In an uncertain world, the ability to make good decisions should be a prized skill. Sadly, it’s a skill that appears to be lacking among so many world leaders. The recent fiasco in UK politics and China’s policy stance on how to run its economy are just two of the most recent examples of poor decisions by leaders that have imperilled their countries’ economic prospects.
The saga of what happened in the UK will no doubt be the subject of lengthy books and academic papers, but here is a summary:
In September, UK Chancellor of the Exchequer Kwasi Kwarteng announced a series of unfunded tax cuts, driven by a perhaps quixotic view that reducing tax was the cure for all growth ills.
Markets felt otherwise. Sterling and UK gilts were ruthlessly punished in financial markets, in the process severely exposing the UK pension fund sector and its use of a popular type of investment product called liability-driven investment. To shore off systemic risks, the Bank of England intervened in the bond market by buying longer-dated gilts at a time when it would have preferred to continue winding down its quantitative easing programme. Ultimately, the UK government had to stage a U-turn, cancelling the tax cuts. Kwarteng had to feel the metaphorical wheels of the double-decker bus he was thrown under roll over his back, while Truss soon followed in losing her job, making her the shortest-serving UK prime minister in modern history.
Markets were just as ruthless to punish what they saw as a sign of persisting with policies that are unlikely to support the growth of the sort that China achieved just a few years ago.
There’s little chance of Chinese President Xi Jinping losing his job any time soon, following the recent Chinese Communist Party congress that entrenched him as the leader of the world’s second-largest economy. However, markets were just as ruthless to punish what they saw as a sign of persisting with policies – such as the “common prosperity” doctrine and zero-Covid rules – that are unlikely to support the growth of the sort that China achieved just a few years ago. On Monday 24 October the Hang Seng index plunged over 6%, with the tech sector (which represents many of China’s leading technology companies) falling over 10%. The offshore yuan slipped to multi-year lows against the US dollar.
To the above examples, we can add many others, both in politics and business. Corporate history is filled with stories of poorly considered acquisitions or entries into new markets that have failed spectacularly. We all feel the effects of these bad decisions, whether through the destruction of growth and wealth or the opportunity cost of good decisions not being taken.
While we may feel that we are powerless to prevent leaders of governments or large corporations from foolish decisions, we can certainly improve our ability to forecast and make decisions in our own business and investment lives.
Foxes and hedgehogs
This is a view espoused by Philip Tetlock of Wharton Business School, in his book, Superforecasting: The Art and Science of Forecasting, (co-authored with Dan Gardner), where he examines the predictions of people from all walks of life and discerns what makes some people better than others at forecasting (and, for this discussion, better decision makers).
Tetlock concludes that forecasters fell into two broad camps. The first camp is made up of those who organise their outlooks based on one Big Idea (for example, socialist or free market; or eternal optimism or pessimism, for example). Then there are those who are more pragmatic and use as many analytical tools as possible, rather than looking at problems through a particular ideological or partisan lens.
The first camp he calls hedgehogs and the second he calls foxes, drawing on the words of ancient Greek writer Archilochus: “The fox knows many things but the hedgehog knows one big thing.”
The fox knows many things but the hedgehog knows one big thing.
(Tetlock wasn’t the first to use the fox and hedgehog analogy. Philosopher Isaiah Berlin categorised great thinkers into two camps in an essay in the 1950s. South Africa’s own Clem Sunter has used the analogy extensively in his scenarios for the future).
Tetlock found that forecasters who followed the characteristics of the fox fared better at forecasting, by a wide margin, when compared with those who were more hedgehog-like. He found them humble and willing to have their ideas scrutinised and questioned by others. They paid attention to detail, assigning time horizons and probabilities to outcomes, and then constantly reassessing their methodologies, whether their forecasts were correct or not.
A similar idea is conveyed by author Adam Grant in his well-known book Think Again. Like Tetlock, Grant espouses a humble and curious approach that’s more akin to that of a scientist than (dare we say it) a politician, preacher or prosecutor (these three are Grant’s categories). Grant argues that we should constantly question our presumptions, looking for new information to update our positions.
A complex world of investing
How do these principles translate into the world of investing? Building a portfolio can be a complex process, with several decisions required that take into account, for example, the global and local economy, the dynamics of different sectors and the inclusion of some forms of protection in case things go wrong. Importantly, when it comes to managing an investment business, it also requires the management of a group of often diverse thinkers.
Chris Holdsworth, chief investment strategist at Investec Wealth & Investment SA, says diverse opinions can be a strength rather than a weakness. “Differences of opinion and different ideas help us to uncover our own particular biases or behavioural shortcomings. The idea is to avoid groupthink or consensus that is too easily obtained,” he argues. Or, as Morgan Stanley’s Barton Biggs once noted, harmonious meetings can be a sign of groupthink. “Agitation, passionate arguments and some stress are good signs,” Biggs noted.
Annelise Peers, chief investment officer at Investec Wealth & Investment Switzerland, agrees, saying that investment teams need off-the-wall ideas. However, they also need a system that enforces discipline. “Investment committees need good leadership to provide a clear idea of what to do, as well as for people to take responsibility for decisions,” she says.
Data and sport
A notable feature of modern decision-making, whether it’s in politics, business or investing, is that there’s never been better access to data to help us in our processes. From detailed surveys to real-time, high-frequency information, today’s forecasters have access to information that their predecessors in previous times could only dream of. Moreover, we have a growing industry of machine learning and artificial intelligence that can collate and manage complex data almost instantaneously.
Despite these advances, decision-making is as hard as it’s ever been. Taking a cynical view, in some cases, decision-making is worse despite the access to more data. Sometimes this stems from a wilful disregard for facts and data, in favour of an ideological view. Presumably, Xi Jinping has access to research and data but chooses to be like a hedgehog in pursuing zero-Covid policies, despite their damage to the economy.
Like Don Quixote pursuing windmills (or ideals) despite what others may say, Truss and Kwarteng were so driven by the idea of building an economy based on low taxes that they ignored the warnings of their own Office for Budget Responsibility, which was set up precisely to analyse the impact of different fiscal policies.
Ignoring data is one thing, but relying too much on it can also be a problem. This idea is covered in a book by Ed Smith, an author and former test cricketer, who spent some time as England’s national selector. Sport is a good laboratory for assessing performance, he argues, because of the amount of data that is churned out in almost real-time, while success or failure can be assessed almost immediately.
But access to good data is not enough to guarantee success. You may develop an algorithm for selecting a team or the shares in a portfolio but, as Smith quotes Oaktree’s Howard Marks as saying, your system will soon be replicated by others (for a sports writer, Smith likes to quote the words of well-known money managers like Marks and Barton Biggs). True success comes from trying out new ideas and making calculated risks that can set you (or your team) apart.
Smith uses the analogy of a bookshop or a skilled editor. While an online shop will give you good book selections based on your reading patterns, the beauty of a bookshop lies in the serendipity of finding a book you might otherwise not be interested in. Similarly, a good magazine editor will get you interested in the article you didn’t know you wanted to read. Investing, recruiting and trying out new markets can benefit from this approach.
To close, perhaps the new UK Prime Minister Rishi Sunak is the fox to Truss’s and Boris Johnson’s hedgehog. So far, he has made the right noises. Time will tell however, whether he turns out to be a shrewd decision-maker.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View, and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek, and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.
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