| | It has been just over 2 years since I last placed an entry on this blog; I'm surprised I remembered the password. The angry young man you see on the pages of this blog is me at age 20, a university student who hadn't yet even taken any finance-specific subjects for his eventual major in the subject, and who spent most of his time in non-academic pursuits.
I found myself reading back between the lines of vitriol as recent headlines on the collapse of Lehman Brothers brought back memories of shouting drunkenly that the author of certain get-rich-quick schemes ought be arrested. Between the memories it occured to me that this was a (very) poorly written description of the potential for collapse in the mortgage market, which happened, spikes in the price of fuel, which happened, and a future of increasing inflation, which is happening. But now that the "I told you so" is out of the way I'll get into why I'm really writing this.
Is it really probable or even possible that a 21 year old undergrad with only second or third hand information on the market would have a better grip on the future of market movements than the analysts of Lehman et al? No, and it's absurd to think it. The people behind the wheels of these titanic banks were smart, educated and had the grit to apply these on a daily basis to get good profits for their companies. So what blinded the experienced captains from the iceberg?
Investment funds are funny things. They've had to adapt to a market which only values what their performance has been in recent months, and hence their access to investors is determined by their short term performance. Their product however, is best measured over the longer term and even though it is most often in the best interests of investors to invest for the long term they most often fail to appreciate this.
The human tendency to rank things from best to worst becomes our deepest flaw. Immensely complex systems behave in immensely complex ways and hence have immensely complex attributes. Placing a simple ranking on any such system is arbitrary. Financial giants are not the only analysis of complex systems in which people gloss over the details.
Humans too are complex systems of behavioural patterns and attributes, and many people still today choose to gloss over details of the system to arrive at decsions based entirely on a single pattern. Historically a pattern which presents a good example is the colour of one's skin. Not so long ago judging someone on the colour of their skin was a good bet. Whiter people tended to be better educated, with better prospects on the whole. However this analysis failed to take into account the complexities of humans, who by consequence of such complexities of nature can never be held to a ranking system so arbitrary. Conseqently humans can only ever be judged on the content of their character, and never the colour of their skin.
Immensely complex systems such as humans and investment banks cannot be judged by single arbitrarily chosen indicators, but often are. The captains know this, and they know that if their banks start to fall behind the others in the arbitrarily chosen indicator of short term profit, that they will lose investors, the very coal that feeds their boilers. So the captains, aware of the iceberg warning, are trying to nudge ahead of each other, to be the most profitable in the short term with no long term focus, to get the most investors in the boiler, and hoping all the while that in the blackness of the night there will not be an iceberg in their way.
There was.
The moral of this story is to know your investment horizon, because if you want to get your ship to a destination somewhere over the far away horizon but are only looking at the waves in front of you, you may not see the risk-assessment iceberg on your investment horizon.
|
| | Posted 9/16/2008 11:31 AM - 9 Views - 0 eProps - 0 comments
- recommend
  - recs0
- share
- email
 - sent0
|
