Pulses Ripple

Reality is complex. We can’t simplify it as much as we would want to. We can create structures and simplifying stories to help us make decisions, but there needs to be an acknowledgment that we don’t all live the same lives. 

Our realities bump. Understanding requires work. No one has the capacity to understand in every way. We end up having to trust each other. Trust each other to go down different paths, while figuring out a way to stay in connection. 

We can be right on the edge of human knowledge. If there is no connection back, even if someone expands those boundaries, no one else will apply the learnings. 

There is a big tension between applied knowledge and theoretical knowledge. Opening questions up and closing down options to make tangible decisions. Sometimes by going down theoretical rabbit holes, you lose touch with other people. You live in a different place even if you are physically in the adjacent spot. 

Because of randomness, ambiguity, and complexity, we don’t and can’t understand how everything is connected. We don’t and can’t know all the consequences of our decisions. We need to build in feedback loops, and capacity to understand the impact we are having on the world. 

Actions matter. Actions have consequences. Consequences have consequences. We pulse, and our pulse ripples. The ripple is too complex for us to understand. We have to let go of that. 

We are here. We are part of the world. Making peace with that complexity is difficult and important.

Going to Zero

Nassim Taleb has written about Risk in a very accessible way. His books include “Fooled by Randomness”, “The Black Swan”, and “Anti-Fragility”. He writes about risk and decision-making. In particular, he looks at tail risk. The extreme events that have never happened before, but will have a dramatic impact. Events that fundamentally change everything.  If you only look at what has happened, you assume that things are fairly controlled. That the world is like the spinning of a coin, or the roll of the dice, with varied but fixed outcomes. But it is more complicated than that. Real risk is not normal. It has fat tails, so there are more outliers (unusual observations), than would normally be expected. That is on both the upside and the downside. When normal changes, it can change dramatically. When you think through risk, you need to ask, “What makes this go to zero?”. You need to know what will destroy you, and you need to protect for those risks. Then you need to position yourself to be available for the positive surprises. Why could this go really well? You do not know that it is going to go really well. But you need to open yourself up to that possibility. Risk can't be studied purely by looking at history, even though history matters. 

Risk and Return

I had failed stuff before, but not academic stuff. When I got to University, I was left dazed and confused on several occasions. Sometimes for time pressure reasons and the sheer volume of work to get through. I was made to fully realise the limits of my academic ability. My mantra getting through was, “This is not Rocket Science. You are not pushing the boundaries of human thought. Other people have done this before.” One idea that I found really problematic coming out of the maths of finance was the oversimplifying of risk to volatility. Volatility is quantifiable. It is how much the average observation, differs from the average of the observations. So, if you know the average, how far “on average” will one of the parts be away from that. It is appealing if you can count something. If you want to believe in a world where you can clearly say return simplifies down to a number, and risk simplifies to a number. Then you can adjust return for risk. Take the level of risk appropriate for your appetite, and you choose the option at that level with the highest reward. Now, that seems beautifully simple. It is just wrong. You don’t get paid for taking risk. You get paid for value added. You don’t get paid for complexity, you get paid for solving things. You don’t get paid for not failing. You get paid for getting to a solution.

 

Big Picture

No one has a view of the whole picture, or the ability to process it. We do not know in advance what the correct destination is, or what our future choices will be. We make our choices based on what we already know, with a limited glimpse forward of the possible consequences of our actions. There are individuals whose choices go against the grain, but if you look at a big enough picture, prejudices and bias starts to show. Daniel Kahneman and Amos Tversky opened up the field of Behavioural Finance and the study of cognitive biases. When you look at groups and group decisions, you can get a sense of how our processes work. This doesn’t mean we aren’t individuals. But we are individuals who don’t live in isolation. Our choices are affected by the choices of those around us. They are affected by the constraints of physics, time, and our very human limits. Context is everything when grasping at the randomness, ambiguity, and complexity of wrestling with personal choices and understanding. 

Big Picture

 

Turning on the Tom Tom

Autonomy suggests individual decision making. If it is abstract (controlled and theoretical), it works very well. In reality, our decisions impact each other in complex, ambiguous, and random ways. How do you handle joint decisions when a path is shared? Tom-Toms are one form of GPS. My wife’s name is Gemma John. We were once driving through an area in Fulham across the river from where I lived in Putney. The GPS was telling us to go one way but Gem was pretty sure we should go another way. So I turned off the Tom-Tom and listened to the Gemma John. Even in an area I knew reasonably well, I had got to the point where I had to decide whether the GPS was doing a better job than me (when in doubt), and whether to trust it or not. At what point do you delegate your decision making when you are in an area you do not understand? Or when someone (or something) can make better decisions than you, even if you believe you have a decent understanding? 

 

Wrestling with Ideas

A good idea is not enough. Bringing a thought to reality is a complex coordination problem that requires time, resources, and connection. I have wrestled long and hard with my inner idealist and pragmatist. Learning which battles to pick. Learning the art of silence. Learning when good intent actually escalates conflict. Learning when there is no need or value in defending myself or my beliefs. And when there is. I find it interesting that in stories of the old sages, the wise old hermits that get consulted seldom do more than ask ambiguous questions. As if those who know the most are those who see the humour in it all. In my utopia, my understanding of the world is not forced on others. I am an anarchist in that way. My ideal relationships are peer to peer. But I am not submissive, and am resistant to those who wish to dominate without consent. A dance between protecting my good ideas, and letting them go enough for them to influence reality.

 

Risk Tolerance

Financial Planning starts with a conversation about you and your relationship with money. The goal being to understand your risk tolerance. If you want to still the waves of money anxiety, you are building your capacity to deal with complexity, randomness, and ambiguity. We do not, and cannot, have a complete understanding of cause and effect. We cannot know in advance what the result will be for each path we pick. If we did, we would all just pick the one that took us to our intended destination. The rules are always changing. You cannot just do exactly what has been done in the past, and expect the same result. A good conversation about financial planning starts with understanding you as a person, how you see money, what your goals are, and what you value. You do not get paid for taking risk. You get paid for adding value in monetizable areas others have signaled is in short supply. Risk tolerance is mainly your ability to adapt, adjust, and accommodate. Like physical strength and flexibility, risk tolerance is something you can build through exercise. Then you make money, or your money makes money, by solving problems for decision makers with money.

Polis Smous

I started my career in Finance in South Africa and the United Kingdom during two watershed moments. Just after the bursting of the Internet Bubble, and during the cracking of the walls around endowment policies and remuneration of Insurance Sales. Endowment Policies pay a lump sum after a specific term or on death. They combine investment and risk cover. The sales people often were not professional financial advisors giving appropriate advice. They were remunerated up front, in commission. If the client stopped paying their premiums, or another “Polis Smous” (Policy Hawker) convinced them to churn/swap, there were big, indefensible, clawback penalties. The scandal made the environment ripe pickings for “Pure” investment or risk products, and saw a massive professionalisation of the advice industry. Allow time to pass, and even the pure grow and get legacy skeletons in their closet. The constant trade off between starting from scratch, and keeping the good bits of the old way of doing things. As the environment changes, we need to change. The question is whether we are brave enough to be transparent and honest.

The Power of Grayskull

Risk is not just the chance that something will go wrong. The study of risk goes wider than that. Looking at the complexity, ambiguity, and randomness of the world and asking whether within that, “is there anything that we can rely on?” When you look at an individual instance of something, it is a bit of a roll of the dice. At least with dice, while there is uncertainty, there can only be six clearly defined outcomes. With a coin, there can only be two outcomes. If it is a fair dice, and you roll it enough times there will be roughly the same number of ones, twos, threes, fours, fives, and sixes. If a coin is fair, toss it enough times they will be roughly half tails and half heads. It is not merit that drives victory. Actuarial Science is partly the study of, and attempt to weather the storms of, the underlying distribution rather than the specific result. The distribution is the variety of outcomes that are possible. Alternative histories. A form of “there, but for the grace of God, go I”. What happens if we pool risk, and stop taking full credit for everything that goes well or badly? What happens if we admit that we are not Masters of the Universe?

Point of Focus

Some of our waves of money anxiety are memories. Both of our own experiences and those of the bubble we are born into and raised in. These thoughts that push our decisions in various directions may not even be things we are aware of. The Yoga Sutras call memory waves Smriti, and they can be mighty obstacles. Smriti are not all negative. Some generational strengths get hidden beneath dirt, waiting to be rediscovered and polished. Beneath both the positive and negative lies the permanent. The point of focus that lets us unravel all the randomness, complexity, and ambiguity. Becoming aware of our subconscious, conscious and dreams and building a daily practice around that point.

Relative Size of Sun, Earth and Moon

Creating Calm

“Past performance is used as a guide only. It is no guarantee of future returns. Your investment can go up and down and you may not get back the full amount invested.” This is the standard disclaimer that all asset managers are obliged to make part of the conversation. Investments can, and do, double, triple, quadruple, or go to zero. There is so much noise, and difference between daily, monthly, and annual returns that it bears little resemblance to a salary. Even though your money is working. A salary is more analogous to a dividend. A dividend gets declared. Management aim to smoothly pay for the use of Capital. Aim to increase it each year. To pay it sustainably. They consider the strength of the capital to endure, and the ability of the business to adjust. The challenge is looking for the signal in the noise. Creating the ability to cope with the noise. Creating calm in a continuous storm.

Beyond Good Ideas

I am not a successful entrepreneur. I have a small business, but that is not what pays my bills, and I am the sole employee. At the moment I have no clients, and I have only had a few small projects. Most of my work is unpaid musing and study. I started the business to do Engine repairs, and to use my monetizable skills in a stomachable way. I live off my Engine which I built using money I was paid for professional work. I had a few public shares in the first company I worked at, that were given to us as part of a Broad-Based Share Scheme. I had no shares in the other two, which are privately held. My Engine is invested in two Equity Funds (from the firms I worked at) and a portfolio (that I selected) of large publicly held global businesses. My thoughts on business are therefore academic. Small business is hard. The odds are steep. With plenty of musing, I see few easy paths. It’s not just about good ideas. It is also about building Capital, overcoming barriers to entry, managing risk, and navigating complexity.

Melilla Border Fence

Safer in the Dark

Money is a smarter form of barter. It partially solves a coordination problem, but it is not the best we can do. If you have wheat and you want milk, you can sell the wheat for money and buy milk rather than finding someone with milk who wants wheat. There is still a chain of dependency. If one person had money, and ninety-nine had both something to offer and something they wanted, a purely money-based economy would need that money to slowly make its way around. Smarter Barter would be very aware of the complex market and would be able to pair and co-ordinate people without money. Half the problem is mapping. We walk around in bubbles unable to clearly articulate what we want, and unable to see what we could offer with the appropriate training. Unclear destinations. Unclear paths. We try sneakily figuring out offerings and finding customers without alerting competitors. In a world with perfect transparency, zero transaction costs, and the ability to copy instantly, the worry would be that there would be no friction to act as a container to reward effort. We live in the dark as a way of protecting ourselves. Real meritocracy would hardly reward anyone. No one isn’t replaceable in the world of money.

Securing your Basket

Choices are made in baskets. Once one is made, the set of options changes. There are both intended and unintended consequences. To explore, Economists simplify this pesky problem with an assumption. “Ceteris Paribus” meaning with other conditions remaining the same. All else equal. The world is complicated, ambiguous, and random. We see only a slice of it, and we see based on how we have seen before. We see only what is meaningful to us. We see only when we notice the change/contrast. We have limits. Our worlds bump into each other, and in the past we lived in bubbles with shared baskets and constraints. Now it is difficult to navigate the lack of shared context that stands in the way of staying in touch with other worlds. Our messages to each other arrive as foreigners. We are constantly unpacking and unpicking. Through the chaos, a foundation becomes more essential. A base. Secure space to retreat to and to advance from. Where conditions remain the same.

Navigating the Madness

Decisions aren’t made in isolation. Value is relative and dependent on both how we see the world, and how the person we are interacting with sees the world. Our options depend on their options. There are trade-offs and unintended consequences. Actions have reactions. One thing changing means everything else ripples. How do we end up navigating our way through this complexity? One way is empowering decision makers and reducing the size of those decisions. More decisions. Smaller decisions. More awareness. More transparency. More commitment to a feedback loop. The world is noisy and ambiguous, but we can each adapt and adjust to accommodate change if it is small and we are willing. The beauty of markets, trade, and prices are they don’t reflect permanent value. They reflect agreement. When two informed decision makers engage and consensually support each other through exchange. Voluntary, autonomous, sustainable relationships.

Complex Decisions

Unpacking Constructively

We haven’t got shared words. Words are imperfect, but useful if they connect us. If they move the conversation forward. Words are models of reality. I am a Soutie with one foot in South Africa, and one foot in the UK. After “persistent problems with salient collective terminology” (Peter Aspinall), the UK office for national statistics defines ethnicity as “something that is subjectively meaningful to the person concerned”. I reluctantly tick White African with half a nod to the colourblind dream of the Rainbow Nation, and half a nod to the reality of persistent bias in all the companies I worked in, and both countries I have lived in. The latest stab at a word for ethnicity that doesn’t sit well for me in the UK is “Black, Asian and Minority Ethnic”. BAME. “Black” people are not a minority in South Africa, and they are only a minority in wealthy countries because our Nations were consciously constructed by race. Creating minorities. Borders don’t interest me much. Religions, nations, companies, races, numbers, and words are imperfect models of a much more complicated reality. The key is unpacking constructively.

2011 UK Census Ethnic Group

Endless Knot

Actions have consequences. Some are intended. Intention and incentives matter, but the world is so complicated (and getting more so) that we don’t, and can’t, have a strong grasp on cause and effect. The stories we layer on the world are glitchy and built on our own personal faulty understanding. Then thrown into the mix is a double helping of randomness that tends to swamp our efforts. The only thing you can truly plan for is that things won’t go according to plan. Build in a feedback loop. A little lesson from each step. Realise that each step taken changes the world. The lesson you learnt applies to a world that no longer exist. And is only relevant to one of the ways that world could have played out. Complicated. Ambiguous. Random. In a way that is empowering. No one understands. Don’t expect yourself to. The main goal is to create an environment that gives you time. Then the ability to adapt, adjust, and accommodate. Then create. Do something meaningful to you. Build. Learn. Rebuild. Every day.

Build to Build

I don’t agree that there is a trade-off between risk and return. You don’t make money by taking risks (unless you are an Insurance Company). Risk management is simply an acknowledgement that the world is complicated, ambiguous, and random. The future is surprising. Investment Returns come, not from being able to predict the future, but from creating value over long periods of time. You create value through the application of skills and knowledge. Uncertainty means it isn’t 100% clear what skills and knowledge you need to develop, and what problems will need to be solved. I like knowing my effort won’t go to waste. I don’t mind working hard. I do mind working pointlessly. I prefer evidence to faith, unless the process itself is something I am okay with. If the value is the process. Otherwise, I want to see the value first. Understand what needs doing. Why it works. What I need to learn to do it. The world changes, but there is a lot of evidence of skills and knowledge that add value. Build those for yourself, so you can build for others.

"The Sower" Vincent Van Gogh

Horsepower

Not all good ideas are good business ideas. Not all good business ideas are good ideas. We can’t reduce a complex world down to clear decisions that don’t have trade-offs, and uncertainty. Decisions have consequences. Within businesses, this complexity can be left to the judgement of those where authority lies. Businesses have Cost Centres, and Profit Centres. Things that don’t bring in money, but are still considered ambiguously worth it. Maybe even considered the Core Purpose. The Profit Centres are the Engine. Print Media has gone through the disruption of having its Engine removed. Quality Content was the Core Purpose. But Advertising was the Engine. Search and Social Media swooped in. Now lots of people produce content (of ambiguous quality) for almost free. I have written over 2,400 posts in the last 5 years for £23.44. Except I don’t get paid till that hits £60. Don’t hold your breath. I’m not. No one clicks on my ads. It is important to work towards a detached Engine, so that your purpose doesn’t get its financing removed if the rules change.

Generating Power

Revert to Mean

Reversion to Mean is the reliable default assumption that you should take “this changes everything” with a pinch of salt. Habits run deep. Normal changes slowly. Normally. The hardest part of a fast is breaking the fast, gradually returning to more sustainable behaviour while maintaining the essence of the changes you took to an extreme. The danger is that big changes lie in the tails. The Fat Tails. Thinking the world can be neatly summarised into Risk and Return numbers that drive your decisions is like learning to drive on a farm, or learning to shoot fish in a barrel. Reversion to Mean works well enough that it is a Hubris factory. It can build track records of success that turn men into demi-gods. Till the day you realise the world is too complicated, ambiguous, and random to control. Till you realise you are not a God, and the best everyone can do is do their best. Till you personally, revert to mean.

Beware the Extremes