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Tuesday, December 23, 2014

Making Dumb Groups Smarter


 The reason a good and bohemian writers want to know about grammar rules is so she and he know when and how to break them to best effect.

"The problem with the global village is all the global village idiots."
-- Paul Ginsparg

Thomas Piketty’s “Capital”, summarised in four paragraphs Economist

There may well be SPOILERS ahead ... Groups underestimate how much time and resources a project will require ( ie. Simple Readers' Flow Chart); they’re overly confident in what their work will accomplish; they reach for the most popular ideas, not the most effective or relevant ones; they assume (globalizing associations take note) that “things or events or people that are similar in one way are similar in other ways too”; they stick with bad ideas because they’ve been working on them for so long. So many group activities, so many ways to screw them up. But Sunstein and Hastie’s article isn’t simply a guilt-inducing overview of the pitfalls of collaboration. It’s a study of the particular ways that people are subtly pushed into making poor decisions. (Sunstein, a former White House staff and legal scholar, has some expertise on this point as a coauthor of the popular 2010 pop-psychology and business book Nudge.)

Every organization, like it or not, is a political one, they write—there are things that can and can’t be openly said and ideas that can only be promoted with higher-level approval. And the leader of the group, simply by expressing his or her thoughts, is making a statement about what lines of discussion are acceptable. So, to the extent that you want an open and free discussion on an issue—and maybe you don’t, but that’s a different blog post—step back.
“Leaders often promote self-censorship by expressing their own views early, thus discouraging disagreement,” they write.
Making wiser groups:
  • Silence the leader
  • ‘Prime’ critical thinking
  • Appoint a devil’s advocate
  • Establish contrarian teams

Making Dumb Groups Smarter

German researchers discover a flaw that could let anyone listen to your cell calls WaPo. Here is the research paper.
 
The rise of behavioral finance has led to a widespread awareness of the human inclination to veer away from logical decision making, although most of us seem to get caught in the same traps over and over again anyway, even though we are aware of our tendencies.  I know I do.
On the other hand, the popular notion is that there is a “wisdom of crowds” (even though that’s likely to be true only under certain circumstances).  There are, of course, many times when the crowd goes astray, sometimes helped along these days by our electronic tools and their reinforcing algorithms.  (No market commentary intended, although some readers might take it that way.)
In between the individual and the crowd are small groups of people trying to make decisions together.  We live in a world of organizations.  Since this forum is devoted to those who roam the investment ecosystem, I’ll focus there, but the same issues plague group decisions everywhere.
To our detriment, those issues haven’t gotten the proper attention.  You see almost no focus on such problems within investment organizations — or by the outsiders that are charged with doing due diligence on them.  That doesn’t make sense:  we need an understanding of “organizational finance” in addition to behavioral finance.
A good place to start is an article in the Harvard Business Review by Cass Sunstein and Reid Hastie, which provides an outstanding summary of the hurdles we must jump (together).
When you read it, think about the organizations that you have seen from the inside.  Then contemplate how little you know about the workings of those you’ve only glimpsed from the outside.  Investment committees (all the various permutations thereof, at asset owners, advisory firms, asset managers, etc., different from each other, but also similar in so many ways) and formal investment teams, as well as looser collectives of decision makers, are all charged with making good decisions and are all at risk of doing so poorly because of interpersonal dynamics.
Why?  Quoting the article:
1) Groups do not merely fail to correct the errors of their members; they amplify them.
2) They fall victim to cascade effects, as group members follow the statements and actions of those who spoke or acted first.
3) They become polarized, taking up positions more extreme than those they held before deliberations.
4) They focus on what everybody knows already — and thus don’t take into account critical information that only one or a few people have.
The authors point out that these problems stem from two main factors:  garbled “informational signals” and “reputational pressures” that get in the way of open and honest debate.  One would expect rational allocators of capital to be aware of those potential failings and work to optimize their interactions to make the best decisions possible, but that’s just not the case in most organizations.  (In that, investment organizations are like other ones; the research work on group decision making “has yet to have a noticeable effect on actual practice.”)
Whatever kind of organization that you are in, the article can serve as a nice framework to judge how you’re doing — and it offers some suggestions that might help you consider how to improve your chances for working effectively together.
But you should look outward too.  If you have an element of due diligence in your work — “that’s all of us,” someone tweeted recently — reflect upon the degree to which you truly understand the decision making processes of those who serve as your agents (and their agents, and theirs; in fact, the whole daisy chain of them).  Their actual deliberations may not match up too well with the stories you have been told.
In any case, doesn’t learning more about decision making make sense for those who toil together?  We run frantically toward whatever new frontier promises even a remote possibility of alpha, when it could be found around the very tables at which we meet.

Nate Silver has an article Here’s proof some pollsters are putting a thumb on the scale
It’s time to stop worrying about outliers and start worrying about inliers. Earlier this year, my colleague Harry Enten documented evidence of pollster “herding” — the tendency of polling firms to produce results that closely match one another, especially toward the end of a campaign. What’s wrong with the polls agreeing with one another? The problem is that it’s sometimes a case of the blind leading the blind.
Wisdom of crowds