Islamic State as hypermodern, momentum traders

Following up on my earlier post on Syria, Alexander Burns sends me this very interesting email:

Dear Professor Cowen,

Thanks for your reply tweet regarding your Marginal Revolution post on modelling Syria / Islamic State. I enjoy your books and blog.

I’m writing a thesis at Australia’s Monash University that synthesises Jack Snyder’s work on strategic culture / strategic subcultures with Martha Crenshaw and Jacob Shapiro’s work on terrorist organisations. Two recent presentations:

1.       Mid-Candidature Review Panel slides: http://www.alexburns.net/Files/MCR.pptx

2.       Monash SPS Symposium Presentation on Islamic State: https://t.co/Ju11zvFBSP

Several weeks ago I discussed Islamic State with my Mid-Candidature Review panel whilst also reading Gary Antonacci’s Dual Momentum Investing and the Dan Zanger interview in Mark Minervini’s Momentum Masters interviews book. It struck me that Islamic State were like momentum traders for several reasons:

(1) Islamic State have grown rapidly in foreign mujahideen; control of parts of northern Iraq and Syria; and have grown in power projection capabilities. This dynamic is very much like successful momentum traders have worked in a financial markets context using Jesse Livermore’s trend-following approach, William O’Neil’s CANSLIM system, or Paul Tudor Jones II’s speculative activity in Eurodollar and foreign exchange markets.

(2) Islamic State have to-date survived aerial bombardments and have exploited a range of weaknesses in their enemies (e.g. jihadist beheading videos as psychological warfare against the Iraqi Army; Turkey’s borders with Iraq and Syria; and alliance manoeuvers around the Assad regime and the Syrian civil war).

(3) Events like the capture of Mosul, Iraq; combat experience in the Syrian civil war; involvement in oil black markets; and the proclamation on 29th June 2014 of a worldwide caliphate have momentum-like qualities, particularly in terms of creating the psychological climate for nation-building.

(4) Islamic State has outperformed their peer jihadist groups in their growth and ideological impact.

(5) Islamic State’s use of social media to amplify ideological propaganda is more hypermodern and sophisticated than other terrorist groups.

(6) Their rapid growth has led to spillover effects such as the refugee crisis in Europe.

(7) The Western media’s concerns about Islamic State — and their cultural impact — feel like the 1998-2000 part of the 1995-2000 dotcom speculative bubble, albeit in a counterterrorism context.

(8) Your perspective on Islamic State as hypermodern may also be relevant to the proto-Marxist work on accelerationism and postcapitalism (Nick Srnicek and Alex Williams’ Inventing the Future; Steven Shaviro’s No Speed Limit; and Benjamin Noys’ Malign Velocities): contemporary terrorist groups operate in a different political / technological / ‘average is over’ context.

With his permission I reproduced the email as is, though added in a few extra paragraph breaks for ease of reading.

Comments

Pundits routinely use terms like "momentum" in these contexts, but how can it be much more than a folk-theory? That is, how can we separate "momentum" in the empirical financial market sense from unfalsifiable just-so stories?

Importantly, in the case of markets we're talking about asset *price* momentum. Prices rise and fall in due to the subjective valuations of market participants (over or under reaction, etc). That makes it easy to stray from "fundamentals". There's no analogous market price for states or groups like ISIS. There are only micro fundamentals. (Well, maybe Western media coverage of ISIS begets more media coverage, but that has a trivial effect on ISIS's ability to actually hold and take new cities compared to access to money and artillery.)

Likewise, to my understanding financial momentum is about price movements, not movement in a corporation's micro fundamentals. Maybe the last 6 months of stock appreciation in APPL has predictive value for the next six months, but the sales of the iPhone 6 needn't predict the sales of the iPhone 7 in quite the same way.

So what are we doing then? Taking a widely used folk theory and reifying it with a specious analogy to finance? Don't forget the finance concept is itself a reification--a metaphor plucked from physics--to describe a reliable aggregate macro-behavior with opaque microfoundations.

"maybe Western media coverage of ISIS begets more media coverage, but that has a trivial effect on ISIS’s ability to actually hold and take new cities"

Precisely. Someone read a book about some topic and is now putting 2 and 2 together. In this case the book's content and the Syrian conflict. Wait for next January's analysis of my own about "how ISIS's demise is like my holiday-pounds-losing".

Sam: (i) price momentum in financial markets rely on behavioural biases, persistence, and underreaction/overreaction dynamics (momentum investment manager Gary Antonacci - who clearly understands the "opaque microfoundations" involved) --- these biases also exist in counterterrorism / national security policy; (ii) it is possible to develop event arbitrage / risk arbitrage models for the impact that groups like ISIS have on particular financial markets, such as oil; (iii) recent academic work on strategic culture has gone beyond your 'folk theory', 'specious analogy' and 'unfalsifiable just-so stories' description (in his 1993 PhD and 1995 book 'Cultural Realism', Harvard's Alastair Iain Johnston advanced a Popperian falsifiable model); and (iv) analogical thinking from different areas can be useful in theory-building along with communal verification.

(i) "these biases also exist in counterterrorism / national security policy " - on an individual level, but not between organisations/states. the momentum theory focuses on price levels. Prices of standardized goods. Conflicts between countries or wanna-be countries are not exactly like a transparent regulated market (for example a "stock market") where every shot fired equals a buy-/sell-order. On an individual level such bias may develop, but means nothing if the other side is just bringing in the bigger guns. Which is exactly what you can see in Syria. Momentum as behavioral effect does have influence on the individual's perception. Who dies or not and who holds which piece of land though, is not a question of momentum theory.

(ii): ISIS had exactly 0 % impact on Oil

(iv): Yes absolutely. But "analogical thinking from different areas" is at least as likely to create and push unfunded biases itself.

Alex from G:

(i) Biases can exist in the senior leadership, strategy formulation, and resource-allocative processes of organisations. Momentum trading in financial markets focuses on cross-sectional variations in returns, behavioural biases (e.g. anchoring and confirmation biases), herding, and overreaction. The price levels you mention are a result of these microfoundations and relate more to areas like order book dynamics in market microstructure and moving average models in technical analysis. I use the momentum trader analogy to describe Islamic State's persistence over time (compared with more short-lived terrorist groups); rapid growth; and outperformance of peer jihadist groups. Hence the interesting parallels between momentum trading as an investment strategy and current observations about Islamic State.

(ii) I've watched oil markets for several months using a ThomsonReuters Eikon system: Islamic State has been considered as a risk factor in Iraq, Syria, and Turkey black market oil supplies. This fits an event arbitrage / geopolitical risk strategy.

(iv) De-biasing strategies can be used with analogical thinking. For example, Yuen Foong Khong's work on Vietnam War decision-making.

"(ii) I’ve watched oil markets for several months using a ThomsonReuters Eikon system: Islamic State has been considered as a risk factor in Iraq, Syria, and Turkey black market oil supplies."

What is the total volume, in barrels per day, of "Iraq, Syria, and Turkey black market oil supplies"?

Mark: Any estimative assessment of black market oil supplies would need to consider the information gaps involved. A Bayesian approach might work. My original point was that Islamic State did have an observable impact as a risk factor. They also had an impact in terms of market rumours - which can lead to shifts in market volatility and price overreaction. For an example, see Leah McGrath Goodman's book The Asylum: Inside The Rise and Ruin of the Global Oil Market (New York: HarperCollins, 2011) about how geopolitical risk events affect global oil markets.

Excellent response sam. I agree with nearly every word.

Jesse: as I pointed out to sam - momentum strategies involve more than the price appreciation that he describes. There are also often changes in the companies or organisations that experience momentum-like growth. For instance, new strategies that are implemented or a higher return on equity.

On a Straussian level this post is a good argument against graduate school.

Ha ha. सं गम कापळाती ल साहित्या साहि never changes त्या पळाती लत त प, more intellectual rigour.

Thats the only level in which it contains any kind of good argument.

The remark about paragraph breaks is the tipoff.

Zeitgeisty: Straussian truth-sensing would require you to address what I wrote --- and the recent presentations to graduate school I posted links to --- rather than to make snarky comments about email formatting / the graduate school experience.

Are you saying that "Straussian reading" is a real thing and not just an internet meme like cat pictures?

In that case, it is possible that some of us have been doing it wrong.

why would he do your work for you? Just go ahead and get your paper from your paper mill, make sure to add PhD to all your business cards too. Maybe even Dr. Alex Burns, PhD. To really hit the point that you really are special.

Don't trust anyone who goes to Monash. Trust me, I went there.

Nonsense. It is well known that they are actually a Baudrillardian hyperreal simulacrum.

So, then, a couple reverses and they'll go broke quickly? Or does this just mean we need a Terrorist Futures Market?

bellisaurius: There are at least two known attempts to create a "Terrorist Futures Market": (i) DARPA's Total Information Awareness projects on geopolitical risk; and (ii) the StratCap hedge fund proposed by George Friedman for the geopolitical risk firm Stratfor. Islamic State also could be possibly antifragile as former options trader Nassim Nicholas Taleb has defined it.

nigel: The key insights of comparing Islamic State to momentum trading are the following:

(i) Islamic State has grown rapidly (in members, resources, and power projection) and persisted over time - despite efforts to stop it - and has grown beyond other peer terrorist groups.

(ii) These insights on rapid growth and persistence over time can be modelled using insights from momentum investing (and other areas).

(iii) Both areas involve behavioural, cognitive and decision biases.

Hence the comparison is not jargon as you claim.

It's possible to translate these insights into normal language and into geopolitical concepts. It's also worth exploring how two different domains might intersect to reconceptualise how a group can be understood.

My original post did mention the "dire humanitarian crisis" of refugees. In your scenario if search theory can help to find and save survivors then why shouldn't it be used?

"De-biasing" goes beyond jargon to deal with anchoring, confirmation, disposition effect and other significant biases. My PhD work includes a protocol to deal with these issues (referencing the work of Daniel Kahneman and Richard Thaler in behavioural economics; and Robert Jervis and Gregory Treverton in the psychology of intelligence analysis).

Finally, as a PhD student I am not playing ""disinterested" intellectual games" as you suggest.

Cool info, thanks!

Does this post do anything except use an inapt jargon to discuss the problem? Does this help us understand the subject better than a normal vocabulary would? I doubt it. "De-biasing" is only present to the extent jargon obscures the subject. I think geopolitical concepts and normal language are much more relevant and useful here than finance theory.

At the risk of showing my "bias": is it bad taste to play "disinterested" intellectual games with a dire humanitarian crisis? Like next time there is a tsunami that kills a hundred thousand people in Southeast Asia, will we talk about how search theory can be used to model how survivors look for scraps of food to stave off starvation?

nigel: The key insights of comparing Islamic State to momentum trading are the following:

(i) Islamic State has grown rapidly (in members, resources, and power projection) and persisted over time – despite efforts to stop it – and has grown beyond other peer terrorist groups.

(ii) These insights on rapid growth and persistence over time can be modelled using insights from momentum investing (and other areas).

(iii) Both areas involve behavioural, cognitive and decision biases.

Hence the comparison is not jargon as you claim.
It’s possible to translate these insights into normal language and into geopolitical concepts. It’s also worth exploring how two different domains might intersect to reconceptualise how a group can be understood.

My original post did mention the “dire humanitarian crisis” of refugees. In your scenario if search theory can help to find and save survivors then why shouldn’t it be used?

“De-biasing” goes beyond jargon to deal with anchoring, confirmation, disposition effect and other significant biases. My PhD work includes a protocol to deal with these issues (referencing the work of Daniel Kahneman and Richard Thaler in behavioural economics; and Robert Jervis and Gregory Treverton in the psychology of intelligence analysis).

Finally, as a PhD student I am not playing “”disinterested” intellectual games” as you suggest.

Terrorists, by definition, try to scare people. An efficient way of doing this throughout human history is through violent public spectacle. In 2015, the public is online. What is new or clever here?

Exactly. Somehow the mere fact that they live in the 21st century makes them "hypermodern."

Pongogogo: Islamic State's innovations include establishing a quasi-state structure (noted by Jessica Stern and Loretta Napoleoni amongst others); its use of psychological warfare to exploit armed forces and alliance structure weaknesses; and its enactment of jihadist strategic thinking. Bruce Hoffman in terrorism studies promoted the "violent public spectacle" thesis.

Mark: The fact that Islamic State lives in the 21st century - and thinks / acts in 21st century ways - is significant when trying to understand them as a contemporary terrorist group. They are not as some conservative analysts have described simply medieval thinkers in a modern world.

« Islamic State’s innovations include establishing a quasi-state structure»

What is the innovation in that? In every civil war, the rebel factions establish alternative governments in the areas they control.

"The fact that Islamic State lives in the 21st century – and thinks / acts in 21st century ways - ..."

We must be talking about different Islamic State groups. But the only Islamic State group I know about thinks and acts in 7th century ways, because that's the century to which the Islamic State I know of wants to return the world.

I like my idea better. They look for and fill holes. The momentum that is discussed is the Obama policy of break and run. Let's knock off Libya, and leave. Let's leave Iraq. Let's leave Afghanistan. Let's knock off Assad, then drop it when it is too hard.

From Obama's point of view, Isis is like the Republicans but more amenable to dialog.

Sokal hoax constructed specifically for Tyler Cowen?

FredR: my post is not a Sokal hoax at all because:

(i) Strategic culture frameworks can be falsifiable in a Popperian sense and microfoundations have been identified (Alan Bloomfield).

(ii) There are potential conceptual links between Islamic State's strategies and how the momentum class of investment strategies work.

(iii) The potential conceptual links can be studied via examining the known facts about Islamic State (including observational studies) and how momentum investors work (such as I did with Gary Antonacci's work).

Hmm, I wonder why governments aren't hiring economists to model IS as a financial market fad instead of maintaining these large intelligence agencies. Surely it would be a lot cheaper. I guess they're just not up on economics' amazing ability to understand humans in every area of life better than we ourselves ever could by abstracting away from actual motives, intentions and histories and fitting our behaviour to an approximation of Pavlov's dog's.

Poincare: Alan Krueger and Jacob Shapiro's work in terrorism studies draws on rational choice and principal-agent models to offer insights from economics about how terrorist organisations work. In the case of Islamic State and what their "actual motives, intentions and histories" are - William McCants' translations and work is instructive.

"Events like the capture of Mosul, Iraq; combat experience in the Syrian civil war; involvement in oil black markets; and the proclamation on 29th June 2014 of a worldwide caliphate have momentum-like qualities, particularly in terms of creating the psychological climate for nation-building."

The "psychological climate for nation-building"? How does a "psychological climate for nation-building" have any effect on actually building a nation?

Mark: Islamic State's strategy is to build a nation-state in parts of Iraq and Syria. The author Loretta Napoleoni suggests that Islamic State is using a 'shell state' structure similar to how shell corporations work. The caliphate proclamation had a clear effect in terms of the numbers of foreign mujahideen who went to Iraq and Syria. The things I listed help confer greater legitimacy on Islamic State in the eyes of its potential supporters.

Parts of Iraq and Syria? It seems to me they are attempting to build a 'nation' out of the areas that no one cares much about. The 'shell structure' isn't some hypermodern innovation, it's evidence that they simply lack the actual good quality territory and manpower to pull a real state off.

Those who write clearly have readers. Those who write obscurely have commentators. I would have thought that this post would have a lot more commentators.

Should cite the first two sentences as a quote by Camus

Isis could easily manipulate oil market. Go long and then attack Saudi Oil infrastructure. Short oil and sign a nonaggression treaty with major producers. Billions to be made painlessly. The market works!

Compare ISIS's 'manpower' to the armed forces of Saudi Arabia and other Arab nations. 'Go long' indeed. ISIS might be able to get some suicide bombers to hit a few Saudi wells and pipelines but any march by ISIS to take out S.A's infrastructure would be a one way trip for them.

I'm a little meta-surprised that TC didn't get the swiftian absurdity of Alex Burn's nonsense.

In the spirit of the same approach, why don't we plug in some High Frequency Trading (local information priority access which IS clearly has over its adversaries), some convertible arbitrage (what's the worst that can happen to sunnis supporting IS vs those opposing it), and a little bit of LBO theory (foreign states like turkey covertly supporting IS for takeover of a much larger geopolitcal arena). Hey wait, we can stick some keynesian theory here too (IS is more likely to spend locally on its sunni dominated areas vs the shia controlled iraqi govt). Oh wait, I can also plug in the church-turing thesis here, want me to try?

As someone above mentioned, he's from Monash! And Monash is in australia. And as the great Vizzini told us, "as everyone knows, australia is populated entirely by criminals".

Could someone tell me how 'momentum traders' describes ISIS? From what I read momentum traders buy and sell stocks based not on their fundamentals but on the pattern of previous trades. In other words riding fads and rumors etc.

The analogy with ISIS is again?

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