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Howard Marks – navigating the crisis - creed, preparation and control

What kind of mindset and organisational culture does it take to survive and to thrive in market turmoil?

Let’s be frank, there are a vanishingly small number of people who have navigated multiples crises successfully and have something interesting and reflective to say it about it.

One person who does is Howard Marks. Founder and Co-Chairman of Oaktree he is, for our (and Warren Buffet’s) money, one of the most thoughtful and experienced investors in the market today.
 
In the latest episode of Decision Nerds, we got to speak to him in the middle of recent market craziness. We had a fascinating chat - not about tariffs, Trump or trade wars, but the inner game; what individuals and firms need to succeed in this environment.

Joe's writing on investment decision-making is here.  

You can find Paul on LinkedIn here. 

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The Disruptor in Chief’s blizzard of executive orders, tariffs and foreign policy positions and his propensity to change them is making life difficult for investors and clients.   

Things look and feel uncertain, perhaps more so than in living memory. 

In this bite size episode, we discuss the science and practicalities of dealing with uncertainty.

 

The Electric shock study refernced in the discussion.
 

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As the wordly philosophers of Coldplay suggest, getting what you want, but not what you need, might leave you in need of fixing. 

Leaps in investment platform technology give investors more information, more choice and the ability to act more quickly and easily. We want that, but is it what we need? As Joe points out, many of the positive developments in tech are double-edge swords. He thinks from a behavioural perspective, now is one of the worst times ever to be an investor.

𝗞𝗲𝘆 𝘁𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀:

#𝟭 𝗟𝗮𝗰𝗸 𝗼𝗳 𝗳𝗿𝗶𝗰𝘁𝗶𝗼𝗻 – it takes me less than 10 seconds from launching my platform app on my phone to being able to deal. Is that a good thing? In one dimension yes, but the overarching story of behavioural finance is people doing irrational things that create bad outcomes. Slick and seamless tech combined with noise, FOMO and a constant barrage of stimulus has the potential to exacerbate these problems.

#𝟮 𝗔 𝗰𝗼𝗺𝗽𝗲𝘁𝗶𝘁𝗶𝘃𝗲 𝗱𝗼𝗼𝗺 𝗹𝗼𝗼𝗽 – tech providers exist in a highly competitive environment and 'faster, easier, more' are key facets of the battleground. No one wants to lead a pitch with, ‘and….this is how we reduce information available to clients and make it harder for them to trade’.

#𝟯 𝗥𝗲𝗳𝗿𝗮𝗺𝗶𝗻𝗴 𝘁𝗵𝗲 𝗴𝗮𝗺𝗲 – whilst it might be possible to get providers around a table to agree a common approach that helps investors manage their worst impulses, a market-based solution is likely more workable. This needs those who advise on these platforms to be changing the conversation and including behavioural design as part of any selection process. Imagine a world where providers compete on how they help clients beat their biases as much as how slick the tech itself is. 

𝗣𝗵𝗿𝗮𝘀𝗲 𝗼𝗳 𝘁𝗵𝗲 𝗱𝗮𝘆? 𝗜𝗻𝘁𝗲𝗹𝗹𝗶𝗴𝗲𝗻𝘁 𝗳𝗿𝗶𝗰𝘁𝗶𝗼𝗻

“Intelligent friction,” is a concept from the payments industry which focuses on interventions based the risk level of a transaction. It aims to balance a good user experience with effective security. Buy a coffee in a new country when you land there fine, buy a laptop, expect an intervention. There are some obvious investment analogies here. And of course this is only one tool in the arsenal, getting better at education and helping clients help themselves is also pivotal.

We don’t want to lose all the good things that tech brings, but to mangle Coldplay, we should perhaps be trying to help people want what they need.

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Joe doesn’t like performance fees - but why? Are they innately problematic or just badly and perhaps cynically implemented in the mutual fund industry? In this bitesize episode, we get into alignment of interests, bad design and investor behaviour.

𝗧𝗵𝗲 𝗺𝗼𝘀𝘁 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁𝗶𝗻𝗴 𝗽𝗮𝗿𝘁 𝗼𝗳 𝘁𝗵𝗲 𝗰𝗵𝗮𝘁?

Performance fees are most often discussed in the context of alignment and risk sharing. Joe raises an interesting question - can they also be used to nudge investors away from unhelpful behaviour?

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We all have things in our working lives that drive us insane. Anyone who regularly listens to the pod will know that there are a few subjects that consistently raise Joe’s blood pressure to unhealthy levels…

In the interest of Joe's and our future guest’s wellbeing, we wanted to find a way of dealing with these issues productively. 

Our solution, Decision Nerds: Room 101 

Room 101 is the torture chamber in George Orwell’s classic book, 1984. For those who cross its threshold, it contains, ‘the worst thing in the world’. 

Many Brits will remember the Room 101 TV and radio shows where celebrities suggested what they thought was the worst thing in the world and competed to have their pet hate consigned to oblivion (my personal favourite being Jimmy Carr and tax avoidance schemes).

Our take on Room 101 is slightly different. Like the celebrities, Joe, I and our guests will discuss the issues that make our eyes roll. But it won’t be just a winge-a-thon, we’ll try to get to the heart of the issue and start a productive discussion. 

𝗖𝗵𝗮𝗿𝘁𝗰𝗿𝗶𝗺𝗲

We're kicking-off with ‘chartcrime’ and something that particularly riles Joe - the overlaying of time series, such as inflation, from different periods and looking for predictive patterns. Are these charts a problem, or is it how they are used and framed? 

In the episode, we discuss:

𝗣𝘂𝗻𝗱𝗶𝘁𝗿𝘆 𝗮𝗻𝗱 𝗽𝗿𝗲𝗱𝗶𝗰𝘁𝗶𝗼𝗻 and how different investor types might confuse the two

𝗧𝗲𝘅𝗮𝘀 𝘀𝗵𝗮𝗿𝗽𝘀𝗵𝗼𝗼𝘁𝗲𝗿𝘀 𝗮𝗻𝗱 𝗰𝗵𝗮𝗿𝘁 𝗰𝗿𝗲𝗮𝘁𝗼𝗿𝘀 - are they the same thing?

𝗧𝗵𝗲 𝗮𝘄𝗸𝘄𝗮𝗿𝗱 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻 that might stop people producing these charts

Our Room 101 episodes are bite-sized and designed to provoke a conversation. Hot takes, or deeply considered meditations are both welcome. https://www.linkedin.com/posts/paul-richards-34965883_%F0%9D%97%A5%F0%9D%97%BC%F0%9D%97%BC%F0%9D%97%BA-%F0%9D%9F%AD%F0%9D%9F%AC%F0%9D%9F%AD-%F0%9D%97%96%F0%9D%97%B5%F0%9D%97%AE%F0%9D%97%BF%F0%9D%98%81%F0%9D%97%B0%F0%9D%97%BF%F0%9D%97%B6%F0%9D%97%BA%F0%9D%97%B2-we-activity-7282682076963733504-tB9s?utm_source=share&utm_medium=member_desktop

And of course, feel free to submit the most egregious example of chartcrime you have ever seen (if you want to raise Joe’s blood pressure).

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If you’ve been around the block, you will likely have seen some eye-rolling use of evidence during meetings. Evidence can be used badly for many reasons; a misunderstanding of what conclusions can be drawn from it, or perhaps it has been cherry-picked to support a particular position.

In this episode, we unpick these issues with Professor Alex Edmans of London Business School. Alex recently published a book, ‘May Contain Lies’, which discusses the methodological, psychological and incentive problems surrounding evidence use.

We spend a decent amount of time on a core idea from the book, ‘The Ladder of Misinference’. If you think scientifically, there are no earth-shattering revelations here, but I really like it because it is a simple teachable framework that groups can adopt. Alex gives some great examples that everyone can understand and internalise. 

The Ladder deals with the challenges of method, but that’s only half the story. We also have to beat the behavioural cards that nature has dealt us, e.g. confirmation bias. 

And even if we beat the first two traps, incentives can nudge us away from saying what we really believe. 

Key insights:

- How Alex tries to move beyond black-and-white thinking and engage with complexity - getting the right mix of data and stories

- Why do bad ideas stick - do you still 'Power Pose'? 

- Changing minds – the power of good questions (there’s a great experiment on pianos and toilets that you can try at home).

- Trading off the short and long-term - why he chose the most critical agent to help him publish his book. 

- Understanding neurological carrots and sticks - what happens when we put people in a brain scanner and give them statements they like and don’t?

- The state of debate around ESG and DEI – ideology, identity and pressures to conform.

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Lying – it’s something that all humans do. Most of the lies we tell are small and harmless. But deceptive behaviour in the investment industry lowers trust and increases costs and complexity.

We are deceptive for many reasons and one of them is that we can get away with it. This is because, despite what we might believe, most of us are pretty terrible at spotting lying – including highly experienced financial analysts.

But what would happen if we all had access to AI-powered technology on our phones that could spot deception with a high degree of accuracy? Would that change how the industry behaves? 

This is no idle speculation – in this episode of Decision Nerds, we explore research that suggests that AI is significantly better at spotting lying than humans. And as we all know, AI has a habit of surprising us by appearing in the wild far faster than we might expect.

How would this technology impact the investment industry? We discuss:

𝙏𝙝𝙚 𝙢𝙤𝙩𝙞𝙫𝙖𝙩𝙞𝙤𝙣 𝙛𝙤𝙧 𝙙𝙚𝙘𝙚𝙥𝙩𝙞𝙤𝙣 𝙞𝙣 𝙩𝙝𝙚 𝙞𝙣𝙙𝙪𝙨𝙩𝙧𝙮 – the entirely logical reasons that we don’t always tell the truth

𝘿𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩 𝙠𝙞𝙣𝙙𝙨 𝙤𝙛 𝙙𝙚𝙘𝙚𝙥𝙩𝙞𝙤𝙣 𝙖𝙣𝙙 𝙩𝙝𝙚𝙞𝙧 𝙧𝙚𝙡𝙖𝙩𝙞𝙫𝙚 𝙞𝙢𝙥𝙖𝙘𝙩𝙨 – what are the traps that managers fall into and why

𝙅𝙪𝙨𝙩 𝙝𝙤𝙬 𝙢𝙪𝙘𝙝 𝙗𝙚𝙩𝙩𝙚𝙧 𝙞𝙨 𝘼𝙄? – the results might surprise you

𝙒𝙤𝙪𝙡𝙙 𝙖 𝙩𝙧𝙪𝙩𝙝 𝙢𝙖𝙘𝙝𝙞𝙣𝙚 𝙙𝙚𝙨𝙩𝙧𝙤𝙮 𝙩𝙝𝙚 𝙞𝙣𝙙𝙪𝙨𝙩𝙧𝙮 𝙤𝙧 𝙢𝙖𝙠𝙚 𝙞𝙩 𝙗𝙚𝙩𝙩𝙚𝙧? – our take on ‘creative destruction’

𝙏𝙝𝙚𝙧𝙚’𝙨 𝙣𝙤 𝙩𝙧𝙪𝙩𝙝 𝙢𝙖𝙘𝙝𝙞𝙣𝙚 𝙮𝙚𝙩  - we discuss a few better questions that we can use today.

Affectiva facial recognition demo
Paper on analysts' ability to spot CEO deception
Paper on AI's ability to spot CEO deception
Lying on CVs

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𝗛𝗼𝘄 𝗺𝘂𝗰𝗵 𝘁𝗶𝗺𝗲 𝗱𝗼 𝘆𝗼𝘂 𝗴𝗶𝘃𝗲 𝗮𝗻 𝘂𝗻𝗱𝗲𝗿𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗶𝗻𝗴 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗺𝗮𝗻𝗮𝗴𝗲𝗿?

1. Hire a manager after a period of strong performance.

2. Watch in horror as you don’t experience that outcome, maybe the opposite.

3. Spend a huge amount of time and emotional labour deciding on whether your initial thesis was wrong, something has changed at the manager, or with market dynamics.

4. After sucking up a huge amount of governance time, decide to sack the manager. 

5. Rinse and repeat with potentially similar outcomes.

Now that might not be you, but it is a story that plays out regularly.

Experiencing underperformance is one of the unavoidable realities of hiring an active manager. And it’s painful for everyone; clients, managers and advisers. And badly managed pain creates some predictably bad outcomes for all parties.

One important and manageable issue is time horizon mismatch. And this is what and I explore in the latest episode of Decision Nerds. We discuss

𝗪𝗵𝘆 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗲𝗱𝗴𝗲 𝗶𝘀 𝗻𝗼𝘁 𝗲𝗻𝗼𝘂𝗴𝗵 – managers need an appropriate amount of time to let their edge play out. It may be longer than you think.

𝗧𝗵𝗲 𝗕𝘂𝘅𝘁𝗼𝗻 𝗜𝗻𝗱𝗲𝘅 – a simple way of articulating time frames that would help everyone.

𝗘𝘃𝗲𝗿𝘆𝗼𝗻𝗲 𝗵𝗮𝘀 𝗮 𝗽𝗹𝗮𝗻 𝘂𝗻𝘁𝗶𝗹 𝘁𝗵𝗲𝘆 𝗮𝗿𝗲 𝗵𝗶𝘁 𝗶𝗻 𝘁𝗵𝗲 𝗳𝗮𝗰𝗲 – we posit that most people’s ability to predict how they will deal with the pressure of underperformance won’t reflect reality when things get tough.

We talk about the distinct behavioural pressures facing clients, advisers and managers and what they might consider doing to make things easier. A couple of takeaways if you don’t have time to listen.

𝗖𝗹𝗶𝗲𝗻𝘁𝘀 - what is your real capacity for tolerating underperformance, how do you know this?

𝗠𝗮𝗻𝗮𝗴𝗲𝗿𝘀 - have a clear view of the timeframe your results should be judged over. Whilst this a tough problem, if you don’t have a view, one will be forced on you.

𝗔𝗱𝘃𝗶𝘀𝗲𝗿𝘀 - is your role to be a behavioural bulwark and help clients through this period, or just keep them happy? They are not always the same thing.

More information on the Buxton Index is here: https://lnkd.in/eHXDfkfe

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Thinking and talking about failure can be tough, especially when it’s us who’s failing.  But it’s important for us as individuals and investment teams to find a way to do this in an effective manner that allows us to both learn and evolve. In this episode of Decisions Nerds… 

- Joe pits his inner Brian Blessed against an AI auto-editor 

- We examine Joe’s framework for thinking about errors around investment beliefs, processes and outcomes.

- We then think about this in the context of broader research that thinks about different typologies of errors; basic, complex and intelligent. 

- We then discuss the practical steps that can make life easier. 

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We downed some eggnog and decided to record an impromptu Christmas special. We have a chat about how insights from behavioural science might help the festive holidays proceed more smoothly:

 😂  Why Joe's team might think (in his own words) that he’s an ‘egotistical a*&hole’.

😧  A simple way to feel better about Christmas (but you might not like it).

😠  The nudges that retailers use to get us to buy. 

💵  Gift cards or cash as a present – to constrain or not to constrain?

🤔  Do New Year’s resolutions get a bad rap and how can we can structure them to give a better chance of success?

🍿 Our favourite Christmas movie as a metaphor for decision-making and a gift that helps people understand their value to the world.

Wherever you are, however you celebrate (or don’t), we hope that you have get some high-quality time with family and friends over the festive period. 

 We’ll see you on the other side.