My last post got me thinking a bit more about uncertainty and decision making. It reminded me of a podcast I had listened to a while back, on uncertainty, storytelling and hedge fund managers.
It is based on the work of David Tuckett at University College London.
This is the line that I remembered. In the interview Tuckett said, “Fund managers have too much information but never enough; therefore [they] have to gain conviction for their actions by telling themselves stories.”
Tuckett is an economist turned psychoanalyst who has been studying the emotional underpinning of financial markets.
In the podcast he is discussing how hedge fund managers make investment decisions. What fascinated me was this underlying idea of how these men (in most cases) manage uncertainty and ambiguous information. According to Tuckett’s analysis they are not the typical caricatured geniuses or hucksters. They are relatively decent people who want to do right by their clients.
The trouble is, they are deluged with information.
The uncertainty in this instance arises not from the absence of information, but the inability to tease apart the relevant information from the irrelevant. Yet they have no choice but to make investment decisions, with the information before them. Decisions that are consequential for them and their clients. Without clear decisive information, Tuckett says, they can quickly become overwhelmed with anxiety.
And how do these men cope with the need to make decisions in the absence of information?
According to Tuckett, the only way they can overcome anxiety and find the conviction to act is by inventing stories. They essentially create a narrative to justify their actions, whether it is to hold on to certain shares or to sell them.
Here is what he says:
Listen to the podcast:[ It is about 20 min into the podcast. ]
Here is the paper:
Tuckett’s overall concern seems to be the culture of “group think” these men are in, rather than the actions of individual managers. His work is mainly a critique of the so called “rational” framework of economic theory.
But it made me wonder, could they have done this differently? Would any of us have acted differently faced with the same deluge of murky information? Perhaps a narrative, of some sort, however delusional is necessary when faced with this kind of ambiguity.
It is based on the work of David Tuckett at University College London.
This is the line that I remembered. In the interview Tuckett said, “Fund managers have too much information but never enough; therefore [they] have to gain conviction for their actions by telling themselves stories.”
Tuckett is an economist turned psychoanalyst who has been studying the emotional underpinning of financial markets.
In the podcast he is discussing how hedge fund managers make investment decisions. What fascinated me was this underlying idea of how these men (in most cases) manage uncertainty and ambiguous information. According to Tuckett’s analysis they are not the typical caricatured geniuses or hucksters. They are relatively decent people who want to do right by their clients.
The trouble is, they are deluged with information.
The uncertainty in this instance arises not from the absence of information, but the inability to tease apart the relevant information from the irrelevant. Yet they have no choice but to make investment decisions, with the information before them. Decisions that are consequential for them and their clients. Without clear decisive information, Tuckett says, they can quickly become overwhelmed with anxiety.
And how do these men cope with the need to make decisions in the absence of information?
According to Tuckett, the only way they can overcome anxiety and find the conviction to act is by inventing stories. They essentially create a narrative to justify their actions, whether it is to hold on to certain shares or to sell them.
Here is what he says:
“Stories involve weaving facts together within an imaginative context. The specific stories managers told me about the individual securities they chose to buy, sell or hold were woven to legitimise the sense that their choices were linked to their general strategy. They also had to create the emotional conviction both to allow them to tie the initial knot when making the investment (creating a dependent relationship) and then to allow them to tolerate impatience and doubt so that they could remain attached to their decisions for the length of time necessary to let things work.”
Listen to the podcast:[ It is about 20 min into the podcast. ]
Here is the paper:
Tuckett’s overall concern seems to be the culture of “group think” these men are in, rather than the actions of individual managers. His work is mainly a critique of the so called “rational” framework of economic theory.
But it made me wonder, could they have done this differently? Would any of us have acted differently faced with the same deluge of murky information? Perhaps a narrative, of some sort, however delusional is necessary when faced with this kind of ambiguity.
This is the same process employed when it comes to any diagnostic work (even doctors do it), since one has to formulate a narrative and then look for evidence to support or refute it.
There is a distinction that also needs to be considered when examining financial markets, since many of the analysts knew that there were high risks in some of the financial instruments, but instead of being cautious, the objective was to simply play the game under the assumption that someone else would be stuck paying off the "sucker's bet".
All one has to do is look at the housing market to consider that when organizations engage in selling paper to each other, the concept of the lender's risk is lost. Who loses? Certainly not the group that provided the original loan, since they have long sold the obligation to someone else downstream. It becomes a kind of "hot potato" since that money can be made by all the intermediate transactions with the hope that you aren't the one left holding it when the bill comes due.
These problems aren't the result of incomplete information as much as they are the product of reckless abandon that precludes thinking that anything bad can ever happen. It's the unwarranted hubris of the financial markets that creates these disasters.