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.

Worth Reading

The emergent theme: mastery of craft and practitioner awareness as vehicles to engage constructively with inter-group, stochastic processes.

· Nu Testaments: James Parker posits that the high-profile religious conversions of Korn‘s Brian ‘Head’ Welch and Reginald ‘Fieldy’ Arvizu are the flipside of drug abuse and nu-metal touring. Will they appear on Celebrity Rehab with Dr. Drew? Will they join the 25th anniversary tour of Christian heavy metal band Stryper?

· Newsted on Metallica: ‘I never looked back’: Good advice from the ex-Metallica bassist on how to handle life after leaving a super-team: make an independent course, don’t live in the shadows of past successes, and keep the door open for future one-off collaborations. Update: Metallica.com’s 3am message and Blabbermouth’s coverage of Metallica’s Rock And Roll Hall of Fame induction.

· Inside a Hedge Fund Meltdown: Hedge fund trader Victor Niederhoffer gives his side of the story about the Refco transaction that led to his ‘blow up’ during the 1997 Asian currency crisis. What a difference a few hours could have made . . .

· Impossible Frontiers: Andrew Lo‘s research sits at the nexus of quantitative finance and practical experience in running a hedge fund, AlphaSimplex. This paper (abstract) co-written with Thomas J. Brennan suggests limitations in the Capital Asset Pricing Model, which determines an appropriate mix of risk and return for a diversified market portfolio, and has implications for funds which rely on short-selling to generate alpha, or investment returns above the market benchmark and vetted for risks.

· Credit Suisse Asian Investment Conference 2009: view the keynote panels and read the conference guide.

· Double Standard? CEOs who want a bailout often adopt the rhetoric of Gary Hamel and C.K. Prahalad‘s book Competing for the Future (1994): government money is necessary for industry survival. James Surowiecki’s ‘paired study’ of the US auto and banking industries shows why the Obama administration’s private equity advisers are pulling the plug: years of firm mismanagement, no profit margins, variable future cash flows, poor liquidity, and international competitiveness.

· Why Your Boss Is Overpaid: Tim Harford’s article was an ‘aha!’ moment on how individual incentives, status hierarchies and infra-group rivalry can sabotage teams. The second ‘aha!’ moment was to grasp how the Australian Government’s recent changes to performance measures in the academic research game are likely informed by tournament theory.

· Henry Rollins’ diary entry 29th March 2008: Some very useful advice on patience and the writing craft: ‘I know a year and a half sounds like a long time and it is but not when it comes to a book. Trying to write has taught me about patience. I remember many years ago, I was living in NYC and working on Get In The Van. I had come back from practice and went back to work. My chair was a bed and my desk was a steamer trunk with a box on top of it. I was transcribing writing out of a notebook and it hit me that in a year, I would still be working on this same book. There is yet another book project that I will start preparing for second draft raking soon if I can get clear on other projects.’

· Xeper as an Operative Secret: Don Webb‘s short essay reveals the Temple of Set‘s initiatory raison d’etre: individual, self-willed becoming. He omits, but has mentioned elsewhere, one powerful psychological framework to achieve this life-orientation (Mihaly Csikzentmihalyi‘s research on creativity, flow and positive psychology) and a very good fictional example of the method and its potential results (Gully Foyle’s transformation in Alfred Bester‘s The Stars, My Destination).

· Event Arbitrage (HBS 9-208-090, 2007): Outlines a two-day M&A simulation and provides details on the market microstructure, merger announcements and transactions. Also explains how to value a ‘negative stub’ alternative investment strategy.

· Managing Learning and Knowledge at NASA and the Jet Propulsion Laboratory (JPL) (9-603-062, 2002): Summarises the lessons learnt from the Apollo moon missions, the Space Shuttle program, and the high-profile failure of several satellite missions in the mid-to-late 1990s. NASA’s KM and organisational challenges included shifting from a heavyweight, waterfall style of project management to the Faster, Better, Cheaper program; the looming retirement of senior staff with organisational memory, and technology solutions which failed because culture, team, and knowledge transfer issues were not addressed. Details a project management office solution which included a budget line item, intranet/portal development, a debriefing process for decision trees and project failures, and a leadership development program. A major outcome is NASA’s Lessons Learned Information System which parallels the US Army’s Center for Lesso
ns Learned
.