Test for Inhuman Market Forces

Humans obey prospect theory. The Wikipedia page has a nice summary, “losses hurt more than gains feel good.” Naturally, humans apply this principal when investing in the stock market (see here). We would expect the stock market to a behave according to prospect theory, given that market supply/demand is the sum of individual investor supply/demands. As we increasingly rely on automation of financial decisions, the stock market may reflect deviations from what prospect theory would predict, if the algorithms are not programmed with prospect theory taken into account. Deviations over time from prospect theory in the stock market (I think) would reflect one of two things – algorithms are making more financial decisions, or more weirdly – humans are becoming less human.

Coordination problems like those described in Meditations on Moloch are not as obviously visible in the stock market, but they could likely been seen through deviations as well. In simulated prisoner’s dilemma’s, humans tend to cooperate more frequently than so called “rational choice theory” models would predict. In a hypothetical future where more contracts run on blockchains, we may be able to see a clearer picture of societal level cooperation (or defection), and take steps to increase or decrease cooperation where necessary.

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