Day Trader Management
The NYTimes’ Joseph Nocera wrote Saturday about the closing of Neil Barsky’s hedge fund, Alston Capital. Barsky, it seems, is one of the good guys. (The same issue has an article titled “Hedge Fund Manager Accused of Fraud,” just so we keep things in perspective).
One of the reasons Barsky left the hedge fund biz after seven years was:
[he was] “tired of the ways the business had changed. “When I first started in 1998, we used to send out quarterly numbers. Now investors want weekly numbers. Professor Louis Lowenstein” — the iconoclastic and recently deceased Columbia University business law professor — “has a great line in one of his books: ‘You manage what you measure.’ ”
I for one wouldn’t call it a ‘great line,’ but the practice has certainly become widespread—and we are generally the worse for it. Let me explain.
If Measurement is Good, How Much More Measurement is Better?
Nocera provides another example of change, in his fascinating book Good Guys and Bad Guys. In the mid-1970s (not that long ago for some of us) investors couldn’t be dragged out of bank savings accounts into new-fangled money market funds. Too risky, doncha know.
Fast forward to 1987, the go-go ga-ga days when everyone was focused on—daily mutual fund prices. Awfully risque.
But it’s not just finance. MBA programs and systems consulting firms have been pushing a hot product for some years now. It’s sold as efficiency, liquidity, process outsourcing–but at its heart is Lowenstein’s ubiquitous link between measurement and management. More measures, more frequent, more detailed: equals better management.
If you can measure it, you can manage it; if you can’t measure it, you can’t manage it; if you can’t manage it, it’s because you can’t measure it; and if you managed it, it’s because you measured it.
Every one of those statements is wrong. But business eats it up. And it’s easy to see why.
I just got an iPhone app that lets me check my QuickBooks account. Now, of course, I crave my receivables data updated instantly, constantly, 24-7. Because I can. And because more is better. Isn’t it?
A consultant friend was about to be hired to help improve engagement survey scores for an executive’s team. He tells me::
“In no time, you heard middle management’s attitude evolve; ‘OK, this group is going to meet its goals; we are not going to be the ones lagging behind on these numbers. We will be able to show measurable improvement in engagement.’ And so they were about to turn ‘engagement’ into another meaningless exercise in meeting the numbers.”
The ubiquity of measurement inexorably leads people to mistake the measures themselves for the things they were intended to measure. It doesn’t have to be this way–but it too-often is.
Even Malcolm Gladwell feeds the measurement frenzy. In his current New Yorker article How David Beats Goliath, he cites Vitek Ranadive. Ranadive has made a career of turning un-integrated batch processes into aggregated real-time processes—faster, more data-rich, integrated. He suggests the problem with national economic policy is that the Fed has to wait weeks for data. Presumably if the Fed worked with real-time data, we’d have better economic decisions. Call it day-trading national interest rate policy.
If Barsky thinks weekly investment numbers for his hedge fund are too short-term, let’s hook him up with Ranadive. Set up the databases right, and we could all be day-trading hedge funds! And of course, there’d be an app for that.
Management by Measurement Isn’t Just a Financial Disease
If MBMM—management by massive measurement—actually worked, day-traders would outperform Warren Buffett. I think they don’t.
The US mortgage industry morphed from a web of relationships (banks, bankers, home-owners) into a global impersonal market of short-term transactions. More liquid? Yes. More efficient? Yes. Lower cost of funds? Yes again.
But today’s meltdown arose precisely because replacing lengthy relationships with multiple transactions, substituting markets for relationships, and metrics for management leaves nothing but short term, impersonal money at the heart of business. The saying on Wall Street became, "I’ll be gone, you’ll be gone–do the deal." On Main Street, it translates as, "just tell me you’re going to meet next month’s metrics." It’s seductive, and it’s addictive. And not good for business.
When hooked up to its kissing cousin incentives, MBMM is a powerful drug. As incentives critic Alfie Kohn says, "Incentives work. They incent people to get more incentives." Like I said, addictive.
There’s nothing inherently wrong with measuring. Or transactions. Or markets. They’re fine things.
But undiluted and without moderating influences, they become not just a bad deal; they can be a prime cause of ruining the whole deal.
And what about your experiences as a day trader? Seems to me there must be some lessons to be mined from that experience?
Reminds me of a nightmare I had in the "noughties" Charlie. I’d just sat through a seminar at my consulting firm on how e-business was going to revolutionise and improve the world be providing real-time access to detailed performance information for senior executives.
I had this sudden vision straight out of a Dilbert comic strip of all that real-time detailed performance information being made available to Dilbert’s nemesis – the Pointy-Haired Boss.
Aw sh*t I thought – we’re empowering the Pointy-Haired Boss.
In my time I’ve implemented performance measurement systems that used statistical process control principles to try to ensure that managers didn’t react on a day by day basis to random fluctuations in the numbers.
It didn’t work. The temptation to meddle on a daily basis when given daily numbers was overwhelming.
And you know, I do it myself. I look at my website stats far too frequently. I start focusing on tweaking the website when far more important elements of my marketing mix aren’t managed simply because there are no hourly updated numbers for them.
It takes real discipline to focus on managing what’s important – not just what we have numbers for.
Ian
Ian,
That is scary indeed–empowering the pointy-haired boss! And I do it too, Ian; the temptation is nigh unto irresistible, when given data, to mess with it.
Which leads to Jim’s question. Yes, indeed, I did spend 5 weeks 9 years ago trying my hand at staring into the electrons of a daytrader’s terminal. The education cost me about $30,000.
What did I learn? I learned it is indeed seductive. Make a 2-minute trade that nets you $3,000 and the temptation is enormous to assume that Yes I Am Really Smart, and that if I can just dig a little deeper into this screen full of data, I can get rich clicking the "buy" and "sell" buttons.
I gave myself 5 weeks; the trend was clear at week 2, but I kept thinking success was just around the corner. Until one of my compatriots–fully as bright (or dumb) as me–asked if he could borrow $10,000, just until he ‘nailed’ his approach, which was, of course, just around the corner.
I still believe, on some level, that I could have nailed it. But just to be safe, I’m not going near a terminal. Too much data makes me dumb. I got proof.