We all make decisions, such as asset allocation, based on the information available. Recently, Harvard professor Andrew Abbott raised a very important point that differentiates “knowing” from knowledge.
There is a lot of knowledge, discovered by different people and recorded in books and digital media, and a lot is now available on the web. But there is so much knowledge discovered that we are limited to our “knowledge”. First, our brain cannot download all the information and process it like a supercomputer. Second, we have to trust certain experts to tell us what they know and we can rely on their judgments to make decisions. Of course, they can also be wrong. Third, even with rapid scientific advancements, there are “unknown unknowns”, so we can only make decisions on the basis of our limited “knowledge” and make short-term tactical decisions, or we can choose short-term strategies. long term and wait for better opportunities.
Life is not always a two-player game like chess. The rules and steps are defined mechanically. The stock market is a game played by the individual against many, such as large institutional investors, hedge funds, investment banks and other retail players. Although market regulators claim to aim for a fair, transparent and competitive market, the reality is that the size, resources and knowledge of the players are very different. Hubs such as leading investment banks and asset managers have a distinct competitive, scale and knowledge advantage over other players, especially retail investors.
Behavioral economist Daniel Kahnemann basically says that we think fast and slow, mostly thanks to what psychologists call fast heuristics (rules of thumb) or slower but deeper strategies that take longer to be evaluated and considered. longer term.
In an uncertain market, the difference between a decision, a tactic or a strategy is knowing your business or your counterparty, essentially a matter of trust. If you trust your broker or advisor, you reduce your risk. In a market, you don’t play chess or checkers where you learn the mind of your only opponent. You play against a multitude of very different players with different resources and mindsets. John Maynard Keynes, a very successful speculator who made and lost many fortunes, made the important observation that investing in the financial markets is like picking the winner in a beauty pageant. It’s not who you think will be the winner. You can guess who you think the rest of the spectators or judges will pick as the winner. You are not playing against a single mind, but against the collective mind.
This is where each player tries to outsmart the market. Hedge funds in supercomputers make decisions using artificial intelligence (AI) and big data that can make transactions and decisions faster than any other. Other players âmoveâ the market by buying stock market data that is nanoseconds faster than everyone else and therefore can trade before others. Other brokers who trade on behalf of the big guys are simply following their lead. If Warren Buffett buys the A share, just call and the market will go up because everyone thinks Buffett is a smarter stock picker than others.
Retail investors are too small, lack market power and first-hand information. They can only choose positional games knowing that they will never catch the lowest price, nor sell at the highest in the market. The smart gamer is not overly greedy and does not panic so easily. You learn as you go. If you keep losing, you may not be a player anymore.
There is a big difference between mechanical tactics and organic strategies. Mechanical tactics are strict and very simple rules. You can just set it as buy at price X and sell when you earn 10%. If the market operates by such simple rules and you can read that rule, you can outsmart the market.
I recently participated in a discussion between economists and international relations experts, trying to figure out how to model or theoretically think about the US-China geopolitical rivalry. The economist was trying to have a competitive market model of demand and supply of global goods, in which competition from the strongest prevails. The social scientist in international relations pointed out that with military force the result is zero-sum, with an ultimate or hegemonic winner. This is why the great powers generally have a hierarchical structure, with the hegemon at the top and clearly the number two, three and middle powers.
War is a matter of tactics and strategy in search of zero-sum results, while economics and peace are not zero-sum. The linear and mechanical point of view treats zero sum as I win-lose, while organic cooperation and competition strives for a win-win outcome.
In peacetime, policymakers deal primarily with economic, political and social issues, as national security and defense operate in their own silos. Economic and social calculations are easily calibrated, as differences are measured in money, with side deals and deals that allow for conflict resolution.
However, as geopolitical rivalries, terrorism, migration and internal instability are likely to intensify, national security looms large on the political agenda. War and conflict operate with zero-sum results and a very different mindset. There is only one perceived winner, and in most conflicts it ends in a stalemate or protracted conflicts and skirmishes. Diplomacy can be conducted on the margins, like a deal with side contracts and negotiations. Military outcomes have stochastic changes because the winner can impose rule-based behavior changes on the losers. The weaker power can cede or cede positions or resources without consideration, as the stronger power can force it by threat or by inflicting enormous losses. This results in behavior of international relations which sometimes does not have an economically rational sense, but follows a logic of realpolitik.
Environmentalists and animal psychologists who study the animal kingdom have discovered that there is a complex relationship between predator and prey. When the predator eats too much prey, like wolf packs destroying the deer population, they end up reducing their food supply and their own population decreases. If there are no wolves, the deer population explodes, eats too much grass, and also experiences population declines.
Nature organically creates self-regulation – the lion will kill to eat, but not more than necessary. Humanity unfortunately does not have a natural predator and therefore has consumed or abused the natural environment by destroying the natural habitat where animals, fish, trees and marine life coexist. The pandemic is nature’s revenge, in which an animal virus (coronavirus) zoonotic leaps from animal hosts to humans, threatening to shrink the human population. Until, of course, the invention of vaccines.
The game of survival is therefore not a simple economic theory of perfect competition or even oligopolistic behavior. It includes many players whose survival or domination tactics and strategies involve allies, enemies, predators, and victims. Sociologists, zoologists and environmentalists, other than economists, already know that “the market knows no better”. Indeed, the whole environment is modified not only by the behavior of the stakeholders (all living things on the planet), but also by interplanetary events, such as sunspots, meteorites and field changes. gravitational that impact life on Earth. As the old saying goes, man proposes and nature disposes, or, as a Chinese saying goes, human calculation cannot beat the calculations of the sky.
The bottom line is that human behavior depends on a pattern of thinking that does not always reflect reality, but only perceptions of reality, which can be very different for each individual or group. If all the players behave rationally, the result of the group can be rational. But if some are irrational, then the outcome is not completely predictable.
This is why life is so interesting and full of surprises. An organic approach means you watch life in all its fluidity, ever-changing, sometimes drastically, but if you understand how to read nature’s patterns (of which linear and mechanical responses are a part but not all) then you can do better. coping with life’s ups and downs and crises.
Nature teaches us all about humility in the sense that there is no finality, only constant change. We need to respect, share and care for each other, including Nature, which is both alive and includes us all. Protect one and protect all. The opposite is true. Destroy one and we may end up destroying us all.
Tan Sri Andrew Sheng writes on global issues from an Asian perspective