“Colors, like features, follow the changes of the emotions” – Pablo Picaso
Human psychology is augmented by modern life via a continuous positive feedback loop. (And one must remember that if not for the human psyche, we would be neanderthals). What else is there that sets man apart from monkey – proclivity for tree climbing notwithstanding? Observe the sociopath; one who is incapable of feeling and unable to exhibit emotion, a distinctly inhuman being, masquerading in the skin-sack of human form. Given a thick coat of fur and tough skin, little would be left to distinguish such a beastly creature from a member of the ape family. It is with emotion as the primary driving force that humanity adapts to the modern jungle. Mind melding with steel we have adopted unfamiliar dwellings and continuously altered our surroundings to fit our changing needs. Perhaps the most obvious example of human psychology assimilating modern life can be found in an all too commonly overlooked invention, the traffic light.
The traffic light was invented in 1877 by Garrett Augustus Morgan. An African American inventor and businessman, Garrett Morgan, like many emotional investors, was well ahead of his time. Born in Claysville, Kentucky, Garrett Morgan was the son of former slaves and only received up to a sixth grade education. At age 16, with the educational equivalent of a middle-school drop-out, Garrett Morgan moved to Cincinnati, Ohio on a hope and a prayer. The observant reader might stop now to consider that Garrett Morgan was one of the first modern practitioners of emotional investing. How, under normal circumstances, could someone so disadvantaged be so in tune with their surroundings?
Upon moving to Cincinnati, Garret Morgan lived an unequivocally unremarkable life. In search of greener pastures, Morgan followed his heart and migrated to Cleveland, Ohio. For nearly 17 years, Morgan sloughed away, repairing clothing for the more privileged. It wasn’t until 1922, at the age of 45, that Morgan filed US Patent No. 1,475,024, the first, three-signal, traffic light. While inventions such as safety hoods, hair straighteners and the self-extinguishing cigarette rank among Morgan’s greatest achievements, the traffic light is arguably the most ubiquitous of his accomplishments. It should be obvious that while in hindsight such an elegant life saving device seems obvious, at the time, Morgan tapped into a veritable jet stream of the collective human consciousness. Previous traffic lights at the time only consisted of “Stop” and “Go”. Indeed, Garret Morgan’s greatest innovation was the yellow light; “Slow”.
“Traffic signals (…) are just rough guidelines” – David Letterman
The parable of traffic light explains the green versus red mentality applied to most independent trader’s personal investments. See, most traders view the market as either green or red. If personal investments are up for the day, the market is green. If they are down, the market is red. More generally, if an index, such as the S&P 500 is trading higher, an investor might comment that the market is “green”, and if it is lower “red”. Green means good. Red means bad.
That’s fine, right?
…But where is the yellow?
Where is the “slow” signal? There was a reason why Garret Morgan’s invention caught on where others failed. Morgan’s stoplight was not the first by any means, in fact, his invention could be considered a laggard in the field of professional traffic safety considering cars were invented in 1885. In fact, the very first traffic signal was invented decades before the first automobile. In late December of 1868, a gaslit traffic signal, the first of its kind, was hung in London. This traffic signal was meant to guide pedestrian and equestrian traffic in a safe manner. However, this traffic signal was short-lived, as only a month into its service, it exploded in a glorious failure, killing the policeman whose job it was to operate it.
What these early traffic signals lacked and what the modern traffic signal as envisioned by Garrett Morgan had was an innate understanding of their ultimate audience; humans. Perhaps early traffic signals were successful when horses ruled the roads. Horses, as many know, if well trained, will follow instructions to the “T”. A horse will stop or go as they are told so as to acquire the carrot and avoid the dreaded punishment stick. Their emotional range extends only so far as the carrots they munch on and the sticks they neigh away from. That being said, human emotions are not equestrian, they are complex and changing. The evolved human does not respond well to simple stop and go commands. Being bridled with a stop versus go dichotomy throws our minds for a loop and as history has shown us, humans revolt against uncomfortable things.
Garret Morgan recognized and attempted to reconcile this discord, as humans began to take back their autonomy through the invention of the automobile. Suddenly, simple instructions, being told when it was permissible to pass or not, could no longer control our means of transport. Independent emotional actors were behind the wheel, and they demanded a third option, an option specifically tailored for the complex man; slow. Seizing upon this opportunity, Morgan laid the groundworks for an empire of traffic safety and control, his yellow light permanently changing the way humanity viewed automobiles.
Like driving a car, financial investments are not, in a psychological sense, stop or go. That is to say, Humans innately demand more than the binary positive or negative, yet, the words “green” and “red” are still too often heard on a trading room floor. Somehow, this artificial construct, this artificial restraint, has been indoctrinated into the culture of investing. It’s no wonder then that the vast majority of retail investors fail. How could one hope to succeed in a game that is rigged against their very nature? How could a man driving a car ever hope to compete in a horse’s world?
This binary signal mentality is at the root of the cognitive dissonance many investors face. When one’s portfolio is reduced to being either red or green, individual freedom and human autonomy is completley disregarded. What is missing from this binary mentality? This maximum security prison-esque red-green world-view that traps(shackles down) so many investors. What is missing, if not obvious already, is the third choice; the yellow signal. While even the most novice of investors has complained that their position is in the red, or bragged that they were momentarily green, never has there been a word to describe an in–between.
Why is it that traders do not describe their positions as yellow? “I am yellow today”, or “The market is yellow today” are both phrases that have never been uttered on the trading floor of the New York Stock Exchange. Well, Garret Morgan could see that the yellow light was missing. He knew something that the greatest inventors of his age did not. He knew that without compassion, common humanity, and true kindness, all necessary and essential characteristics of any successful human endeavor, stop lights were doomed to fail.
When talking about your investment performance, instead of “I’m green today” or “The market is red” try, “I’m yellow today” or “The market is yellow”.