Posted by Adam Gordon on Jan 16, 2012 in 2025, all, economy & finance, strategic foresight, technology change
Financial markets are delicately poised at the start of the year, to say the least. A steady low-bubbling stock rise – what the FT calls a “stealth” rally – has left the S&P 500 index at a five-month high and the Dow up 10% in 6 weeks, flying in the face of the 2012 analyst outlook which is on-the-whole bearish amid Eurozone debt and global growth concerns.
Bears are in a surprise squeeze. Not so long ago it was rebound-optimist Jon Corzine of MF Global publicly taking the hit that many others were privately taking too.
It’s certainly not news that markets don’t behave as expected, nor that emotion drives decisions, but Joan Foltz, author of Market Whipped: And Not By Choice (Alsek, 2012) suggests something further: that we are going through a basic shift in how markets work and therefore how to succeed in them.
She says the financial markets have become a MMORPG, that is, a “massive multiplayer online role-playing game.” In gamer world, a MMORPG is a vast virtual world where an effectively unlimited number of players assume characters and interact with each other in a persistent and ever-evolving “reality.”
The same computation and virtualization platform technologies that have produced game worlds also underpin financial markets, and are therefore unsurprisingly producing similar effects.
Buy a stock and you have entered a virtual arena of realms and battles, with characters taking roles in stories that play out over a known (to insiders) time period. There are masters and magicians and druids and emporers, and who knows what else, all gaming for your money. Play the game right, and you win theirs.
Says Foltz: “Keep the market in mind as you go through this list of features:
Who are the characters in the game? High-frequency traders, hedge funds, corporations, pension funds, celebrity investors, the media, the government, to name just the obvious ones.
Into this world walk investors who think the markets are what they used to be, and work how they used to work – that they are understandable through due-diligence in research, and winnable by well-considered valuations or by technical analysis. No surprise that they find themselves surprised. In gamer world, nothing is as it appears and nothing works out as expected.
Game on
Foltz’s argument is that traders of all stripes improve their results by acknowledging market MMORPG and thinking like a gamer. That is, seeking to understand where the battle is at any time; recognizing who battles whom, under what conditions, and for how long; knowing who the strongmen are in their realm and what story is playing out.
Investors should know their own token in the game, its attributes and ammunition, as well as its limitations. This will improve judgment of where to be, when to come and go (market timing), and encourage quick exits from realms that are best left to more powerful, and perhaps, darker forces.
The book itself has a chaotic, breathless, aspect, and is marred by a tendency to conspiracy theory. But it does provide a productive analogy that sheds light on unchartered territory. In other words, it does what “futurists” should do when they do their job right: identify and illuminate a change in the world, and describe why assumptions and practices that worked in the past may fail going forward.
Posted by Adam Gordon on Dec 15, 2008 in all, decision-making, failed predictions, forecast filtering, Future Savvy, managing uncertainty, Perils of Prediction, scenario planning, strategic foresight
One of the questions I’m asked a lot is whether Future Savvy would have helped to predict the credit crunch. My response, as in this INSEAD interview, has been that the book gives readers the tools to judge the merits of predictions, so wouldn’t have directly helped predict the financial crisis, but it would have been a key resource in drawing attention to the poor view of the future that bankers and regulators were acting on.
In many ways, focusing on whether “this” or “that” is predicted, or not predicted, is to put the cart before the horse. The horse is the adequacy of our approach to anticipating outcomes and the quality of our foresight as a whole. When this is good, the cart – not missing important changes – will follow.
Credit: http://www.lewrockwell.com/blog
In this, it’s important to realize that many did predict the financial crisis (as many predicted 9/11 in various ways). Sticking with the financial crunch for now: it has generally been portrayed it as a “why-didn’t-anyone-see-it-coming” event. It wasn’t. Hats off to The Times for their October 12 piece: “10 People Who Predicted the Financial Meltdown.”(Summary here). Allowing for a fairly loose definition of “predicted,” the article shows that among those who foresaw the crunch were: Vince Cable, deputy leader of the Liberal Democrats (2003); US congressman Ron Paul (2003); Stephen Roach, senior executive at Morgan Stanley (2004); Christopher Wood – chief strategist of a broking firm in the Asia-Pacific Market (2005); and Nouriel Roubini, economics professor at NYU (2006)… and there were many others.
A different problem
So this reframes the problem entirely. It’s not that the predictions were not there. It was that not enough people believed them and, particularly, important decision-makers didn’t believe them or didn’t have the institutional capacity to respond. So there are two halves to the problem: the ability to see the full spectrum of what may happen, including unexpected outcomes; and the ability to act on what we see. Quality in foresight work – the raison d’etre of Future Savvy – makes it possible to see more outcomes more clearly, and to act with more confidence in choosing what to prepare for. (In the real world we can’t prepare for every outcome.)
There was a good letter published in the FT from eminent futurist Peter Schwartz on December 2, which describes this very well. It shows predictions for what they are (one-horse scenarios), and how decision-makers are typically bound into inaction or wrong action not only by working on the basis of a wrong prediction, but by the predictive mindset itself. This mindset – the habit or culture of picking “one right answer” in the face of a complex situation with many competing outcomes, prematurely closes alternatives and leaves us open to surprise. As Schwartz says, as scenario planners have always said (and he was one of the people who defined the field in the first place), a compelling set of alternative future scenarios encourages decision-makers to recognize unlikely and unpopular outcomes, along with expected outcomes, and therefore to be able to respond earlier and more effectively whatever happens.
Scenarios also contribute to the “act” side of the problem. In a well-done set for the banking industry, a financial-meltdown scenario would at least have been in play, institutionalizing the consideration of less unlikely, less popular outcomes in company and government forums, forcing serious consideration of necessary strategies and contingencies, and therein creating the ability to act early and effectively without having predicted the crisis.
The letter is well worth quoting in full:
Sir, The real question regarding the financial crisis is not, as the Queen asked: “Why did nobody see this coming?” In fact, any number of thoughtful people in academia, politics and business had been compiling the data and sounding warnings for several years.
The question we should be asking is: “Why didn’t decision-makers believe that a global financial meltdown was increasingly likely and then act on that belief?” Or, to put it another way: “What would it take to make decision-makers both believe and act?”
The problem is that decision-makers believe that they are forced to pick one right answer: the most likely scenario. Their approach to decision-making does not afford them the opportunity to consider apparently low probability but highly consequential scenarios. The answer, therefore, to the “believe” half of the question is a decision-making process that considers several scenarios: compelling stories about alternative futures that incorporate the analysis of “outliers” and describe three or four plausible paths forward.
Good scenarios force decision-makers to challenge their own assumptions and reconsider what is possible. As a result, they can take seriously those scenarios that seemed less likely at first, but whose plausibility increases over time.
The second part of the question – “What would it take to act?” – is much harder to address. Suppose that Ben Bernanke or Hank Paulson had come to believe a year or two ago that the house of cards was about to collapse and trigger cascading, global failures. What would they have done, given the realities of the complex interconnected systems at the heart of the problem? Perhaps if they had good scenarios with appropriate indicators to start with, they could have rehearsed different strategies and contingencies. Importantly, these decision-makers could have used these scenarios to persuade others on all sides of the issue also to recognise the complexity of the impending crisis in a more timely way. It’s never easy to convince everyone around you that the game they have been playing to their great benefit is about to change. But with a shared recognition of the magnitude of the risks and the ways they might unfold, they could have acted far earlier to prevent some of the dire consequences that have occurred, let alone what is to come.
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