As I’ve mentioned in some earlier posts, I’ve been doing a read of literature on the crisis, books coming out now – but at my kid’s last swim meet, I took along instead Michael Lewis’s Liar’s Poker. That book, from the 1980s, holds up better than just about anything from that period. He does a better job of explaining the incentives and disincentives of the secondary tier players inside institutions better than anything else I’ve read. There’s astonishingly little in that book that isn’t still relevant today – partly because today’s crisis is a credit crisis, and he was describing bond trading in the 80s, when it underwent a revolution that reformed corporate finance. In some sense, we are living out today the revolution of credit of the 1980s.
One section of that book that seems especially prescient to me – and is not really about finance directly – is his discussion of the how being a successful trader requires incredible fast, raw intelligence to make snap decisions about risk – but also a short attention span. This was all written before the internet, blogging, tweeting, all this stuff of instant novelty (as XKCD puts it in a slightly different sense, “constant novelty saps my initiative“). He describes Mike Millken – accurately, from everything I have read – as being the rare person who combined both instant raw trading abilities with the ability to formulate and pursue a long term strategy about an industry and a company and a market, rather than simply reacting with the next trade. These are really different skills in business, and everything else, and I wonder if the nature of incentives in the overall human capital markets are not favoring trader skills over institution builder skills … many of the finance people I know don’t understand deep-down what I even mean by institution building skills and don’t value it, except insofar as they are able to … trade it. Instantly.
One of these days I want to recount a conversation I had recently with a bunch of military officers, and their questions about risk taking in their profession and risk taking on Wall Street. I need to explain this in much more detail, and don’t have time now – but the conversation caused me to rethink the basic psychology of those students I’ve known going to Wall Street in the last few years. I used to think they were risk takers. I no longer do. The military guys were frequently people who would describe themselves as risk-takers, trained as officers to control and channel the impulse, to the point that many of them would not seem, as personalities, as “risk takers” – quite the contrary: but as one of them said, when you have to make command decisions about lives and kinetic energy, what seems to be a cautious personality is actually something really different, risk by definition.
Whereas my students going to Wall Street in the last few years – I don’t now think they were risk takers. Not one of them has ever opted for a corporate track – too risky, in fact, too many years invested for a middle tier payoff and a constricting career track. Wall Street, from the standpoint of the individual involved, is safer – it’s where your friends are, for one thing, and the payoffs are greater and shorter term. And that’s so even if you are betting huge amounts of money – it’s other people’s money – and if the payment structure pays you upfront, then no problem. Really, really different from the incentives and personalities of the military officers I had this conversation with, leading men in fields of fire and making decisions just as snap about the uses of deadly force.
(This was originally an update to the earlier post on bonuses, but I thought it made better sense as its own post.)
Special Bleg: Related to this discussion, I am working on something that addresses differences in the conception of strategy and tactics in war versus how strategy is conceived on Wall Street and, as one of the commenters notes below, in various games. I would be grateful if in the comments you could point me to clear, basic expositions – of the kind that might appear in a current military academy introductory chapter on strategy – of strategy and tactics, and the difference and why it matters. Not classics like Clausewitz, Hart, etc., which I already have, but current literature.
Second, can you point me to something that explains why and how, when I go back to basic game theory, it does not seem to distinguish the two, strategy from tactics. I recall something from one of the couple of GT classes I took in school that said that the distinction is relevant to the playing of certain kinds of games, but not to the general theory of games – can anyone point me to that kind of discussion? Do I remember this correctly from my long ago classes?
Finally, I want to follow up on one of the commenters about short and long term in games like poker – long term in war often means a strategy that looks long term, but especially looks beyond purely serial thinking, one event, one encounter, one round, one engagement followed by another; what we describe in war as a strategic victory contemplates not just long term thinking, but thinking that is more than iterated engagements. I don’t really understand poker, but does poker really engage in that kind of strategizing? The kind of war strategy that contemplates, for example, the strategic gambit of losing every tactical engagement in order to draw the enemy in to the place where he can be enveloped? Do games like poker have such strategic concepts, or does the serial nature of the game preclude them?
Update: I am putting in SK’s comment from when this part of the bonus post up here – very important distinction, and I agree, but don’t have time to flesh out now where this and how it arose in that conversation. I’ll try to get back to it..
This would be a very interesting discussion. My experience with military officers is that they are not risk takers (by personality)-rather, they are extremely ‘corporate’ and methodical. In essence, they are part of a big, dangerous machine, and their job is to make that machine run well. Effectively, they are engineers in a dangerous business.
The follow up to that is; What does ‘risk’ mean? If it means ‘impulsive,’ then my opinion stands. Military officers really are not risk takers (with a few exceptions: the Pattons of the world). If it means ‘willing to do work that is more dangerous than most,’ even if that work itself is, in many ways, mundane (i.e. building roads, filing paperwork, making powerpoint slides, managing a hospital or feeding facility etc etc-the overwhelming majority of military officers are not directly involved in, or even involved in planning for, shooting), then, of course, military officers are ‘risk takers’ -they build roads and run hospitals in situations where they might be shot or blown up.