The Looming Threat of Psychosis
An underestimated tail risk
This blog is not only about the markets but also about other subjects that I believe are, or should be, of interest to traders, investors, and market professionals.
Before you start reading, this is a caveat emptor: I am not a psychologist. What you will read here are my opinions, based on many years of experience working in several different areas with my background in science, philosophy, and technology.
I believe psychosis is becoming a major tail risk for the world. The National Institute of Health (NIH) offers what I think is an excellent definition of psychosis:
Psychosis refers to a collection of symptoms that affect the mind, where there has been some loss of contact with reality. During an episode of psychosis, a person’s thoughts and perceptions are disrupted and they may have difficulty recognizing what is real and what is not.
The “loss of contact with reality” is the interesting but also frightening part. Why? Psychotic people are not only those permabears posting on social media catastrophic scenarios for the markets daily, but they can also be those who rule the fate of many people, even whole countries, and ultimately of the world.
I started studying physics but quickly changed to engineering due to the ease of getting a scholarship back in the day. I met psychotic physicists. Then, I studied engineering, and I met psychotic engineers. Needless to say, my transition to finance exposed me to an even larger number of psychotic people. But there is nothing like social media; there, you see it all. Social media has provided a boost to collective psychosis.
As noted on the NIH website, psychotic people have “trouble thinking clearly and logically.” Yet, in my opinion, they can also advance because, among other things, they are very aggressive.
The tail risk for the world is that, in my opinion, psychotic people do not realize they need help but instead think their problems will be solved if they change the world in line with their distorted views of reality. They put a lot of effort into trying to convince everyone that their distorted view of reality should be the future.
In the last 20 years, I can think of several “psychotic episodes,” mostly in the technology sector. The tech sector attracts psychotic people because it offers keys to change. For example, we went through the psychosis period of a “space elevator,” a simulation connecting Earth and space. Some people thought it could be made a reality.
Then, we went through the psychosis episode of “The blockchain will solve all the problems of the world.” This theoretical but largely inefficient concept, when applied in reality, was the center of debate for many years. Along the way, many crypto scammers benefited from the psychosis.
Recently, we have transitioned to artificial intelligence psychosis. Distorted views of reality are used to justify hopes of an acceleration toward a utopian society where there is “plenty” for everyone. The basis for the psychosis here is that people who are thinking along these lines have some problems they believe will be solved if some machines take over and rule everything. This is where psychosis meets comedy but the situation is not funny at all. Many are convinced that if we displace millions or even billions from work, the human condition will improve—an oxymoron schema.
Usually, psychotic booms drive sectors of public markets, small or large. Recently, we saw AI infiltrating the tech sector and everyone rushing to declare obedience.
I will turn to another field, physics. There is a psychosis associated with trying to discover particles, also known as the “particle zoo”. In my opinion, this has slowed down progress, although it is a highly debatable thesis. Certainly, it has made a lot of money for companies that design accelerators. Why do I think this is a psychosis? Most people who are not familiar with physics think that particles are real entities. In reality, though, the “particles’ discovered are statistical inferences with a low p-value enough to support the null hypothesis that a certain model is true. No one has ever seen a particle. We only see trajectory traces on detectors and assume that these belong to some particles. Although rarely taught in undergraduate colleges, the underdetermination of reality by data is well-known in the philosophy of science circles.
Why did I mention physics and reality? Psychotic people have a strong conviction that they understand reality and how to change it. Let us cancel cash and move to Bitcoin. It's time to have an AI that can do the jobs of humans. Or, in politics, let us annihilate that country so we are safe. In economics, “debt levels do not matter."
Psychosis is an insidious tail risk for the world. I am not the one to decide how to deal with it; some people are qualified. The problem must be recognized first. Pragmatic science must try to educate society about the risks of some schemes that are presented as solutions to problems but are the outcomes of a psychotic state of mind, individual or collective, a distortion of reality. In a world with advanced technology and weapons, we cannot afford to overlook these problems.