Does looking into people’s mindsets and examining their world views and motivations help explain a social psychology that is related to investing with shares and exchange traded funds (ETFs)?

A recent analysis has been based on social psychology and how this could have led the globe to the ultimate financial crisis that we are witnessing today, within financial markets and spreading out into social makeups. Robert J. Shiller for The New York Times reports that in 1934, the journalist Johannes Steel wrote a  book, “The Second World War,” which described the social psychology that laid the groundwork for global tragedy.

Steel was trying to peer into people’s minds and infer their actual world views and motivations — in part by examining prewar cycles of social provocation in Germany and Japan and Italy. Although he was off on the war timing, he had pinpointed many fundamentals concerning human nature. This “Theory of the Mind” defined by cognitive scientists as humans’ innate ability, evolved over millions of years, to judge others’ changing thinking, their understandings, their intentions, their pretenses.

In a nutshell, factors of human psychology may have led us to the financial meltdown of 2008. Although we cannot predict the future, a person who plans or advises should do do with the idea in mind that market nosedives happen, and nobody can predict them. In 1989, Lawrence H. Summers, now head of the president’s National Economic Council, also told a fictional story about a financial crisis that outlined a series of events and the ways in which investors would react to them. It all sounds remarkably similar to what’s happening today.

How did he do it? Both Summers and Steel were looking at the tenets of what is basic human nature and psychology. Our own nature can both help and hurt us.

One of the best ways ETF investors can protect themselves from their emotions is by having both a buy and a sell strategy. The better one becomes at subtracting emotion (both on the upside and the downside), the better the chance there is for success. We employ a 200-day moving average strategy to determine when to buy and when to sell.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.