PKU Financial Review：In your opinion, what is the most fundamental difference between "confidence" and traditional economic indicators (such as GDP, inflation rate, interest rates)? Why do you believe confidence is crucial?

Peter Atwater：Most economic indicators measure what has happened.  They measure the results of decisions and actions taken in the past.  They offer few clues about what is going to happen next - which if I am an investor is all that matters.

Confidence is predictive.  It offers clues into what investors are likely to do next.  For example, a confidence investor is likely to have a long-term time frame and be interested in abstract opportunities with lots of potential.  The investor is likely to be more global and willing to take risks that are further from home.  When confidence is low, investor preferences reverse.  They crave only short-term opportunities that are close by, that reflect low risk and high tangibility.  And the same behavioral pattern can be seen in business leaders and policymakers, too.  They, too, act as they feel as measured by confidence.

PKU Financial Review：If the innate impulse of confidence drives people to buy at the highest point and sell at the lowest point, how can we overcome this tendency?

Peter Atwater：There are several ways.  One is to look objectively at what you are buying and how it fits the pattern I shared above.  Another, and more important way is to pay very close attention to the narratives of the crowd.  At both extremes, investors think the trend is unstoppable - that it has to continue.  There is nothing to stop it.  Moreover, those who feel otherwise are laughed at and dismissed.  By paying attention to those behaviors, you can see clues warning of a dramatic change in direction.

PKU Financial Review：What characteristics do companies worth investing in generally possess? Could you offer some investment advice for Chinese investors?

Peter Atwater：Before I answer that question, I need to be clear that there is a difference between great companies and those companies worth investing in at a given time in the markets.  What investors want to buy - those the companies they prefer - must fit their mood.  Investor mood drives which companies will receive investors' money.  

I believe strongly in the value of diversification and owning a broad range of investments in a portfolio.  And here, I would encourage investors to own things that the crowd now loves as well as hates.  As I write in my book, what ultimate creates portfolio diversification is owning assets that have a mix of feelings.

PKU Financial Review：In your book, you constructed a thinking framework called the "Confidence Map". Could you give us a brief introduction to it?

Peter Atwater：The Confidence Map framework, encourages investors to consider the certainty and control they feel and to appreciate how those two independent feelings drive the financial markets.  As investors feel more and more certain of the future and feel they are better and better positioned to take advantage of it, money flows into the market, pushing prices higher.  At peaks, investors are too certain of the future and believe their approach is the only one.  They aren't open to alternatives - both in terms of what may happen next or in how to be best positioned.

As confidence falls, investors feel less and less certain about the future and more and more unsure about what to do.  Ultimately, it is their paired feelings of powerlessness and uncertainty that leads them to sell out at the bottom.  They fail to appreciate that hopelessness always marks the beginning of the next upward cycle in the markets.

PKU Financial Review：What was your original intention in writing the book The Confidence Map? Was there a specific personal experience that made you deeply realize the decisive impact of confidence on investing?

Peter Atwater：My original intention in writing my book was to help others see the clear connections that exist between how we feel and what we do.  Moreover, I was hopeful that readers would be able to apply the framework to both their professional and personal lives.

What originally drew my interest into the impact of confidence on investing was the Great Financial Crisis of 2008.  Going into the crisis, extreme overconfidence was evident in the housing market.  Moreover, it was shared by all participants - homebuilders, homebuyers, lenders, investors, government officials...  Everyone was on board.  At the bottom of the crisis in late 2008, all that confidence had evaporated.  People were convinced things could only get worse.  Ironically, and to the disbelief of so many, it was that belief that things could only get worse that marked THE bottom in the markets.  That fascinated me and that extreme trend extrapolation became a core element of my framework.  At peaks, such as we've seen recently in AI, the crowd is convinced things can only get brighter.  At lows, they expect even worse trouble ahead.

PKU Financial Review：Which thinkers or theories in the fields of economics or psychology inspired you the most in constructing your "confidence framework"?

Peter Atwater：There are four who stand out:

Robert Prechter's work in socionomics forced me to consider that actions follow mood.  Until I read his work, I had believed it was the opposite.

Daniel Kahneman helped me to connect cognitive processing to confidence and to appreciate that being confidence means that we are experiencing cognitive ease.  Our brains are relaxed, and with that come enormous benefits to abstract thought (which is a critical element to our excitement over futuristic innovative technology).

Eldar Shafir and Sendhil Mullainathan helped me to see that vulnerability is accompanied by scarcity in what matters to us (and that overconfidence is accompanied by overabundance).  I use their book "Scarcity" in my class.

PKU Financial Review：Could you share some of your personal experience with our readers?

Peter Atwater：I spent the first part of my adult life working in the financial services industry, first on Wall Street and later as an executive in regional banks.  In those roles, I relied exclusively on economic and market data.  My decisions were driven by objective data and, as importantly, the trends in that data.  Unknowingly, my approach made me blind to the cyclical nature of finance.

What my work over the past 15 years has done is to open my eyes to the critical role that confidence plays in financial cycles.  Moreover, it has enabled me to gain clues from things I see outside of the markets.  Car and fashion design, for example, have clear cyclical patterns to them, and so I watch what investors wear and drive closely.  The result is a very rich mosaic of economic, financial, political and social inputs that help to frame my understanding of where markets are in their cycle and where they are likely to be headed next.

This is especially important at extremes in confidence.  For example, rather than looking at panic as something to fear, I now see it as a reason to be excited to and to prepare for the next up turn in the markets.