your book that illustrate its principles in action?
The book shows how several modern-day behavioural finance concepts (e.g., biases/heuristics) were reflected in 17th century investors’ behaviour, demonstrating how long-standing such concepts are in trading and how predictable they can be. A very simple example of this pertains to fractional trading (namely, trading fractions of assets, instead of whole units).
During the 1680s, Dutch investors could buy one-tenth of the Dutch East India Company’s share; known as ducaton, this subdivision amplified speculation, with ducatons being systematically valued at more than a tenth of the whole share’s value. This was a clear case of overpricing, implying arbitrage opportunities (e.g., investors could trade both fractional and whole shares based on their price-differentials).
Fast forward to the 21st century, we are witnessing (as part of investing democratization) a resurgence in fractional trading (e.g., the case of investors on Robinhood and other platforms that have allowed fractional trading since 2019). Research reveals that fractional trading in the 2020s motivates excess volatility and trading frenzies.
As a result, we are observing a replay of the 1680s within a much more advanced technological environment, with 21st century fractional traders being as speculative as their peers over 300 years ago; such speculation was perfectly easy to anticipate, since fractional trades (similar to Vega’s time) tend to attract less sophisticated investors, of modest financial means.
How does your book add to/expand existing discussions on this topic?
Dawn of Behavioural Finance, 1688 backdates behavioural finance by three centuries, as it demonstrates how biases and heuristics established scientifically in the 20th century emerge clearly enough, as early as 1688, in Confusion of Confusions. In doing so, it confirms that these behavioural forces are truly unremarkable, being documented since the dawn of equity trading – and, hence that the main issue in investors’ behaviour is not irrationality (reflected through our errors) per se, but rather the absence of learning (from those errors).
The fact that the mistakes we make in trading in the 2020s are the same our ancestors made in the 1680s denotes the need for a shift in the behavioural finance debate. What good is it arguing that bias X or heuristic Y exists in one’s behaviour, when the same bias/heuristic was recorded over 300 years ago?
If anything, it is like reinventing the wheel; therefore, this suggests the need to move from simply identifying pitfalls in human judgement, to proposing tools on how to learn from them.
Can you provide some practical tips or strategies from your book that readers can immediately apply to improve their business or career?
- Tip 1: Your investment errors are not as astonishing as you think! Investors 300+ years ago made the same mistakes you are making! Human nature does not change; it must be accepted for what it is.
- Tip 2: If investors 300+ years ago made the same mistakes we make today, we are probably not infallible – and neither are you, so try to moderate your overconfidence when investing!
- Tip 3: If investors over the centuries keep making the same mistakes, maybe it is time to start learning from them, instead of stressing ourselves out trying not to repeat them!
- Tip 4: Look to previous centuries’ books for ideas or tips. People from those eras had no access to our technology, and had to rely more on observation and reflection (they were not staring at screens!).
Finally, what book written by another author would you consider essential reading for your audience and why?
Historical finance texts (similar to Confusion of Confusions) have a role to play in contributing to our understanding of investors’ behaviour – denoting the need for a more careful screening of older literature on investments.
I would suggest George S. Clason’s “The Richest Man in Babylon”, Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds”, and George C. Selden’s “Psychology of the Stock Market”. These are books that require zero background in behavioural finance, and should appeal to a broader audience.
“Dawn of Behavioural Finance, 1688”, by Dr Vasileios “Bill” Kallinterakis – Associate Professor in Finance, Durham University Business School is available to buy now via Cambridge Scholars Publishing.
By, Kerry Ruffle
Interested in this topic? You might also like this…