Perspectives and Investing
Alan Kay has been described as the father of mobile computing and at the weekend I read a quote attributed to him that resonated,
‘a change in perspective is worth 80 IQ points’
Far too many investment firms seem to value IQ highly but are less focused on the value of a changing perspective. It is my contention that this crisis will require a shift in many perspectives and those that do will disproportionately benefit.
Pondering what perspectives might be meaningfully changed for asset managers was part of a lengthy and interesting discussion I had this week with a Hedge Fund founder. I thought to share some of the things we talked about.
It seemed to us that ‘suddenly’ many business issues have much more of a focus on customer behaviours and that almost overnight psychology is now more applicable than ever in the eyes of business leaders. Questions of resilience and how customers and employees feel are no longer ‘fringe’ discussions.
We talked about the fact that a house white wine in a small fishing port on a Greek island in July taste so much better than the same Greek wine bottle bought in the supermarket. Logic says it should taste identical.We all know how we feel affects our outlook.
Isn’t it curious that video conferencing technology has been around for many years and has worked well but all of a sudden adoption of Zoom has exploded and looks like it is here to stay. How we feel matters in adoption.
‘How risky is a transatlantic flight?’ This can be answered from 2 broad perspectives.
The pre crisis default answer of rational types would be, ‘well, let’s look at the data on flight safety over the last 40 years and conclude a quantifiable probability’. The answer linked to flight catastrophe, according to The Economist, is one in 5.4 million.
Logic likes a single identifiable answer!
The second perspective and without doubt the non default answer pre crisis, would have been, ‘well, it’s not possible to generalise, the answer is subjective and depends on how each passenger feels. Some passengers will have varying degrees of anxiety about being at 37,000 feet for 8 hours and yet others will be super relaxed or even excited about some wine and a movie.
There is no single right answer.
Perhaps it takes a crisis to shift perspective and thus many investing habits?
Behavioural Investing is in 2020 a well known topic BUT most who discuss it, focus on the irrational behaviours of others and seem to find it easy to judge the ways other investors have it wrong. We discussed how a shift needs to happen, firms need to support investors to understand their own behaviours and raise self awareness in individual peculiarities.
One area of investing we discussed as ripe for a different perspective was risk management.
Ultimately, the purpose of risk management is to ensure that risk is being taken thoughtfully in order to reach the clients long term return expectation. Active asset management firms could (and some of the most thoughtful are already) start shifting perspective by deemphasising trying to think about risk as objective or a single right answer. This focus on volatility, value at risk or a portfolio beta is fine …. but a change in perspective to understanding the natural risk disposition of an individual PM might be more important. In my view one of the biggest risks in any fund is the fact that most PM’s do not know how they tend to react to market risk!
Is it possible to analyse individual risk disposition? Yes, reliable assessments exist. Shifting perspective toward better understanding of a teams risk disposition, how they read situations and how they are likely to react, improves decision making and resilience.
We didn’t conclude it was worth 80 IQ points but at a minimum an enhancer of investment skill.