Thursday 14 September 2017

Surviving the behavioural arms race


I spoke to someone today who was surprised to hear where sterling was trading. They aren’t like us market watching nuts and only glean their news from the television and radio and the television and radio only report sharp down moves in GBP. But GBP is a narrative for all seasons and whether your season is bad weather to support your beliefs or good weather to support your beliefs you will find something in any move to water your roses. So, in line with my Brexit news curfew, I am not going to use the move in GBP to substantiate any narrative. But I am willing to say that GBP has gone up a lot because there are more willing buyers than willing sellers.

And probably because no one can think of any other trade to do, having worn out every other theme over the last 2 years. It also fits with my ‘don’t do what you are told' investment policy because nearly everything you are told to do in your life is for someone else's benefit.

Of course, it’s always framed in such a way as to sound as though it is for your benefit but it rarely is.

- Hi Sir would you like fries with that? Oh how caring, yes please .. that'll be £4.50
- Would you like a job at our bank? Oh yes please .. right sit there for a year on intern peanuts and we may give you a break.
- You know what? You really should get a good education, get good GCSEs, good A Levels, a degree, a job working 14hrs a day to earn money to buy a Victorian terraced house/warehouse shoe box to marry a great professional partner to have kids and pay for their great education so they can do the same and then pay off your mortgage and then save for retirement and then retire and then wonder where your life went and then die - Meanwhile you really should do stuff for me so I don't have to do it.

Somewhere along the line, you have to set your own goals, your own. NO! YOUR OWN! Not what your peer group set for you. Tough isn’t it, in this age of 'social everything' where we are more dependent upon human interaction than we ever have been. In years gone by the envelope of our survival bubble interfaced with nature. Whether it rained or snowed, if the crops grew or withered, if the hunt came in, or ate us, or if we contracted a disease. Everything was focused on battling nature.

Now think how much of your life’s attentions to survival are concerned with nature (‘Oh I worry about global warming’ doesn't count) and how much of your survival is dependent upon people outside your family group. People doing what you need them to. For you to survive.

So human interactions are becoming more critical as the hive we live in expands with more interdependent members. We are no longer independent amoeba, we are cells in a body. A body we need to inhabit to survive. Though I think we may be more like slime molds



So how we interface with others is all the more critical. Behavioural sciences, human biases, understanding our psyche to best tune ourselves and understanding that of others, to tune our responses to them to maximise their responses to us, is fast becoming the cutting edge of marginal return.

An arms race of behavioural understanding results in a vortex of behavioural play and counter play. Those trying to learn how to use and respond to behavioral inputs are already behind the curve as they are learning from and feeding back value to those who are teaching them. A Ponzi scheme if you wish. We don't know

I was at the Nudgestock conference last summer where we were entertained by some of the brightest behavioural experts out there. The audience should have been lapping up the insight but interestingly were still exhibiting there own behavioural biases that prevented them paradoxically from learning about behaviour. One of the speakers was Dominic Cummings. The mastermind behind the Leave campaign of Brexit. What he had to say was fascinatingly brilliant, as his attention to behavioural manipulation in that campaign was what won it.

Now are you still reading this? Or have you associated ‘Dominic Cummings’, ‘manipulation’ ‘leave’ and ‘brilliant’ and formed an opinion that you can’t possibly learn anything more from what I write because you hate the man that manipulated the country into doing something you feel so completely and utterly stupid, classing him as the king of manipulative evil and me, in even being entertained by his talk, must be likewise? Because that is pretty much what the audience did. Instead of enquiring, the audience shut down. Which was the most fascinating live practical demonstration of behavioural biases I have seen from a bunch of folks who were meant to understand and adapt to behavioural biases and gave me hope that there is a huge arbitrage out there in behavioural markets. If the experts can’t spot their own biases then there is gold in them there hills. most likely found selling picks to the behavioural miners. Otherwise known as running courses and conferences.

Unless you understand how people tick, what drives them and what influences them you will never be able to predict their behaviour towards the things that you cherish or need. If you have been in the markets longer than a 12yr old quant analyst, you will know that predicting why and when others will desire to own something is the holy grail to doing it first.

Handbags, stocks, electricity, FX rates, shoes, soap, kids toys.. the lot. Predicting when demand will wax or wain is instrumental to making money out of fashions. Influencing those outcomes by influencing behaviour is power, but as soon as we learn the tricks of manipulation we are able to counter them. Influencer or influencee. It's a behavioural sword fight.

Let our defences down and we are outwitted and they have us, we won’t know it but we will be striving for something that costs us and benefits them. The greatest cost of goals is the unhappiness in not achieving them.

So, as I say to the kids, the shortcut to happiness is to move the goal posts. Part of that is realising that you really don’t have to know everything.

As it is harder to know when to get out of a trade than to get into it, it is harder to know what you don’t have to know than to know what you do.

And, with that, I exit my long sterling position.
Night night

6 comments:

Anonymous said...

Some very good and very true points. You have to do/follow what you want not what you feel you "should" or what others want for you. Also part of the acquisition of wisdom with age is rejecting things you were told were for your benefit but were really to someone Else's benefit and likely your detriment. The tragic part is that you don't get to realise this before you have been through all the BS - only after it seems. The demand for conformity is actually quite rigidly enforced and rejecting it is not easy.

BTW, to follow on WRT to behaviour in the markets, some manouvres used by stock manipulators are such proven to work tactics that they have their own names. The crowd is predictable - it behaves in certain ways and can be made to act in certain ways - the wiring doesn't change.

Al said...

Great post. Great (longstanding) trade.

My ftse trade collapsed under the push of the gbp when I should have made money. But I was relying on correlation across indexes which didn't occur this time. Oh well, never mind.

I'd also like to hear more of what DC had to say.

Anonymous said...

Any recommended behavioral finance books out there? Besides Extraordinary Popular Delusions and the Madness of Crowds.

koenfucius said...

Ha. Sadly, I missed Nudgestock because of an inevitable client clash - I was in Bremen.

But the story you tell resonates with what happened to me two Sundays ago, listening to the radio. I wrote about it in my previous blogpost - Cocktail of Biases. It's all too easy to jump to conclusions based on ones' opinions and preferences, and working around behaviour all day provides little immunity. The experience certainly put me in my place: need to work harder at keeping my mind open, and seeking out contrary viewpoints even more to prevent that knee from jerking...

Polemic said...

Books to statt with

Thinking Fast Thinking Slow by Kahneman...and Nudge by Thaler is also good

Sorry I haven't had time to reply to everyone. Been flat out with the day job. But than you all for the comments

Polemic said...

Books to statt with

Thinking Fast Thinking Slow by Kahneman...and Nudge by Thaler is also good

Sorry I haven't had time to reply to everyone. Been flat out with the day job. But than you all for the comments