We Are All Traders Now?

Mark Pesce pointed me to Bernard Lunn’s article which contends netizens now live in a real-time Web. Lunn suggests that journalists and traders are two models for information filtering in this environment, and that potential applications include real-time markets for digital goods, supply chain management and location-based service delivery.

Lunn’s analogy to journalists and traders has interested me for over a decade. In the mid-1990s I read the Australian theorist McKenzie Wark muse about CNN and how coverage of real-time events can reflexively affect the journalists who cover them. As the one-time editor for an Internet news site I wrote an undergraduate essay to reflect on its editorial process for decisions. I then looked at the case studies on analytic misperception during crisis diplomacy, intelligence, and policymaker decisions under uncertainty. For the past year, I’ve read and re-read work in behavioural finance, information markets and the sociology of traders: how the financial media outlets create noise which serious traders do not pay attention to (here and here), what traders actually do (here, here, and perhaps here on the novice-to-journeyman transition), and the information strategies of hedge fund mavens such as George Soros, Victor Niederhoffer, David Einhorn, Paul Tudor Jones II and Barton Biggs. This body of research is not so much about financial trading systems, as it is about the individual routines and strategies which journalists and traders have developed to cope with a real-time world. (Of course, technology can trump judgment, such as Wall Street’s current debate about high-frequency trade systems which leaves many traders’ expertise and strategies redundant.)

Lunn raises an interesting analogy: How are journalists and financial traders the potential models for living in a real-time world? He raises some useful knowledge gaps: “. . . we also need to master the ability to deal with a lot of real-time
information in a mode of relaxed concentration. In other words, we need
to study how great traders work.” The sources cited above indicate how some ‘great traders work’, at least in terms of what they explicitly espouse as their routines. To this body of work, we can add research on human factors and decision environments such as critical infrastructure, disaster and emergency management, and high-stress jobs such as air traffic control.

Making the wrong decisions in a crisis or real-time environment can cost lives.

It would be helpful if Lunn and others who use this analogy are informed about what good journalists and financial traders actually do. As it stands Lunn mixes his analogy with inferences and marketing copy that really do not convey the expertise he is trying to model. For instance, the traders above do not generally rely on Bloomberg or Reuters, which as information sources are more relevant to event-based arbitrage or technical analysts. (They might subscribe to Barron’s or the Wall Street Journal, as although the information in these outlets is public knowledge, there is still an attention-decision premia compared to other outlets.) Some traders don’t ‘turn off’ when they leave the trading room (now actually an electronic communication network), which leaves their spouses and families to question why anyone would want to live in a 24-7 real-time world. Investigative journalists do not generally write their scoops on Twitter. ‘Traditional’ journalists invest significant human capital in sources and confidential relationships which also do not show up on Facebook or Twitter. These are ‘tacit’ knowledge and routines which a Web 2.0 platform or another technology solution will not be the silver bullet for, anytime soon.

You might feel that I’m missing Lunn’s point, and that’s fine. In a way, I’m using his article to raise some more general concerns about sell-side analysts who have a  ‘long’ position on Web 2.0. But if you want to truly understand and model expertise such as that of journalists and financial traders, then a few strategies may prove helpful. Step out of the headspace of advocacy and predetermined solutions — particularly if your analogy relies on a knowledge domain or field of expertise which is not your own. Be more like an anthropologist than a Web 2.0 evangelist or consultant: Understand (verstehen) and have empathy for the people and their expertise on its own terms, not what you may want to portray it as. Otherwise, you may miss the routines and practices which you are trying to model. And, rather than commentary informed by experiential insight, you may end up promoting some myths and hype cycles of your own.

Don Tapscott’s Transformation Agenda for Risk Management in Financial Institutions

Paul Roberts pointed me to this Don Tapscott video about how wiki-type collaborative knowledge might transform risk management in financial institutions. Tapscott draws on his coauthored book Wikinomics (2008) to pose the following points:

(1). Financial institutions need to share their intellectual property (IP) about risk management in a commons-based model similar to the Human Genome Project or Linux.

(2). The key IP are algorithms and ratings system for risk.

(3). In response to an objection that the key IP should remain proprietary, Tapscott points to the failure of algorithms and rating systems to prevent the systemic risk of the global financial crisis.

(4). Tapscott appeals to financial institutions to act as peers — “a rising tide lifts all boats” — and that through sharing this information, they can compete more ethically in new markets, reinvent their industry, transform the practices in risk management, and act with a “new modus operandi.”

Tapscott is a persuasive business strategist who manages above to integrate his advocacy of “wikinomics” with the current debate on financial institutions, and his earlier, mid-1990s work on how technology would transform business. He echoes Umair Haque’s call for a Finance 2.0 based on transparency and social innovation in financial markets.

Here are thoughts, some ‘contrarian’, on each of Tapscott’s points.

(1). Read Burton Malkiel or the late Peter L. Bernstein and you will see that finance is driven to innovate new instruments, methodologies and institutions to hedge or arbitrage risk. Some of these are commons-based such as the actuarial development of insurance. Some innovations are now blamed for the problem, such as RiskMetricsValue at Risk methodology. The Basel II Accord which attempts to provide an international regulatory framework raises an interesting question: Under what conditions can a commons-based approach be successfully implemented in an institutional form and practices? Off-balance sheet items and special investment vehicles are two potential barriers to this goal. As for Tapscott’s examples, their success is due to a combination of public and private approaches, such as the parallel research by the National Institutes of Health‘s Human Genome Project and Craig Venter‘s Celera Corporation. This combination dynamic can be left out of an advocacy stance for a commons-based solution.

(2). Tapscott and Haque are correct to identify these as points of leverage. Some of the algorithms and rating systems are public information, such as Google Finance and Morningstar metrics, and trader algorithms on public sites. There are however several potential barriers to Tapscott and Haque’s commons-based view. Investors will have different risk appetites and decision/judgment frames despite access to the same public information. Philip Augar discloses in The Greed Merchants (Portfolio, New York, 2005) that proprietary algorithms rarely remain as private knowledge within institutions unless the knowledge is kept tacit, or in the case of ex-Goldman Sachs trader Sergey Aleynikov, through lawsuits. Aleynikov’s expertise in high-frequency trading which uses complex algorithms and co-located computer systems highlights other barriers: access to technology, information arbitrage, learning curves, and market expertise. As Victor Niederhoffer once observed, this advantage renders large parts of the financial advice or investor seminar industry obsolete, or as noise and propaganda at best. Finally, although public information may help investors it may never completely replace risk arbitrage based on private information or market insight.

(3). Tapscott’s observation about the global financial crisis echoes Satyajit Das, Nassim Nicholas Taleb, Nouriel Roubini and others on the inability of institutions to deal with the systemic crises which the complex instruments and methodologies created. Some hedge fund managers however have been very successful, despite the crisis. Others, notes Gillian Tett in her book Fool’s Gold (The Free Press, New York, 2009) helped create the financial instruments which led to the crisis, yet largely avoided it. So, a more interesting question might be: How did such managers avoid or limit the effects from the systemic crisis, and what decisions did they make?

(4). This is Tapscott as inspirational advocate for change. He echoes Haque on momentum and long-based strategies for investors. He also channels Adam Brandenburger and Barry Nalebuff’s game theoretic model of cooperating to create new markets and then competing for value. This is unlikely to happen in competitive financial institutions. A project to develop a commons-based approach to financial risk management may however interest a professional organisation such as the CFA Institute (US), Global Association of Risk Professionals (US) or the Financial Services Institute of Australasia. Will Tapscott lead an initiative to develop this?

Brian Eno’s ‘Scenius’ Keynote for Sydney’s Luminous Festival

My notes from Brian Eno’s Scenius keynote talk at the Sydney Opera House on 29th May 2009 for the inaugural Luminous Festival as part of Vivid Sydney.

 

Eno goes out of his way to downplay his work and his public image; he also tape records every talk he does.

 

In response to a group of protesters outside who were angry about the Australian Government funding Eno’s trip, Eno explores various governance issues about government arts funding. He felt uncomfortable about receiving government funds. Noting the public influence of scientists such as Richard Dawkins, Stephen Jay Gould and Daniel C. Dennett, Eno states that one of the problems artists faced is that they often did not make clear on their grant funding applications how the broader society would benefit from their work. A second problem was the deliberate mystification by artists of their craft and methodologies. Eno feels that artists need to detail with greater clarity their methodological approach.

 

Eno praises Charles Darwin‘s On The Origin of Species (1859) as a model of clarity which revolutionised our scientific worldview and challenged the prevailing theological interpretations of natural history.

 

He describes Western cultural history as the evolution and interplay of functional artifacts and aesthetic forms. Eno illustrated this by showing and talking about four different screwdrivers from the Sydney Opera House’s maintenance department — contrasting the functional ends with different handles. He also mentioned fashion and joke punchlines as examples of ornamentation and self-presentation.

Scenius’ is Eno’s term for a proxemic subculture which diffuses from an aesthetic response and evolves into a unique design space to solve complex social problems. Eno describes late 1960s San Francisco as a space that was less politicised than is now portrayed, and in his view, was more about a group of people deciding to simply ‘live’ a different philosophy. He also describes the Manhattan Project in these terms, given that the scientists essentially solved the problem of nuclear fission through brute force. He then suggests that there were other scientific frontiers, potentially cold fusion, that were at a similar conceptual and epistemological stage as nuclear fusion was in 1935. ‘Scenius’ also describes Eno’s role as curator/mentor in New York’s ‘No Wave’ scene in the late 1970s.

 

In contrast to these successful large-scale collaborations, Eno suggests the Santa Fe Institute has been a failure, as nothing really has emerged, and its researchers continue to work on their individual projects rather than collaborative research programs. Eno omits that Citicorp’s Walter Wriston tapped Santa Fe expertise so that its capital markets and trading division could develop complexity models of international and cross-border financial flows.

Eno thinks in terms of axes, continuums, and spectrums which are then layered in a possibility space (he uses an overhead projector to explore various axes and issues throughout his talk), and drew on ideas from product development and quasi-experimental methods of iterative, rapid prototyping.

 

He talks briefly about working with Danny Hillis to co-develop the algorithms and music for January 07003: The Bell Studies for The Clock of the Long Now (Opal, 2003), and the rationale and research design of the project for the Long Now Foundation.

 

Eno feels that climate change and the ‘limits to growth’ scenario means that artistic methods for problem-solving need to be diffused more widely, and that everyone needs to perceive themselves as having the abilities to contribute to solutions.

Spearheading Social Media Innovation

Congrats to QUT’s Axel Bruns who now spearheads the Smart Services CRC‘s Social Media program and is likely to become a Chief Investigator in the ARC’s Centre of Excellence for Creative Industries and Innovation. The significance of these appointments is that Bruns has the academic track record as an internationally recognised expert to make a strong research business case to government policymakers, grant-making agencies and institutions for large-scale social media-oriented research.

Bruns’ career illustrates how to navigate the academic research game: it has changed from conference papers and solo projects to team-based projects in competitive institutional contexts. Bruns co-founded the online academic journal M/C Media & Culture in 1998 which became an important open publishing journal in digital media studies and criticism. His PhD thesis cemented his academic credentials, and led to Bruns’ produsage theory of user-created content. This work has underpinned a publications record, collaborations such as Gatewatching with emerging scholars, and streams at the Association of Internet Researchers and Australian and New Zealand Communication Association conferences. Thus, in a relatively short time, Bruns has positioned himself as an internationally recognised scholar on digital and social media innovation.

The next generation of digital and social media researchers can learn from Bruns’ example and career-accelerating strategies.

Jacob Weisberg’s Possible Fallacies

Slate‘s Jacob Weisberg recently surveyed a range of sociopolitical issues from nuclear proliferation to the China Century where the expert consensus might be wrong.

Weisberg’s survey sample includes macroeconomic aggregates (home ownership, asset investment classes, international competition), geostrategic stability (China, nuclear proliferation), and longrun environmental issues (climate change, fossil fuels). In each, Weisberg contrasts a prevailing view, hypothesis or expert with a challenger.

Below are some thoughts on Weisberg’s analyses and observations on research methods in journalism
.

· Selection and Framing of Experts: Weisberg mentions the late realist Samuel P. Huntington‘s thesis on political order in changing societies, to raise concerns about China’s near-future macroeconomic growth. He also refers to neorealist Kenneth Waltz‘s views that nuclear proliferation is inevitable. Huntington and Waltz both represent dominant traditions within international relations theory, and neither are as new or radical as Weisberg seems to portray. The selection and framing of experts is crucial: it would be even more interesting to compare their views with other schools of thought, such as liberal democratic, critical or constructivist theories, which have different deductive premises and levels of analysis. After all, neoconservative fears about Iraq were not just that nuclear weapons acquisition was a defensive action, but also the security orientation of ‘Axis of Evil’ regimes and their potential connections to non-state actors. Perhaps Weisberg could have checked with a nuclear proliferation specialist such as Graham Allison or Jessica Stern. Equally, a China specialist might convincingly show that Hu Jintao’s Chinese government is aware of Huntington’s thesis and has plotted a different future trajectory

· Heretics & Mavericks: Weisberg cites Freeman Dyson as a heretic of climate change models, although Dyson’s scientific expertise is primarily as a physicist and cosmologist. Other mavericks such as the late Federal Bureau of Investigation counterterrorism expert John O’Neill and United Nations weapons inspector Scott Ritter were ostracised in organisational politics, whilst economist Nouriel Roubini strengthened his reputation by foreseeing the global financial crisis. Perhaps it’s also a matter of luck, timing, and having an effective image makeover.

· Incomplete Deductive Arguments: Weisberg observes that market analysts are re-evaluating house ownership, stock investments and the global competitiveness of car manufacturers. Yet the common assumptions that Weisberg mentions are really incomplete deductive arguments with hidden premises. First, home ownership does not necessarily lead to greater community involvement, and the negative factors mentioned (financial risk, labour market mobility, commute time) are weighted during the purchase decision or emerge later in decision regret. Second, evaluating and comparing the risk premia of bonds versus stocks requires further details on the time horizon, sampling frame, weightings and volatility. Shocks such as the 1973 OPEC oil crisis, the 1995-2000 dotcom bubble, the 1997 Asian currency crisis and the current global financial crisis may affect the comparison of bond and stock returns. Third, although the Detroit Three have cut costs and launched several international joint ventures, their debts and liabilities are partly the result of earlier decisions. Weisberg’s argument that these balance sheet issues are the Detroit Three’s main barrier is not really new: asset management and private equity firms have targeted them for over two decades in their acquisition, reengineering and turnaround attempts. Perhaps that’s why the Obama administration has hired media banker Stephen Rattner.

· Inferences from Small Samples: In his sections on long-run stocks, climate change and fossil fuels Weisberg quotes from a single academic study. Whilst this establishes a challenger hypothesis it also probably means that the sample is too small for inferences that would establish a definitive Kuhnian paradigm shift in a knowledge field. Weisberg would have a more robust argument if he referenced meta-analyses which evaluated a group of studies for their sample size and other effects.

Influencing The Gamble

Fiasco author Thomas E. Ricks is gaining positive media reviews for his new book The Gamble: General David Petraeus and the American Military Adventure in Iraq, 2006-2008 (Penguin Press, New York, 2009). The Washington Post has published excerpts; NYT and LA Times have reviews here and here. Ricks joins my list of journalists and open source intelligence researchers who are exem

The reviews suggest Ricks has uncovered lots of rich insights from his reportage on how Petraeus changed US counterinsurgency doctrines in Iraq and Afghanistan, and its policy framework in the Bush administration. Petraeus was informed about Vietnam’s counterinsurgency lessons through his PhD studies at Princeton, completed in 1987. He also chose several foreign-born advisors with subject matter expertise such as Australian Lt. Col. David Kilcullen. Finally, Petraeus cultivated several allies in military and policy circles who led a counter-response to convince the Bush administration to re-evaluate its policies. American Enterprise Institute resident scholar Frederick W. Kagan was a prominent warrior-scholar in the successful counter-response. So, timing, an institutional track record, a team of advisor-experts and coordination with co-journeyers was vital to Petraeus’s successful case for policy and doctrine change.

How Keynes Gained Self-Mastery To Influence Global Leaders

The global financial crisis has refocused commentators on the life of intellectual/vipra John Maynard Keynes. Hedge fund manager Barton Biggs devotes the closing chapter of a recent book to Keynes’ aesthetics, investment style and economic influence. Ex-World Bank investment manager Liaquat Ahamed zeroes in on how Keynes became so influential in the first chapter of his new book Lords of Finance: The Bankers Who Broke The World (Penguin Press, New York, 2009):

As I began writing of these four central bankers and the role each
played in setting the world on the path toward the Great Depression,
another figure kept appearing, almost intruding into the scene: John
Maynard Keynes, the greatest economist of his generation, though only
thirty-six when he first appears in 1919. During every act of the drama
so painfully being played out, he refused to keep quiet, insisting on
at least one monologue even if it was from offstage. Unlike the others,
he was not a decision maker. In those years, he was simply an
independent observer, a commentator. But at every twist and turn of the
plot, there he was holding forth from the wings, with his irreverent
and playful wit, his luminous and constantly questioning intellect, and
above all his remarkable ability to be right.

Keynes proved to be a useful counterpoint to the other four in
the story that follows. They were all great lords of finance,
standard-bearers of an orthodoxy that seemed to imprison them. By
contrast, Keynes was a gadfly, a Cambridge don, a self-made
millionaire, a publisher, journalist, and best-selling author who was
breaking free from the paralyzing consensus that would lead to such
disaster. Though only a decade younger than the four grandees, he might
have been born into an entirely different generation.

Ahamed offers several lessons here on self-mastery strategies for intellectuals/vipra who desire to influence the objective universe. Keynes mastered a repertoire of roles which developed his intellectual strengths through a boostrap process. Although an establishment outsider, Keynes influenced the frames and contexts of economic decision-makers and political leaders, and in doing so, created the Keynesian school of economics.

Keynes used luck, timing and dramatic situational contexts such as the Treaty of Versailles negotiations in 1919 and the Great Depression in 1929-33 to protest against the establishment, create a reputation for asking difficult questions, and to envision solutions. Through each of these exogenous shocks he used his repertoire to gain influence and public notoriety, despite financial and health setbacks. From his initial antinomian commentary, Keynes’ scale and scope of his solution design expanded to its zenith: the co-design of the Bretton Woods system for international fixed exchange rate and monetary policy management, which lasted from 1944 to the Nixon Shock in 1971.

For consultants and foresight practitioners who wish to cast their influence into the world, Keynes’ career path and strategies illustrates one model of how to achieve this.

Picking Up The Phone To Hear White Noise

Social-democrat economist John Quiggin fires an interesting salvo in the journalist-blogger debate: ethics and journalistic practices are perhaps the key distinction between the two.

Watching the hostility between ‘old media’ journalists and some Web 2.0 bloggers is often like watching Muzafer Sherif‘s Robbers Cave experiment. For bloggers, traditional journalists are constrained by objectivity, news values and institutional power, and traffic in biased op-ed columns and lightly rewritten corporate press releases. For journalists, bloggers don’t understand the norms and practices of the craft, don’t navigate the institutional shadow network, and vary greatly in the quality of their analytical insights. The two clashing stereotypes fuel a circular debate, which like Sherif’s experiment, may only change when a frame-changing exogenous threat is introduced.

For me, Quiggin makes three key points: (1) journalists have a socially recognised role to “pick up the phone” and talk to strangers; (2) journalists may select material from their interviews into a story and do not have to report everything; and (3) journalists have “a formal code of ethics and a set of informal conventions” to do this whilst bloggers do not. In doing so, I believe Quiggin adopts a middleground position similar to Terry Flew, Barry Saunders, Jason Wilson (from their YouDecide2007 project) and my own thoughts on citizen journalism, with some new insights.

My personal experience of Quiggin’s first point is that their role can empower journalists with Freedom to talk with anyone, and to view a situation through different, iterative stances. As I discovered during a 1994 student journalism stint and 1995 coverage of Noam Chomsky‘s Australian lecture tour, this is a great shock: in the right situation, people can tell you anything, and you can also become a a participant-observer who is now inside the unfolding events. It’s a little like Jim Carrey‘s character in the romantic comedy film Yes Man (2008): you ‘forget’ the self-limitations of yourself and act beyond normal social conventions.  As Quiggin observes, few people can ask questions of strangers and expect to get revelatory answers.

This approach reaches its zenith in New Journalism as a methodology and repertoire of practices in three ways. First, the journalist may create the “story” through a catalytic, influential effect on the external environment. Second, the journalist can become part of the “story” through capturing their subjective consciousness, and trying to capture a similar stance from the other participants through internal dialogue, scene reconstructions and other techniques. Third, the journalist has more freedom in convention, methodology and practice, such as using fiction techniques in a non-fiction profile. At its core, New Journalism fuses autoethnography, anthropology and acting, which are facets that a blog publishing system might not capture.

Quiggin’s second observation is a major flashpoint in the debate: how journalists hone a story and select the facts to report. Bloggers turn to critical media studies for many of their arguments: objective news values, op-ed columnists and other biased sources, institutional forces, and a conservative implementation of web publishing capabilities. In turn, journalists point to the chatter/noise factor in blogs: they may be alternatives to op-ed columnists and newswire press releases yet do not yet replace areas that are resource-heavy and have mature practices, notably investigative journalism. Bloggers counterargue they have more freedom to use nonlinear narrative styles and to publish the raw sources. Perhaps one of the lessons from YouDecide2007 and AssignmentZero was that the editorial decision process to hone and select material is more nuanced in practice than Twitter‘s role as a first responder in disasters and emergencies.

How do journalists navigate such decision processes? Journalists have discipline-based norms, practices and ethics as barometers. This acts as a check and balance within newsroom culture and its role only becomes clear in a go/no-go decision where the editor has to weigh up the competing interests of different stakeholders and the potential outcomes of publication. In contrast, many bloggers appear to be driven by normative-based anchors (Web 2.0 compared with institutional journalism) and commons-based advocacy (education, sustainability, future generations). But belief alone in noosphere politics and networks may not be enough to surmount the different manifestations of power. If bloggers want to influence the objective universe they can learn much from journalist ethics and strategic nonviolence.

Wikinvest

Parker Conrad and Michael Sha launched Wikinvest in 2006 to gather user-generated security analysis. The project collates wiki profiles on investment concepts, fundamental analysis of companies and technical analysis of market price movements. It also appeals to MBA students with sections on personal investing, investment concepts and funds management. Conrad and Sha have graduated from Harvard dorm day traders to Web 2.0 knowledge entrepreneurs.

Claire Cain Miller’s New York Times profile makes the obligatory link with Wikipedia, the online encyclopedia. Conrad and Sha go into some detail of their verification process for data and public sources. Actually, the wiki has some specific applications for the pooling or crowdsourcing of investor insights. Sell-side analysts in the research departments of investment banks can have dual allegiances if the underwriting departments incentivise their research products to drive sales revenues. The best will gravitate to portfolio managers, dynamic asset allocation and hedge funds that use event/risk arbitrage and short-sell strategies. An investor wiki could provide a counterbalance to these influences through a broader snapshot of investor sentiment, and strategies to delimit analyst biases and groupthink. A side-effect however is that investor views are more likely to converge to a mean, and the market efficiencies may thwart value investing strategies that require information asymmetries.

In fact, the Wikipedia analogy has some limitations because analysts, traders and portfolio managers all structure and use market information in different ways to online encyclopedias. This was one of wiki creator Ward Cunningham‘s insights when he devised the Portland Patterns Repository in 1995: the value of a repository to capture domain knowledge and processes, and to codify them from tacit to explicit form using a methodology such as design patterns or object oriented programming structures. If it stays within Wikimedia’s online encyclopedia model then Wikinvest will be suited to fundamental analysis and introductory investing topics. However, it could evolve into a different form if it adopts insights from behavioural finance and tactical asset allocation into the wiki process. These areas augment Cunningham’s original schema with strategies to deal explicitly with how information quality and source selection can affect investor decisions, judgment and verification. Even these vary depending on the end-user, their self-awareness, the intended contexts of use, and what potential outcomes may occur (a normative stance on the superiority of user-generated content over ‘traditional’ media is not sufficient alone to address the concerns that these processes are meant to anticipate and solve). The pressure to change and evolve may come from sell-side brokerages which now use Wikinvest as a cost-efficient data source for market commentaries. Alternatively, it may come from Wikinvest’s end-users as the wiki gains more public prominence, and attracts a range of investor styles with knowledge of asset classes, inter-market volatilities and global dynamics. If this occurs then Wikinvest and other wikis could have a pivotal role in the democratisation of finance beyond London, New York and Chicago.

Just don’t be surprised if Icahn Reports maven Carl Icahn (video) launches a wiki raid.