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Sahil Alvi
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Sahil Alvi is a management consultant, economist, intra-preneur, and writer. Sahil lives and works in Dubai. He is strategy consultant with a global consulting firm where he leads the firm’s strategic and business development initiatives including origination of strategies and opportunities for... More
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The Essentialist by Sahil Alvi
  • Analyses of Psycho-Social Indicators To Inform Investment Strategies 0 comments
    Aug 3, 2010 6:25 AM

    The ebbs and flows of economic fortunes of nations and companies have a direct correlation with the social and psychological "health" of the people who inhabit those nations and corporations.

    It is common knowledge that dysfunctional societies (where crime rates, divorce rates, teenage pregnancy rates, suicide rates, high-school dropout rates, illiteracy rates, etc. are high) also have low levels of productive economic growth (GDP per capita); high levels of unemployment and under-employment rates; low, flat or negative real wage growth rates, etc. It would be interesting to explore whether the psycho-social indicators precede economic indicators or vice versa.

    We know, as a self-evident truth, that psycho-social maladies result in economic stagnation and even decay for a vast majority of the population whose economic fortunes are tied to the geographies or corporations under consideration. We also know that individual or family financial stress leads to many mental and psychological health conditions such as insomnia, depression, hypertension, heart disease, diabetes, low self-esteem, etc. We know that national economic malaise leads to several social problems such as increased destitution, drug use, prostitution, suicides, and so forth. 

    What comes first and what follows? What is the cause and what is the effect?

    Perhaps, George Soros' "Theory of Reflexivity" applies to this situation. Psycho-social turmoil leads to economic instability -- which in turn -- leads to more psycho-social turmoil with an ever greater pitch and velocity in a continuous downward spiral that can be stopped and reversed only by significant, firm and far-reaching policy mechanisms such as Keynesian-style deficit-spending economic stimuli to jump-start productive activity within an economy.

    There is a certain ecosystem in which humans thrive, grow, and prosper. Such an ecosystem is defined by the opportunity to the entrepreneurial, the clever, the industrious, the agile, the innovative, the adaptive, the meritorious individual or company to reap the rewards of their labor in a relatively safe, fair and equitable society. Conversely, in an environment antithetical to promoting merit -- innovation, entrepreneurship, value creation and the capitalist ideal are more or less suffocated and frustrated.

    There are numerous examples of the above stated phenomena:

    Just one such example is:

    Over several years, Colombia's decline across a wide gamut of economic indicators can largely be attributed to the descent of Colombian society into a brutal and unrelenting civil war. Or was it the other way: Did civil strife drive away investors and the profit motive for sharp, industrious, capitalist-minded individuals?

    Question is: Does a strong moral fabric predict positive economic performance -- both for the individual and for the society. In effect, does it pay to be good -- not just in the hereafter -- but also in the here and now?

    More concretely, can one develop profitable trading strategies based on the psycho-social "performance" indicators of economies, and even, companies. Can we, for example, see a conclusive and positive correlation for a specific company where strong corporate social responsibility "performance" results predict strong corporate earnings and subsequent stock performance...over the long-term...factoring out any potential short-term "noise" or "bump" that comes from the PR-spawned corporate announcements about CSR initiatives?

    There are numerous quantitative analyses that can be run to track asset (stocks, bonds, derivatives, currencies, real estate, etc.) performance vis-à-vis psycho-social indicators. Infact, if proprietary traders and hedge funds are not doing this already, a new school of investment philosophy could be developed where the study of psycho-social indicators across various economies and companies would inform investment and trading decisions.

    ...to be continued and detailed out further.

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