artifical intelligence · Big data · Business Culture · decision making · Investment · Learning · Maths · Statistics

The unrules by Igor Tulchinsky, founder and CEO of WorldQuant

Igor’s rules

  1. The UnRule: all theories and all methods have flaws. Nothing can be proved with absolute certainty is, but anything may be disproved, and nothing that can be articulated can be perfect.
  2. You only live once. Your time on earth is the only truly irreplaceable resource. If today was my last day, what would I be doing with it?
  3. Life is unpredictable. There are limits to planning; the key is to act. Foster opportunities, then take advantage of outcomes. If you have to decide and you can’t, flip a coin. If it’s the wrong action, you will feel it and reverse course. Actions have a compounding effect; it’s bad to deliberate for too long.
  4. Establish concrete quantifiable goals and always go from A to B. Concrete things are attainable. Abstract and nebulous wishes are not.
  5. Develop willpower and persist. The most important limit is how much ability and persistence you have. Age means little.
  6. Play to your strengths, don’t compromise. Weaknesses can only be improved marginally, but strength can be improved more.
  7. Obstacles are information. If you can’t get something to work there is a reason. Learn adjust and attack it again.
  8. Aim for the anxious edge, the point of mild anxiety
  9. Arrogance distorts reality. Arrogance makes you perceive the environment in the way that maximises your ego. Environment does not exist for you, so your perceptions turn into fiction. You make bad decisions by chasing illusions. This gets harder after success when hubris slips in.
  10. Make everyone benefit
  11. Opportunity is unlimited, ideas are infinite
  12. Blame no one else. Minimise regrets.
  13. There is a virtue in economy of expression. Efficiency implies clarity and economy of thought. Pretend you have a fixed number of words in your life. The sooner they are all said, the sooner you’ll die.
  14. Value diverse and competing methods. Because all theories are flawed, the best approach is to collect as many of them as possible and use them all, in as optimal a fashion as you can devise, simultaneously.
  15. Value multiple points of view.
  16. Make everyone benefit. Align your endeavours with everyone around you and you will create your own tail wind.

Quotes and other insights

  1. To be successful in this investment business you have to think about it all the time. Thomas Peterffy
  2. Keep losses small. Profits will take care of themselves. Izzy Englander
  1. Don’t get emotional about your trades. React instantly to bad news. If it’s scary run. Take aggressive risks but manage losses. Aggressive behaviour forces your environment to react to you, rather than the other way around. You’re in control; you have the wider array of options in a higher probability of success. You need an exit route if it doesn’t work out.
  2. In systems with a high degree of interactive complexity, multiple and unexpected interactions of failure are inevitable.
  3. A good business runs itself. And create this by choosing the right people. A lot of time should be invested in that activity. Optimal compensation schemes are vital.
  4. Minimise bureaucracy. Time is money; time is scarce. Bureaucracy wastes time and money. If you have the right people, right systems and the right compensation scheme you can scale without adding bureaucracy.
  5. What makes a good trader? Intelligence, focus, action orientation, and the ability to learn from errors; economy of words and thoughts, honesty, and a strong sense of self; the ability to take risks, compartmentalise, and handle setbacks without ego getting crushed.
  6. What makes a good researcher? Creativity, tenacity, attention to detail, intelligence, relentlessness, follow-through, and top-level programming skills.
  7. What makes a good manager? Empathy, intelligence, creativity, relentlessness, and follow through.
  8. In their view, quantity of alphas is far superior to quality. Quality cannot easily be defined. They seek to maximise exponentially the number of Alphas they pursue.
  9. If data increases exponentially, predictability should improve linearly.
  10. They key to testing ideas is to have good simulation software.
  11. As complexity increases so will the number and frequency of non linear events will also increase (ie many std dev events – rogue waves, schrodinger equation)
  12. Power laws very common in nature. In some systems the largest entity often brakes scale invariance, ie. it is even bigger than predicted eg. In network systems, dominant player much bigger.

WorldQuant online university in financial literacy worth checking out.

Business Culture · Investment · Learning · Psychology

The emotional side of investment decision making with Jason Zweig

Jason Zweig writes The Intelligent Investor column for the Wall Street Journal and is interviewed here by Shane Parish.

Lots of useful stuff, starting for me from about min 26 of the podcast onwards, here are my highlights as well as some of my own complimentary thoughts:

Financial advice

1. One of the biggest distorting forces in financial markets comes through misalignment of incentives (eg. Brokers paid commission encourages turnover). I think this is one of the greatest truths of financial markets. Charlie Munger also points it out as one of his key mental models, never ever underestimate the power of incentives:

I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.

The way you pay your financial advisor, or your investment manager, your staff, your business managers very very strongly dictates whether or not their interests are aligned with yours. He also talks a lot about how to create greater trust between advisors and their clients through better alignment of incentives

An insight from early in my career when I worked on the financial incentive structure for a team of financial service salesmen: these incentive structures are massively powerful but also cannot remain static. Most incentive structures are not perfect. Usually when you implement a new structure to begin with it has the desired effect but after a year or two the participants understand it and start gravitating towards exploiting its weaknesses at which point in time it’s usually a good time to modify it further.

2. It’s very hard in financial markets to tell the difference between good and bad advice. Outcomes are disperse with many driving factors, narratives are only clear in retrospect and easily misappropriated (see earlier post on Narrative Fallacy). Sometimes outcomes can take years to play out and we judge them over shorter time frames. How could you go about judging this: focus more on their process, ask for evidence that that woks in the long term rather than the short term outcomes and watch those incentives very carefully.

3. We tell ourselves lies every day just to live life effectively, to get ourselves out of bed and moving forward. We think we are better than average at almost anything we do otherwise why get out of bed and do anything? We believe in a “Just world” (a psychological paradigm/theory propagated by Melvin Lerner): The underlying belief we have is that most of us are “good” and good things happen to good people, bad things happen to bad people and that we will get what we deserve. If you are a good investor (you do the right things diversifying your portfolio, controlling costs etc) you will get a good outcome. We are devastated when that illusion is stripped away, when bad things happen to good people and we conclude that they must have been a bad person in some way:eg. a bad outcome for a good investor, or a crime committed against a person; we can often be influenced by this set of beliefs to rationalise that the victim/good person must have done something to deserve the outcome. The financial crisis of 2008 stripped away this illusion vey completely where investors followed “good” advisors and lost a lot of money and Jason believes this has broken down a great deal of trust between financial advisors and their clients. (see minute 42 onwards)

Investment decision making

4. Your decision making needs to be evidence based, not intuition based wherever possible. However you also need creativity to see the connections that others do not. These two are in a bit of tension.

5. He gives an absolutely brilliant definition of risk:

Risk is the difference between what investors think they know and what they end up learning about their investments, about financial markets, and about themselves.

But he glosses over discussing this. The reason I think it is so brilliant is it encapsulates three different types of risk we face when we make investment decisions

A. The investment itself turns out to be different from what we expected eg. Earnings disappoint, cashflow disappoints and it goes bankrupt

B. It may be that the investment performs exactly as they expect fundamentally, but financial markets end up pricing it way different from what they expected. Eg. Nominal economic growth is 4 % but bond yields are only 2.5 %, to highlight the thing investors have been most surprised by in the last decade: how low bond yields can go and stay

C. And most importantly, about ourselves. About our emotional reactions to losses, our ability to remain rational during periods of pain. Most of us suffer from tremendous loss aversion, as behavioural economists would call it.

6. The power of not trading. “Both buying and selling are a form of hubris” believing that you know more than other people, or that you have some unique insight into a situation. I am pretty sure this does not apply to every investor as I have seen some very effective investors operate with a very active style but there is definitely a difference between knowing when to act and when you are just reacting to the noise.

7. Minimising risk by simply not being overconfident in your views, a very powerful way of ensuring you don’t blow up, don’t put everything on one bet,

8. To flourish in a bear market you need two things: cash and courage. So going into a bear market you need to make sure you have the cash otherwise there is no chance to have courage. This is not easy, very few institutional investors ever raise cash, they tend to remain fully invested. And there are many situations in bear markets where institutional investors are not given the option to invest because either their clients are panicking or because they have not managed their liquidity and risk appropriately. And in the midst of a bear market it’s very difficult to have courage. Great quote from Benjamin Graham on the subject from the depths of the 1932 crash:

Those with the enterprise lack the money, and those with the money lack the enterprise to by buy stocks cheap

9. Needing to know your own temperament and understand your own emotions is absolutely essential as an investor.

To be a good investor you need independence, scepticism, good judgment and courage. Easier said than done.

In his opinion the best investors are “inversely emotional”. They need to be a little on the autistic spectrum: able to see that others are experiencing severe emotions but able to detach themselves from that emotional gravitational pull and go in the opposite direction. Again interesting examples of Benjamin Graham being described as “Humane but not Human”, Charlie Munger as being simply “rational”.

10. So if you are a regular human being, not on the autistic spectrum, can you teach yourself to be “inversely emotional” like this?

It’s not easy. You have to put policies and procedures in place to help manage the emotions. If you are an alcoholic you don’t walk past the bar on the way home. So avoid stimuli and shut off noise that could distract. Focus on and listen to analysis that’s rational and unemotional. How do you put the right governors in place to manage the emotions during a decision making process? To avoid the temptation to react to short term performance and pain of loss but not to be complacent either? To avoid the enthusiasm of a new idea and seeks the world might be different going forwards from the past even when past patterns are different.

Danny Kahneman says its very difficult to do as an individual but it may be possible to do as an organisation with the right structures in place.

If it is possible to do as an organisation, I suspect it is still very very difficult to do, and most will fail. That is because it takes much more than structure, though structure is a prerequisite. It takes an incredible culture. That’s because the the pressures to conform with a crowd are already operating at a small number of people, it’s hard to be independent and diverse even among a group of colleagues. To not be swayed by the myriad of cognitive biases we each have interacting with each other is a big challenge. Not to allow group think to quickly dominate an idea.

We will have to work very hard at establishing the culture as one that is both creative, but also evidence based and rational rather than driven by emotions which are the natural drivers of many of our actions at a level we ourselves may not even be aware. We need to have good mental hygiene! How to do this practically is, I think this is the topic of a whole separate blogpost!

11. Once again value of history, really understanding the lessons of history. Be a student of financial history!

Here is the link to the podcast:

Listen to Elevate Your Financial IQ from The Knowledge Project with Shane Parrish in Podcasts. https://itunes.apple.com/gb/podcast/the-knowledge-project-with-shane-parrish/id990149481?mt=2&i=1000354857225

Business Culture · Learning · Psychology · Relationships

Givers, Takers and Matchers

Adam Grant is an organisational psychologist who has published a book on this concept of the way individuals operate and how they then function in organisations. Organisational citizenship behaviour is the field of organisational psychology focused on behaviours that are not relevant to the task at hand but critical to the success of the effectiveness of the business: speaking up with ideas, effective team work, going the extra mile, sportsmanship, showing loyalty, helping out day to day.

Adam hypothesises a mental model of three basic types of people driven by different values

Givers ask “what can I do for you?”. Givers have a “trust first, ask questions later” bias or heuristic (at least to begin with in an organisation). They have a core value and belief that starts with an assumption that others will be generous. They are afraid of becoming a doormat, being taken advantage of. They are driven by values of generosity and helpfulness.

Takers ask “what can you do for me”. They believe other people are selfish, are mistrustful and prefer to take first to ensure that they get what they want. Takers tend to believe that “other people are always out to take advantage of a situation” and even if people are well behaved suspect “opportunism laced with guile”

Matchers tend to think “I don’t want to be too selfish, if you do something for me, I will do something for you”. They are driven by values of fairness and justice. Matchers start off more conciously thinking “I will be fair to you, and I will make sure I dont get more than I deserve but I dont get less than I deserve.”

Most people have a default mode of operating. Lots of people do adopt a matching strategy to play it safe in an organisation, but most have a tendency towards being either more like givers or more like takers. Some matchers do take the strategy to an extreme and optimise to constantly be in a balance of fair trades which feels very transactional, does not build trust and does not optimise for the long term

Adam wanted to understand how organisations develop their cultures and the types of people who are attracted to them and who succeeds and who fails in those organisations.

He did studies classifying people into the three groups and then measuring outcomes. In aggregate more people are matchers than either givers or takers. So his basic questions were:

What sort of structures are optimal for team and individual performance? Who succeeds and why?

Organisational norms and culture can influence the types of team work that develops. Some organisations are highly competitive and will attract takers, others highly collaborative and attract more givers.

What happens when an organisation tries to change its culture. Highly competitive teams with lots of Takers that try to be more collaborative often end up with a “cut throat collaboration”: This operates as “I will pretend to help you but I am really just waiting for an opportunity to stab you in the back when I can get ahead”.

If you start off collaborative and then move more competitive you often get friendly competition, “I am going to try to be more competitive with you but I am really hoping you push me to raise my game and afterwards we go out for drinks and the loser buys the winner drinks”

Culture comes from what you incentivise and reward. A strong individual compensation focus tends to drives takers, versus collective compensation that tends to drive givers. An organisation full of takers is not going to attract givers.

You don’t want to influence takers to become better fakers by just telling them what you measure: they will then just focus on achieving that. So be careful of being too explicit in your objective setting. If the culture is not strong and carefully managed, you can end up in a culture where the most visibile takers/fakers are the only ones who are successful. Ie you reward those able to manipulate the system.

Instead focusing on the incentives, focus on taking away the disincentives to be Givers in an organisation. Demonstrate that you value their behaviour. For example “to make partner here you have to be more selfish” is not sending the right signal.

In many team work and service orientated jobs no one wants a taker on the team and organisations often find ways of weeding them out so the organisations tend to be heavier in Givers and Matchers.

Darwin proposed a theory of Group Selection: “If you had a tribe where they were always ready to aid one another and sacrifice themselves for the common good, they would be victorious over most other tribes” and that would lead to the possibility of group selection in evolution. The theory was and is controversial but later evidence does seem to prove that under certain conditions there does seem to be evidence for this. A group of all takers is likely to often end up with suboptimal outcomes as individuals aim to maximise their own outcomes and not the groups.

In an analysis of performance evaluation and promotion decisions across 51,000 appraisals across multiple organisations, they found that the amount of time you spend helping others is as critical to assessments of performance, as to how well you do your own actual tasks.

Curiously Givers end up more often at the tails of the distribution either succeeding big or failing big in the business. Even after controlling for other factors this continues to be the case in his data. So for Givers what determines their success or failure?

Their strategy determines this: if you are a Giver, then who you help, when you help and how you help determines your success.

Over time people get feedback and reinforcement on the job. Some Givers get positive reinforcement and go on to succeed. others get negative feedback and reinforcement, feel they are taken advantage of and decide they need to change. The question is whether they change their style (i.e. become a Matcher) or change their strategy (who, how, and why they help).

The danger for Givers is deciding to just to be reactive and help with whatever requests come their way instead of deciding carefully what sort of giving behaviour does the organisation actually need? Is their behaviour aligning with the organisation’s mission and teams objectives.

Time management skills are critical for performance and productivity. Givers who are not thoughtful about how they spend their time can have terrible productivity. Being thoughtful on time management can also be clearly more helpful to others.

An ideal team in Adams view, has a mixture of Givers and Matchers. Matchers tend to be generous because they are matching givers. But you need the Matchers to weed out Takers because givers can be to trusting and too generous to takers whereas matchers will be much harder on them. Matchers believe more in fairness and justice compared to compassion and generosity.

TED talk with Adam Grant

And this Knowledge Cast episode with Shane Parish

Farnam Street interview with Adam Grant

Business Culture · Learning · Psychology · Relationships

Leadership, coaching and managing

The Knowledge Project Podcast Shane Parish with Michael Lombardi, former general manger of the Cleveland Browns and coach of the New England Patriots. It’s a really dense podcast and you find yourself having to pause just to absorb some of the sentences because they are so packed with wisdom.

Four key aspects of leadership

1. Have a plan – have beliefs, a philosophy, create the system clearly, pay attention to the detail.

2. Communicate the Plan clearly and concisely to the people you are leading

3. Trust – people need to know that they can trust you to be consistent and fair

4. Management of self – being able to be self critical, and honest when you make a mistake

Coaching is both leading and teaching, to be successful you have to do both.

Some insights and quotes:

When you win figure out what you did well and do more of that, when you lose figure out what went wrong and what you could do differently.

How can what you have learnt from coaching be applied to raising your children being a parent?

Coaching isn’t criticism but it can easily feel like that. Conveying that you are aiming to help them by giving feedback and your goals are aligned with them and not to be critical of them as a person is a fine line to walk a difficult balance to achieve.

Difference between being a manager and being a leader:

Managers do things right, Leaders do the right thing

The podcast is interesting in itself in how analytical their coaching process, how much they analyse their team, the other team and come up with a strategic game plan that then gets implemented practically with the team. Also about developing a team with enough flexibility to meet very different conditions as they play against different teams.

Here is the podcast

https://itunes.apple.com/gb/podcast/knowledge-project-podcast-by-shane-parrish-curator/id990149481?mt=2&i=1000343404189

Business · Business Culture · Learning · Psychology · Relationships

Nancy Lublin, CEO of Crisis Text hotline

A truly inspiring podcast that I would recommend anyone interested in any of the following topics to have a listen to.

Key insights and takeaways for me:

Business leadership: Being decisive and moving fast, yet still caring very personally for the people you work with

Purpose: Being driven by a real need and passion not money and perhaps not even really aiming to make money, aiming to make a difference.

Hiring: aim to hire someone who you could live with in a bunker with, someone energetic and someone who is not going to bore you

Developing people: it’s okay to have someone onboard for a short period of time where they develop this part of their life/journey and for it then to be time for them to move to something else. Not everyone has to be a lifer ie. with the company forever. But in the time they are with you they have to be energetic and dedicated.

Developing people: Her enjoyment of seeing people through crucial development phases of their lives when they are in their 20s and 30s.

Creativity: giving people enough space to come up with creative ideas and then pursuing the ones that really get you excited

Process: Applying Systems thinking and feedback loops on data to training people, improving systems.

Creativity: Empowering people you work with and getting out of the way of their creativity, sometimes that requires you stepping out of the frame.

Empathy and support:When helping someone in crisis know the magic words: what not to say: don’t ask “why?” questions e.g. Why someone did something: it usually comes across as accusatory and denigrating. (note this is the opposite of what to do when you are being analytic, as highlighted in a previous blog, when asking Why repeatedly is a very powerful technique).

What to say: use the words “proud, brave, smart”. Those words move people from hot to cooler quickly. Use that with your kids too.

Other people’s perspectives: The value of the perspective of younger generations and understanding the millennial generation. Eg. Her insights that at least for a period of time, texting is a more powerful medium than Facebook and other social media as it is more trusted.

The podcast:

Uncut Interview — Crisis Text Line’s Nancy Lublin from Masters of Scale with Reid Hoffman. https://itunes.apple.com/gb/podcast/bonus-uncut-interview-crisis-text-lines-nancy-lublin/id1227971746?i=1000392185172&mt=2

Business Culture · Investment · Learning · Psychology

Improving decision making in committees

A review of decision making literature from UCL on what makes for good decisions in committees is particularly relevant for investment committees:

1. Diversity of participants (functional diversity) with different independent expertise or knowledge makes optimal decision making more likely (finding global rather than local maxima more likely with different starting points for the mathematical optimisation geeks)

2. Slower decision making is more accurate. (And conversely sometimes you need to trade speed for accuracy).

3. Don’t vote, prefer discussion. Getting to a consensus answer or leave it to an expert final choice, if you do vote it needs to expertise weighted (ie some votes count more than others) based on objective expertise measurement, not one man one vote.

4. Over confidence bias: The worse you are at something the more delusional you are that you know the right answer! More expertise often results in less certainty from expert individuals: the problem is they know how much they don’t know and they can take other less expert people’s opinion into account too much. Go with the experts opinion after having the discussion and as the expert balance your opinion carefully with the input from others.

Podcast: The Naked Scientist

Episode 22/08/15

Dan Bang University College London 5:40 mins up to 10:40 mins

https://itunes.apple.com/gb/podcast/the-naked-scientists-podcast/id74171648?mt=2&i=1000391340611