Hello, and welcome to the Investor’s Bookshelf.Today, we’ll be exploring a book titled The Shepherd’s Lessons in Philosophy, with the subtitle The Truth of Finance from a Humanistic Perspective.
The author of this book is Xiao Xiaopao, a seasoned financial professional from China. She has worked in strategic planning and macroeconomic analysis at a major commercial bank, served as Chief Market Strategy Officer at a fintech company in Hong Kong, and is currently the co-founder of a high-frequency trading firm based in Hong Kong.
Despite her impressive track record in the financial industry, Xiao Xiaopao openly admits that her true passion lies in the humanities—namely literature, history, and philosophy. Over more than a decade in the industry, she gradually discovered that interpreting finance through a humanistic lens often brings greater clarity. In her view, within social sciences such as finance, logic tends to matter more than facts. That’s because facts are endless—you can never observe them all. But where does logic come from? More often than not, it stems from the humanistic ideas behind financial phenomena—those found in literature, history, and philosophy.
This is why both of Xiao Xiaopao’s books—The Consensus of the Herd and The Shepherd’s Lessons in Philosophy—carry the same subtitle: The Truth of Finance from a Humanistic Perspective. Her goal is to help readers chisel open a small window in the towering wall of finance using a humanistic approach, allowing a sliver of light to shine through—just enough to better grasp the intricacies of this complex domain.
The Consensus of the Herd, published in 2020 and previously featured in our series, explains that financial markets are fundamentally constructed by human behavior. Many financial phenomena are, at their core, driven by human nature. When individuals in the market cluster into groups, the “herd effect” easily takes hold—people begin to mimic those around them, leading to patterns of collective action. This makes the influence of human nature on financial markets even more pronounced.
The book we’re discussing today, The Shepherd’s Lessons in Philosophy, was published in 2022. Building on the foundation laid in The Consensus of the Herd, it goes a step further: once we understand that “human nature is a key driving force in financial markets,” how can we apply this insight to better navigate gains and losses? How do we become wise shepherds—those who can identify herd behavior and discern market patterns?
The word philosophy in the book’s title carries two layers of meaning:
The first is philosophy in the narrow sense—ideas and theories from philosophers and formal philosophical traditions.
The second is philosophy in a broader sense—referring to the ability to look beyond appearances and perceive the underlying logic of things, to decode the “source code” beneath complex surface phenomena.
In today’s review, we’ll first follow the thread of narrow philosophy to explore how some of the most well-known “shepherds” in financial history were shaped by philosophical thought. Then, we’ll widen our scope to broad philosophy and examine how ordinary people like us can uncover the “source code” of financial markets—and become wise shepherds ourselves.
Part One
Let’s begin with Part One: examining some well-known “shepherds” in financial history and the philosophical ideas that shaped their thinking.
The first figure we’ll discuss is Nassim Taleb, one of Wall Street’s most legendary hedge fund managers. Over the course of his career, Taleb weathered three major market crashes: the 1987 Black Monday crash, the 9/11 terrorist attacks, and the 2008 subprime mortgage crisis. While countless others suffered heavy losses during these crises, Taleb made substantial profits.
In Taleb’s view, his uncanny ability to profit in these scenarios stems from his deep study of uncertainty. It’s important to distinguish between uncertainty and risk. Risk refers to situations where the possible outcomes are known, but the exact result is unknown. For example, when rolling a die, we know the result will be one of six numbers, each with a probability of 1/6—even though we don’t know which number will come up. Uncertainty, on the other hand, means we don’t even know what outcomes are possible. Compared to risk, uncertainty is far more unsettling and unpredictable.
Events like the 1987 crash, 9/11, and the 2008 financial crisis fall into the category of uncertainty. These were unprecedented, difficult-to-predict occurrences. And yet, Taleb managed to thrive in the midst of them.
Taleb went on to write a series of influential books centered on how to deal with uncertainty, including The Black Swan, Antifragile, Fooled by Randomness, and Skin in the Game—many of which we’ve reviewed before. In those previous analyses, we often approached Taleb’s thinking from financial and economic angles. Today, guided by the author, we’ll instead explore the philosophical foundation behind Taleb’s system of thought.
The first philosophical turning point for Taleb was the Lebanese Civil War. Overnight, his once-prominent family fell into decline. Even more jarring was that his grandfather, Lebanon’s Minister of Defense, proved no more accurate in predicting the war than a local taxi driver. This sobering realization led Taleb to a crucial conclusion: no one can truly predict what will happen in the world. In other words, uncertainty is unavoidable.
This worldview was later refined through the teachings of a Roman philosopher—Seneca. Seneca was the tutor of Nero, the infamous Roman emperor. During his 15 years in public service, Seneca enjoyed immense wealth and power. But after the Great Fire of Rome, Nero—his former student—accused him of conspiracy and ordered his death. Yet despite such a cruel twist of fate, Seneca met his end with remarkable calm. He once wrote:
“Man is a fragile vessel that shatters with the slightest shake. No one can guarantee surviving tonight, or even this very hour... Therefore, nothing should come as a surprise.”
Seneca was a leading figure of the Stoic school of philosophy, and these words reflect the core Stoic ideals: tranquility, self-control, and the ability to endure hardship. These Stoic concepts had a profound influence on Taleb. He came to realize that a stable and predictable world simply doesn’t exist. Since we cannot escape or resist uncertainty, the only viable approach is acceptance. But acceptance doesn’t mean passivity. Instead of obsessing over short-term forecasts or trying to predict the future, we should focus on strengthening our antifragility—that is, our ability to benefit and grow stronger from disorder and volatility. Like a flame that grows when fanned, or coal that burns hotter when stoked, an antifragile system thrives in chaos.
Following this line of thinking, Taleb developed several practical financial principles: maintain ample cash reserves, use a barbell strategy for investments, and ensure skin in the game. These strategies have been covered in depth in previous reviews and can be found through a keyword search. They not only helped Taleb navigate market meltdowns, but also influenced a new generation of financial thinkers.
Now let’s turn to someone even more famous than Taleb: Alan Greenspan, former Chairman of the Federal Reserve. Greenspan served from 1987 to 2006—nearly 20 years and through four U.S. presidencies. During his tenure, the U.S. economy remained largely stable, and no major financial crises occurred. Many regard this era as a golden age of economic management. However, just two years after his retirement, the 2008 financial crisis erupted. This led some to question: Why didn’t Greenspan see the massive risks that were building during his time in office?
According to the author, Greenspan did see the risks, but he chose to believe in the market’s ability to self-regulate and felt that government intervention wasn’t yet warranted.
This preference for non-intervention wasn’t arbitrary. It was deeply influenced by a philosopher named Ayn Rand. In his twenties, Greenspan was a devoted admirer of Rand and her philosophy of Objectivism. Rand believed that altruism is hypocritical and socially imposed, and that practicing altruism destroys the individual’s incentive to create value—ultimately harming society. In her view, only by pursuing their own self-interest can individuals find the motivation to innovate and contribute to society. Thus, all forms of regulation and control are harmful.
Deeply shaped by this philosophy, Greenspan developed a strong belief in free-market mechanisms. As he rose to become an economic authority, this conviction guided his approach: to let markets operate with as little interference as possible. It became the philosophical cornerstone of his tenure at the Fed.
So far, we’ve seen how the Roman philosopher Seneca influenced Taleb, and how American philosopher Ayn Rand shaped Greenspan. Now let’s explore another key thinker whose philosophy has guided many “shepherds” in the financial world: Karl Popper.
Popper was a staunch opponent of drawing conclusions purely from historical experience—in other words, he opposed empiricism.
We all understand what empiricism means. Take this story: a cow is raised by a farmer who feeds and cares for it every day for 1,000 days. Through these 1,000 days of careful observation and reasoning, the cow concludes that “being taken care of is the natural order for cows.” So content is the cow that it never even considers escaping, not even when the gate is left open. But what the cow doesn’t know is that Chinese New Year is just around the corner, and it is about to become the main dish on the dinner table. This cow fell into the trap of empiricism.
Popper believed that the danger of empiricism is that it closes our minds—we begin to see only what aligns with past experience. In decision-making, this means we may unconsciously ignore the possibility of future uncertainty.
In the financial world, many new analysts start out obsessed with technical analysis and historical data. But as they live through more uncertainty events, they gradually abandon this mindset. The author argues that while technical analysis has its uses, its insights are highly time-sensitive and can't be turned into true knowledge—it’s merely experiential. As a tool, it’s useful for observing capital flows, market sentiment, and can help with stop-loss or liquidation decisions. But it cannot predict the future, because many events that will shape the future do not exist in the historical data. So we cannot trust that past prices alone can forecast what’s to come.
To address this, Popper urges us to adopt an open mindset. He said, “Recognizing that a belief may be wrong is the best way to approach truth.” That is, even if we base our expectations on what currently seems most likely, we must always be ready to revise those beliefs in light of new evidence. This notion has since been echoed by many prominent financial analysts.
Part II
Earlier, we discussed how many “shepherds” in the financial markets have been influenced by philosophy. Here, "philosophy" refers to its narrower sense—ideas from philosophers or formal philosophical theories. But some may wonder: if I’ve never been exposed to academic philosophy or don’t have the time for systematic study, is it still possible to become a "wise shepherd"?
According to the author, philosophy studies the most fundamental logic and laws behind things—it is the “underlying code” behind complex phenomena. As mentioned earlier, the author believes that the financial market is essentially composed of human behaviors. Many financial phenomena are ultimately driven by human nature. Recognizing this is the first step to becoming a “wise shepherd.”
By returning to the human perspective, we can gain clearer insights into many things in financial markets. For instance, there is a curious phenomenon: investors—whether in stocks, bonds, commodities, derivatives, or real estate—are almost always interested in the concept of “cycles.”
There are many types of cycles: by time—long-term or short-term; by category—economic cycles, debt cycles, inventory cycles, real estate cycles, and so on. There are even cycles named after individuals, such as Fisher’s debt-deflation spiral, the Minsky cycle, and Zhou Jintao’s “Tao Wave” theory. These various cycles, despite their differences, all attempt to explain the market's direction through identifying key signals. The obsession with cycles stems from a belief that markets are predictable.
However, many investors find themselves disappointed: even after memorizing all these cycles, they still can’t accurately predict the future. Why? The author argues that if we approach this question purely from a financial perspective, the answer is elusive. But from a deeper, human-centered viewpoint, new insights emerge.
One key concept the author introduces is “reflexivity.” Applied to forecasting, it means that our predictions about the future influence our behavior, which in turn changes the future itself—thus rendering our original prediction inaccurate.
For example, if I predict that the market will rise by 100 points tomorrow, I will buy in today based on that belief. But this act of buying itself changes tomorrow’s market—it is no longer the market I originally predicted. And remember, I'm not the only one with a forecast; every market participant has their own view of tomorrow. To accurately predict the future, one would have to know the expectations and resulting actions of all market participants.
Clearly, that’s impossible. But it leads to a valuable insight: to better grasp market dynamics, we must go beyond models and theories and instead focus on the deeper force driving markets—people. While we can’t know what everyone believes about tomorrow, we can try to sense the evolving “consensus” of the market—what most people think.
Take the aftermath of the 2008 financial crisis. A prevailing consensus emerged: financial institutions could no longer be trusted. Not long after, a new technology—blockchain—began gaining traction. Its decentralized, anonymous, tamper-proof, and transparent nature promised to rebuild trust, not through human institutions, but through code. A new market consensus soon followed: blockchain could restore trust.
But this consensus isn’t necessarily correct. After all, locking a fake antique in a world-class safe doesn’t make it genuine. Recording a statement on the blockchain doesn’t make it more truthful. Upon reflection, we must ask: where did this belief—that “blockchain can rebuild trust”—come from? Was it truly our own idea?
The author suggests that, often, we are “being consensused”—in other words, we mistakenly believe our thoughts are independent, when in fact they’ve been shaped by others. Similarly, we may think we’re acting freely, but we’re actually just following others’ actions.
When enough people in the market are “being consensused,” a “herd effect” occurs—individual beliefs and behaviors begin aligning with the majority. In this sense, a “shepherd” is someone who identifies herd behavior early and profits from shifts in market consensus.
So how can one do this? The author emphasizes one thing above all: recognizing the power of language. Language is the primary force that drives consensus in financial markets. Philosopher Immanuel Kant said that we see the world through a lens—what we see is shaped by the lens we wear. The author argues that language is that lens. It doesn’t merely express our understanding of the world—it constructs it. In that sense, language shapes us more than we shape it.
This holds true in economics and finance. In the early 1930s, amid the Great Depression, U.S. President Franklin D. Roosevelt famously said, “The only thing we have to fear is fear itself.” That sentence alone uplifted national morale and helped revive consumption and economic activity. Decades later, President George W. Bush declared: “In America, if you own your own home, you’re realizing the American dream.” This phrase, amplified by media, linked homeownership to patriotism. Government-sponsored mortgage giants like Fannie Mae even launched ads with slogans like “The American Dream—Our Dream.” These narratives fueled a real estate bubble that would eventually lead to the 2008 crisis. These are not anecdotes—they are documented in Robert Shiller’s book Narrative Economics.
Another example: in 2012, during the height of the Eurozone debt crisis, then-ECB President Mario Draghi declared he would do “whatever it takes” to save the euro. This single sentence became a rallying cry, widely quoted by the media and hailed as an act of bravery. Markets responded immediately: Spanish stocks surged 17%, Italian stocks rose 13%, and European markets as a whole began to rebound—before any policy was even implemented. Draghi’s words had a psychological impact that helped stabilize the region.
These examples show the immense power of language to shape consensus. A simple phrase, amplified by media and social sharing, can become a market-moving force. In today’s social-media-driven world, this process happens faster and more intensely than ever before.
The author outlines how modern information spreads: a headline image, a short video, or a celebrity post triggers initial reactions—comments, screenshots, shares. These ripple through social groups and are re-shared, sometimes with memes or creative reinterpretations. Before facts are even verified, opinions and emotions have already spread, forming a consensus. In finance, such viral narratives can drive major market moves, increasing both volatility and frequency of price swings.
To become a wise shepherd, one must understand that language is a primary driver of market consensus. But beyond that, one must also learn to recognize when people are “being consensused.”
The most powerful consensus-forming narratives, the author explains, are rarely based on established facts. They are often “half-finished stories.” For example, cryptocurrencies carry speculative labels like “digital gold” or “hard money,” and promises of decentralization and freedom. These stories inspire people to invest. Tesla, long unprofitable, achieved a massive market valuation due in part to Elon Musk’s vision of colonizing Mars. As Musk became an online influencer, many began investing based on his tweets—choosing to believe his vision of the future.
These are “half-finished stories” that drive consensus.
At such times, we should closely examine the gap between narrative and reality. Statistician Sanne Blauw urged: “Click a few more times.” That simple act—doing a bit more research—can help us view an issue from multiple perspectives. If the facts haven’t changed, but stories around them multiply and become increasingly exaggerated—and if the market responds more and more to those stories, with rising prices and hype—then the story may have diverged from reality. That’s a sign the market is driven by consensus, not fundamentals.
And when you recognize that most participants are “being consensused,” you can start leveraging this consensus to avoid risk and capture opportunity.
For instance, if the market believes a certain industry is about to experience a breakthrough, and consensus turns bullish—even if you’re skeptical of its fundamentals—it might make sense to “speak the same language” as the market and ride the consensus. But to truly benefit, you must stay one step ahead—anticipating how consensus might evolve. If the breakthrough delivers better-than-expected results, how will the consensus shift? If it disappoints, what then?
In fact, often, the moment a story becomes fact is when consensus collapses—because expectations have already been priced in. If reality falls short, a reversal may occur: prices drop even though the event has finally happened.
This brings us to a core responsibility of the shepherd: not only must you recognize current consensus—you must also actively forecast how consensus might evolve. This recalls John Maynard Keynes’ famous beauty contest analogy: in a competition to choose the most beautiful woman, the winner is not the one you personally find most attractive, but the one everyone else thinks is most attractive. To win, you must understand not your own taste, but the crowd’s consensus—and how that consensus is likely to shift.
Lastly, a wise shepherd must possess “boundary thinking”—a deep respect for the limits of their own knowledge.
Let’s define “knowledge boundaries.” Inside the boundary are things you truly understand. Outside are not just things you don’t know—but more dangerously, things you think you know, but don’t. Try this: pick a common household object, like a toilet or vacuum cleaner, and describe in detail how it works. You’ll likely realize you don’t know as much as you assumed. That’s your knowledge boundary.
In finance, the same principle applies. Someone in the pharmaceutical industry may not understand pharmaceutical stocks. Someone with early access to corporate news might still misinterpret it. Someone who understands monetary policy might still fail to predict the market’s response to a rate change.
People consistently overestimate what they know and underestimate the limits of their understanding. That’s why, for most investors, the best move when faced with an unfamiliar opportunity is to pause and ask: Do I really understand this? The fundamentals, the policy context, the market sentiment—am I clear on all of these? If the answer is no, then Buffett’s golden rule should echo in your mind: “Never invest in something you don’t understand.”
Conclusion
So, that concludes the key takeaways I wanted to share from The Philosopher’s Guide to the Market Shepherd. Let’s briefly recap:
The “philosophy” in the book’s title carries two layers of meaning.
The first is philosophy in the narrow sense—the thoughts and theories of professional philosophers. In this regard, the author points out that many “shepherds” in financial markets have drawn significant influence from philosophical ideas. For example, Nassim Taleb was shaped by the Stoic wisdom of Seneca; Alan Greenspan was famously influenced by Ayn Rand’s objectivism; and several renowned financial analysts have drawn inspiration from Karl Popper’s theory of falsifiability.
The second meaning is philosophy in a broader sense—the ability to look past appearances and uncover the underlying logic behind complex phenomena. In this sense, philosophy helps us decode the “source code” of the financial system.
The author, Xiao Xiaopao, argues that at its core, the financial market is a reflection of human behavior. Many seemingly technical or abstract market phenomena are, in fact, driven by human nature. Recognizing this is the foundation for decoding how markets truly work.
She further reminds us that when individuals in the market start to act collectively, herd behavior emerges. People stop thinking independently and begin imitating others, often unconsciously. This is how consensus forms—not through deep analysis, but through social momentum.
From this perspective, a “market shepherd” is someone who is able to identify such herd behavior early—and skillfully use market consensus to their advantage.
To become a wise shepherd, several principles are essential:
- Recognize the power of language. Language is not merely descriptive; it shapes perception. It is the main driver behind how consensus forms in the market.
- Pay attention to when people are being “consensused.” This means looking for a growing gap between narratives and facts. If stories about an asset become increasingly grandiose while the fundamentals remain unchanged, the market reaction may no longer be based on reality—but on collective belief.
- Use consensus strategically. When you realize that many participants are merely following consensus, you can navigate the market to “seek opportunity and avoid risk.” But this requires constant vigilance.
- Respect your own boundaries of competence. Don’t cross into areas beyond your true understanding. The ability to recognize and stay within your limits is one of the most underrated forms of wisdom in the market.
This, ultimately, is the central message of the book:
To become a wise shepherd in the financial markets, you must undertake an internal cultivation—one that blends philosophical insight, behavioral understanding, and strategic restraint.
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