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.

Neil Chenoweth’s 2008 Walkley Award for Business Journalism

Congratulations to forensic journalist Neil Chenoweth and his colleagues on their 2008 Walkley Award for Business Journalism: an investigation into the failed stockbrokers Opes Prime.

I interviewed Chenoweth in 2002 for a Masters paper on Rupert Murdoch’s negotiation strategies.  During our talk, Chenoweth gave me a couple of “aha!” moments on how to conduct a forensic journalism investigation, Murdoch’s use of game theory to understand other parties in a deal, and the murky underworld of cable and satellite television.

Chenoweth writes regularly for the Australian Financial Review, an Antipodean equivalent of the pre-Murdoch Wall Street Journal.  Chenoweth’s Virtual Murdoch: Reality Wars on the Information Superhighway (Secker & Warburg, London, 2001), published in the US with new material as Rupert Murdoch (Random House, New York, 2004) chronicles his decade-long investigation into the world’s most powerful media mogul.  Read a chapter-by-chapter summary here.  Chenoweth’s book Packer’s Lunch (Random House, Sydney, 2006), reviewed here, also has substantial research on Sydney’s corporate dealmakers in the 1990s and their Swiss bank accounts.

Ebook Textbooks & The Market for Lemons

The software consultant Ed Yourdon once warned US programmers in his book Decline and Fall of the American Programmer (1992) that they faced global hypercompetition.  This was a fashionable message in the turbulent early 1990s of industry deregulation, export tariffs, mega-mergers, downsizing and reengineering.  Spenglerian pessimism made Decline and Fall an IT bestseller as Eastern European and Russian computer programmers emerged as low cost competition with their US counterparts.  Now in Thomas Friedman‘s vision of a flatter world the Eastern European and Russian computer programmers have help from an unlikely source: electronic copies of IT textbooks.

Several barriers mean that US textbook publishers are cautious about embracing ebook versions.  Publishers fear the Napsterisation of ebooks on peer-to-peer networks.  There’s no standard ebook device although Amazon’s Kindle is the latest candidate.  There’s no standard ebook format: most use Adobe PDF, however when Acrobat 8 was released Adobe shifted its ebook functionality to a new Digital Reader that did not necessarily read a user’s existing ebook collection.  Potential customers do not have a utility function to necessarily favour ebooks over printed copies: publishers charge high prices for ebook versions that may contribute a higher contribution margin to profits but that give the customer little price differential compared with print counterparts.

The implementation of digital rights management (DRM) also leaves much to be desired: McGraw-Hill’s Primis uses a digital fingerprint on a hard-drive that voids an ebook even if reinstalled on a reformatted drive due to a virus, whilst Thomson’s Cengage Learning uses a time-sensitive model which gives the user access for one semester to an ebook with the full price of its exact print version.  Publishers are also slow to adjust cross-currency rates: Australian textbooks still cost $A120-$200 despite near parity between the Australian and US dollars.

Thus, it’s no surprise that ebook divisions remain small in multinational publishing conglomerates.  One exception is Harvard Business School Press which appears to have ditched Sealed Media’s DRM plugin for Adobe Acrobat after Oracle acquired SM in August 2006 and then had integration problems with information rights management.

These barriers suggest a failure in market design with analogies to George Akerlof‘s study of the used car market in his influential paper The Market for Lemons (1970).  Publishers counter that although there is a lack of ebook standards similar to Akerlof’s paper the economics of publishing provide a disincentive to lower prices.  They claim high fixed costs in printing, photography rights and licensing fees for the case studies taken from Businessweek, Fortune and The Wall Street Journal.  Author fees and promotional budgets to professional associations add variable costs –  however, Australian academics have a disincentive to publish textbooks compared with their US colleagues, as Australia’s Department of Education, Employment & Workplace Relations does not provide recognition points.

To survive US textbook publishers have turned to global market models with regional editions of popular texts (such as Asia-Pacific editions with local coauthors), and adopted the music industry’s business model of electronic and online content (similar to how record labels have released Dualdisc, DVD and collectors editions of albums).  However as Yourdon warned US programmers this may not be a business model with longterm sustainability.  MIT’s OpenCourseWare, Apple’s iTunesU and Scribd all provide free content that mirrors the generic content in most textbooks, although some differentiate via a problem-based approach.

Yourdon’s ‘challenger’ computer programmers now also have illegal BitTorrent sites such as The Pirate Bay, filehosting networks such as Rapidshare, and ebook sites including Avaxsphere.com and PDFCHM to choose from.  The last two provide solutions to Akerlof’s challenge in market design: they have an easier user interface, a broader (illegal) catalogue of ebook titles, and DRM-free files compared to Cengage Learning or McGraw-Hill.  Even business strategists are getting in on the act, as Clayton Christensen, Curtis Johnson & Michael Horn explore in Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns (McGraw-Hill, New York, 2008).

There’s one textbook coauthor who came up with a unique solution to Akerlof’s dilemma in market design.  His Macroeconomics book coauthors Andrew Abel and Dean Croushore opted for the mod-cons from publisher Addison-Wesley: an online site and a one-semester ebook version as a bundle deal.  The textbook coauthor?

Federal Reserve Chairman Ben Bernanke.