Orson Wells [Clip] 0:05
We know now that in the early years of the 20th century, this world was being watched closely by intelligence is greater than man. And yet as mortal as his own...
JB Beckett 0:18
Salutations Dear Citizens as we peer into the new fund order to discover the immutable truth for asset management and wealth managers, the lowdown from the dark side, the frontier and the fringe of asset management and fund research.
Orson Wells [Clip] 0:38
We know now that as human beings busied themselves about their various concerns, they were scrutinised and studied, perhaps almost as narrowly as a man with a microscope might scrutinise the frenzy and creatures that swarm and multiply in a drop of water. with infinite complacent, people went to and fro the Earth about their little affairs, serene and the assurance of their dominion over this small spinning fragment of solar driftwood, which by chance or design, man has inherited out of the dark mystery of time and faith.
JB Beckett 1:16
A podcast for wealth managers fund selectors, distributors and investors, bring it to you the People's Republic podcast on finance, in association with my sponsor, Allianz Global Investors, capturing the latest market news, views and interviews with leading minds in our industry
Orson Wells [Clip] 1:41
Yet across an immense ethereal gulf.. minds that to our minds, ours are to the beasts in the jungle, intellects vast, cool and unsympathetic, regarded this Earth with envious eyes. And slowly and surely drew their plans against us...
JB Beckett 2:06
Allianz Global Investors is one of the world's leading active managers.
In these strange pandemic lockdown times, rest assured that all guests are calling in remotely.
Hi Tom
So we've known each other for some years now and you kindly provided the foreword to the to the refund order back in 2015 says great to get you on the show and talk about your books like 'Critical Thinking', perhaps your new title, 'How to think', And of course, one of my favourites, 'This is Gomorrah' But I suppose more importantly about your philosophy, observations of my industry, but from the outside, and specifically your recent work into metacognition. Welcome to the new fund order, my friend.
Tom Chatfield 3:06
Thank you very much, JB, great to be here.
JB Beckett 3:08
None of the questions I have for you are easy. And I would not dare to throw these questions, frankly, anyone else? But given some of the frankly, out there conversations you and I have had over the years, I know you will take them with aplomb. And I'm sure we're gonna have a lot of fun with them. So let me get us started. Now when I think about the human condition, belying markets, we're observing, you know, an almost Orwellian period of heightened protests and proxy class wars, the uprising of many movements is, of course, nothing new. But this weaponizing of stocks into protest is new. And as we saw with the Reddit social boards and the GameStop war with hedge funds, what is your view of these social media events? And what might it mean for the future of Finance?
Tom Chatfield 3:57
So, I've always found it useful to think of technology, as a kind of amplifier applied to human nature. It doesn't, you know, create totally new behaviours out of nowhere, but it amplifies them. And then as a result of that amplification, you do get new things emerging, right? And so we live in an age of big data. Now, what does this mean? It's a phrase that's thrown around a lot. But the fundamental thing about big data, I guess, is that it's data that humans can't make sense of, but machines can. So you know, it only becomes valuable and powerful. Once we have machines acting upon it. And the opportunities, it gives rise to this lovely phrase, surveillance capitalism, which again, is one of those phrases that's thrown around, but what it really describes is the fact that people's behaviours, and data about people's aggregate behaviours are becoming a new frontier of capitalism. And you asked about finance. Now, fairly obviously, finance has always been in the business of making money from People's behaviours, and sort of hedging and protecting. And mitigating against the downsides of those behaviours, and knowledge is power, and data is power and so on. And you and your audience know much more about this than me. But I think, because I think philosophically about technology, the intensification of data around behaviour is a really interesting way of talking about what's going on. behaviour is being mined in new ways, behaviours turning into new currencies that can only be understood when through machines and technology. And so, finances, you know, kind of walk through it, and others who are data businesses or data machines, they're mining this new frontier. Now, the new frontier gathers its data, partly from things like social media and social media, there's, there's a tension here, right? On the one hand, there is genuine bottom up empowerment.
We look at something like the Game Stop, and the Reddit surge, and so on, there really are people doing things they couldn't do before organising and sharing information in various ways, becoming a movement, registering for like a protest against the system, and making certain people go bust as a result of their behaviours. So we see that around the world, and we can we have been wrestling with that challenge for the last decade, you know, what happens when you put a lot of organising and communications power into a kind of grassroots level. And what happens is crazy stuff, you know, mass protest, mass communications, it's incredibly intense. It's incredibly volatile. But we can only understand that we've got the other side of this, the businesses and platforms that permit this are in the surveillance capitalism business, they are aggregating and analysing this data, and their business model is selling that data and insights based on that data to other people. It's particularly powerful, because it's if you like dark data, in the sense that Google, Facebook, Twitter and others, they know all the details, they didn't share the details of anybody else. Now, this sounds a lot like exactly what Wall Street and others love. Dark data that allows them to have an edge. And so if we look at the flip side of this consumer behaviour, how do the platforms that allow people to buy GameStop shares work? Well, they work through surveillance, they work through partnering with institutional investors, and giving them insights into what average people are doing. And so we have this double headed model. It's not as simple as the people are empowered, and they're hacking the system. It's that people are being empowered. They're behaving in certain ways, which are really powerful and fast and crazy. But then insights and aggregated data based on the surveillance of that, that is also being sold to two really powerful players, tech players, and traditional players as well.
So the major people investing in platforms like Robin Hood, where all this happened, our traditional hedge funds or New Age, hedge funds, Citadel Capital, for example, I think was was one of the investors and, and so I hope what I've suggested is that there's a tension here, which we got to understand both sides, stuff is being democratised. It's going grassroots people are being empowered as never before. But the business model driving all this is one of surveillance and aggregation and data analysis, which concentrates new kinds of power and influence in often quite sort of shadowy players or new monopolies. And that's the tension I think, and I think this, this is one of the great questions of our age. What does it mean? That there's this power and understanding of mass behaviour, this incredible ability to influence people? How do you make sure you're genuinely empowering them? And how in terms of money and allocations and fans, you know, what does the long term kind of value sustainable stuff look like? that's normally exploitative. How do you not turn it into into a kind of broken game?
JB Beckett 9:13
And I was starting... in last few months, referring and reading back '1984' and all this democratisation, all of this tension that you refer to Tom. It's this idea of what is what is the "truth", right. And of course, that was, you know, core to, to Orwell's thinking through through '1984'. And of course, we can make some sort of connection here with the use of statistics which is, you know, very much the mainstay of finance, but also we've seen that the statistics have been a great feature of the pandemic. They have been used and abused by politicians and media to control the truth. And I was thinking that also storytelling, and I think very ap for this short thinking back to Orson Welles depiction of the Mars invasion on radio, and how easily that can mislead the populace. And what lessons could asset managers learn from using stats and stories?
Tom Chatfield 10:24
I love your point about stories. I think one of the interesting blurred Lines we're seeing is that now more than ever, so Orson Welles, 'The War of the Worlds' was famously done as a pseudo documentary, a mocumentary, if you like, before it's time. It was presented on the radio, as if it was real unfolding events. And famously, if somewhat exaggerated, perhaps some people listened in to the radio, and believe that the real Martian invasion was taking place. And now, rather than there being, you know, a gatekeeper who's trusted, and there's kind of one radio station, on which you can, you can pull something like this off, stories are being told all the time in which people are involved. There's lots of rival versions of reality, playing out lots of rival accounts of reality going on alternative facts is one of the great phrases of our time. And, and what it means is simply that every worldview has its own world of facts. And to some degree, in terms of social media, and in terms of politics, in terms of the interactions between these things. It's possible for people to seal themselves off in their own kind of private world of facts or pseudo facts, or if you like, because they're not really facts of claims. And so we see survey after survey telling us that a lot of Republicans and especially sort of people on the on the further right in America believe as a matter of faith, that the election stolen, that the President beaten is an illegitimate president. Now. So what can we do about this? You know, as you say, What if you are in an industry that ultimately is interested in, in bottom lines? that's interested in really understanding value in various kinds? How would you handle these kind of psychic bubbles, which are hype, which is speculation which have FOMO, all the stuff that we've always seen in markets, but were almost alchemically things without value, seem to have the ability to take on incredible amounts of value on the strength of belief, non fungible tokens and FTS, lots of hype around those. I mean, what, what value do they have Dogecoin, a joke, a meme that is becoming worth more than massive listed currents. It's partly because people, the Elon Musk, this world of pushing it and hyping it. In some ways, it's a bit too easy to say that these bubbles will burst, they will. But the point is not that they will eventually burst. The point is that they can become something more than a bubble, they can become a whole kind of world, a little kind of alternative universe, which is a bit like a game, which has its own rules and its own facts, and its own high priests and its own leaders, there's a lot of money to be made by speculating and exploiting upon this. There's a lot of, you know, behavioural surplus to be extracted from this. I think that a responsible attitude is to relentlessly focus on what intrinsic value does mean, and what intrinsic utility does mean usefulness on what is anchored to long term behaviours, and long term needs. But while there is quick money to be made in the space, and while the space has such an outlandish influence on the pricing, and the returns and the value of so many things, it's a kind of reality distortion field, you know, it disturbs all the other facts. So that's a very long answer.
But I think, you know, if you want to understand it and engage with it, you need to see it as a kind of, you know, as a 'war of the world' views and those world views, they can be sustained in remarkable ways. They can the bubbles don't burst as they ought to anymore. Because they can feed have constant influence with people's lives and behaviours, because they can they can keep on going for longer because they can feed off collective belief. And actually, there's a regulatory question here and that's one thing you and your audience more than me. But behind all of this, as I emphasised, you know, when I was talking about data monopolies, there's a lot of manipulation going on. There's a lot of dark influence accruing to individuals and entities. It's very convenient to say this is all people this is mass behaviour. Yeah, this is mass belief. This is just people being people. But actually, that's only half the story. There's also the way these ecosystems are built. There's also the way loopholes are exploited. And there's the way that very influential individuals and entities get to put manipulate other people, and observe their behaviours and profit from it with extraordinary cynicism and power.
JB Beckett 15:24
Well, this idea of dark influence does pique my interest, unsurprisingly, but I've been reading more, I guess, Freud in analysis of social media patterns lately, and my worry is through this subsumption of our society into social media, you know, when one almost becomes just a mirror reflection of the other or a distorted reflection of the other? Are we collectively just becoming less empathetic with one another more binary in our perceptions of truth, values and realism?
Tom Chatfield 15:54
I think one of the really alarming lessons that we can take from this kind of amplification of our behaviours, you know, is that we are influenced really profoundly by the particular information environment, we're in the we're not just kind of one thing, you put people in a certain situation, for example, you surround them with very intense, very, very emotive prompts. In a very tribal situation. You know, the bad people are saying this, the good people are saying this, you must respond fast. Everybody is furious about this. And then you do whip up tribal emotions, you make people very cynical, you amplify certain aspects of their natures. But equally, for example, if you put people in a different kind of information environment, if, for example, there's a sort of private group, where people are gathered around a common cause, like, for example, they're supporting each other around COVID is an appalling situation in India, at the time of recording with COVID, in unbelievable. And many of the stories coming out of India are about individuals and small groups of people helping each other. In desperate, desperate times, about people come into each other's age, gathering money, so you can donations giving money, all from all around the world, people desperate to understand resources, you gather people together around a common cause around common values, in small groups, they bring out the best in them.
Technology, connectivity, people can be wonderful. You put them in a situation where they are being exposed to hateful and divisive messages of high intensity, and they behave like that. So I think this brings us back partly to a debate about, if you like, information ecosystems, about the systems we interact through, and just how powerful they affect us. And I'd make one last point. It's basically a quote you actually because you a little while back, you wrote in a column about cynicism. And you talked about the kind of the perversion of communications about if you like maligned or cynical intent, right. I think it's really important to contrast cynicism. With scepticism. Cynicism is the belief that everyone is doing what they're doing for bad motives. Everyone's in it for themselves. People are basically selfish, self interest and self absorbed. And so basically, then your prerogative is to win at any cost. Play the game, Win Win, if there's an opportunity. Take it, everyone's a cynic. You know, we're all just fighting to try and stay alive. Yeah. scepticism is the belief that you shouldn't take stuff at face value that you need to ask questions in to try and find out what's really going on. And I think there's all the difference in the world, between being interested in trying to find out what's really going on digging into things and just saying, everyone's in it for themselves, so I don't need to listen to them. It's a zero sum game.
JB Beckett 19:13
Well, you know, if I reflect on my own career, I have always felt the most important skill of a fund selector is one of natural scepticism. I take your point, I think there is. But there are also times when we confuse cynicism and scepticism. And it can be at times precarious for a fund selector, who, frankly, when they walk through the doors of an asset manager, they are expecting to be sold a lot of BS at times. And it's hard, therefore to not be cynical, if I might put it that way. But at the same time, our industry or I should say my industry and perhaps wider society, it has this intolerable latency to make faster and faster decisions. And from my perspective, that just seems to lead to bad outcomes. So what are some of the potential sources of error, confusion and misunderstanding that a fund allocator should be wary of?
Tom Chatfield 20:17
Yeah. So there are some really fundamental kinds of bias, which I think a lot of people have heard of them, a lot of your audience will have heard of confirmation bias, they'll know all about it, it doesn't mean any of us can avoid it. Confirmation bias is a universal human tendency. And it just describes the fact that we're much more likely to pay attention to and seek out information and news that confirms things we already believe or might wish to be true. Rather than things that challenge our existing beliefs or, or contradict them. It's a really important one, though, because in the long term, thinking that isn't reality based fails, sooner or later, or sometimes sooner, it makes money from other people, and later it fails. But in the long term, normal reality based thinking, it doesn't measure up, I'll say, non reality based thinking. I mean, for example, if you keep saying there's no global warming, there's no global warming, and there's no problem, there's no problem, there's no problem, you might make a lot of money, you might make a lot of friends, you might get a lot of employment. In the end, if you do nothing, reality will catch up with you, right? If you keep saying this is this virus is just like the flu, there was no problem won't hurt people, in the end reality will catch up with you. And so the reason I made the distinction between, you know, confirmation bias, and reality based thinking is that the best habit, you can cultivate is putting your ideas to a meaningful test is not saying I believe these things to be true. And now what information can I find that supports those ideas? It's saying I believe these things to be true.
What does it mean to put them to the most meaningful possible test? What does it mean, to put them forward in a way that is subject to disprove that can be disproved. Now, this is super difficult in an era of big data, it's super difficult cognitively. It's super difficult when there's so much information out there, that to some degree, you can find endless proof for anything you might wish to believe. But I think, you know, when it comes to long term thinking, combining confirmation bias with meaningful long term tests, is a really important anchor to reality. And, of course, reality and finance is partly a question of collective belief. You know, it's partly collective fiction. It's partly a narrative, right? But sooner or later, often later, you know, certain kinds of urgent reality, catch up. bubbles burst, different kinds of value reassert themselves, I'm really interested in the way that people better informed than me can take an awareness of cognitive biases, like confirmation bias, and recency bias, which is the other one recency bias is again, self evidently, perhaps the tendency to overvalue recent events, compared to older events, how we can push back against those in structural ways. And the last point I'd make, I guess, in terms of you want to put ideas to a test, I think plurality is one of the very best tactics for robustness in the long term. And by plurality, I mean, a variety of perspectives of human perspectives, I mean, a variety of models in terms of statistical models and algorithms. And I mean, a variety of kind of paradigms, or framings.
Because even in the wonderful world of big data, machine analysis, automated trading, whatever you want, even there, every model, and every data set comes equipped with certain assumptions. Now, those assumptions are often very sophisticated. And a model often incorporates many different assumptions set. Nevertheless, ultimately, it's a particular framing, it values certain stuff and other things, right. You need to be looking at multiple models, you need to be talking to people very different perspectives, partly because you're testing ideas, but partly because this is the only way in the long term, to avoid blind spots and grip things, or to mitigate against them. robustness is diversity. And again, I suppose in the fundamental financial sense of this, this is fairly obvious. This is hedging. This is diversification. This is stuff that other people are better informed about the me but I think cognitively, it's easy to end up in a monoculture. It's easy to also to buy into the belief that this particular statistical model, this particular approach, this particular sort of medley of data sources, they are effectively there's there's diversity there, right. That's it really good. It's really sophisticated. It's constantly updating. Actually, you want to step outside the ballpark completely.
I'll put this advice in a nutshell and I hope it's a useful nutshells data and machines can provide answers that only humans can provide questions. You need good questions. So go and equip yourself with the best possible questions.
JB Beckett 25:17
That's a great flip on what I used to say to junior fund analysts coming up about the respective merits of quantitative and qualitative analysis. And I used to suggest that quants, and here statistics, mathematics, etc, could ask great questions, but never, never provide the answers, because the qualitative analysis would be your way to put your fingers into the reality. You know what, actually, what belies the ones and zeros? I think that's a nice way. That's a nice way to flip it on loop.
Tom Chatfield 25:51
We can come up... Yeah, really quickly. So I'm just I'm kind of nodding frantically at the kind of quant and qual. And I think they're so often treated as oppositional right. And, you know, so an inner part that you're in the business of reminding people, there's a place for each, but I think also, to some degree, they're not the opposites, they often appear. Because ultimately, the good questions that the theories and tests that any quantitative analysis will set out to engage with, they have to come from a qualitative place. That's where they begin with a qualitative qualitative procedure in a quantum doesn't generate its own questions. And similarly, ultimately, making qualitative stuff, actionable and worthwhile is about translating it as richly as possible into quantitative tests, predictions and theories. And so you've got to do you've got to see them as two parts of an interwoven process of understanding, not as, you know, this one's good. This one's bad.
JB Beckett 26:55
It's funny, I mean, I studied sociology, mostly at university. And, and I guess the way I would describe my approach to fund analysis and selection was there was anthropological most often than not, and that I would view a fund manager house as a social system. And therefore, I would think about the interactions and the 'how would people go about their day to day business?' Is that, you know, and does that lead to positive outcomes? Now, that might be me, telling myself a story, that I can somehow understand what's happening behind closed doors, but I would look for evidence, I would look for little tells in that. And so I've always tended to lead towards the qualitative analysis more so than the quants.
In the quants, I, you know, having applied quantitative analysis, you know, over the decades, and, and then thinking about how to then apply them into algorithmic models to select fund managers. And there's some there's some supporting evidence out there, going back to 2005 that, you know, frankly, some algorithms can outperform human fund selectors, because it does dial out some of those biases. And the way I guess I reconciled it was if asset management was wholly controlled by computers, that were then wholly driven by sets of rules as to how those computers would then manage the money.. quantitative analysis would be the pure, the pure solution to that. But because we've got these squidgy, fuzzy organisms that we call human beings trying to run money, who often try to sidestep and manage and manipulate and bend the rules that they are given? Then, for me, quantitative analysis can't give all the answer.
Tom Chatfield 28:59
That's absolutely right. And I think it's really important to say that people often talk about 'full automation', but they don't mean it. They haven't thought enough about what they're saying what they mean is shifting the bias out a level. And sometimes they mean shifting the bias to, you know, the design and specifications and engineering stage, there's still people there. There's still people making subjective judgments, you've just potentially shifted a lot of kind of biases and assumptions to a place where you're less equipped to analyse it. And then you might end up in a situation where you everything worked absolutely, brilliantly until it doesn't, at which point you're completely stuffed, because you don't have people as it were on the shop floor who built it to understood it. You don't have people in the system.
And you don't really know why the thing that worked perfectly because it was trained for certain circumstances doesn't doesn't work and others, actually, as I love this anthropological approach, and I think Danny Kahneman, the Nobel winning behavioural economist, has a new book coming out called 'noise'. And I've heard him talking about this. I discussed it with him a while ago. In fact, and You know, he very much, I think, believes that 'noise' is if anything more significant than bias and more useful as a term because noise describes the stuff that neither we nor anybody else control.
'Bias'... The trouble we're talking about bias is you can end up thinking when in that case, we'll do thing x, and that will mitigate against the bias. And that people make decisions based upon the way somebody looks, you know, for example, or the name of something. So we'll strip out the names and the images, and we'll replace them with with numbers, we never can have mutual denominators. So we've stripped out that bias. So that's great with de-biassed stuff. He makes the point that noise is always there. Because humans are strongly influenced by irrelevant factors in all the judgments they make. They make when did you last eat? What's the weather? Like? What did you read when you would do scrolling Twitter this morning, we can't divorce our decision making as human beings from a lot of ambient noise. And so when you're talking about human judgments, you have to both be aware of noise, try and mitigate against it and understand it while keeping people in the loop.
It's really complicated. You can't just but I think what I'm saying is that sometimes noise is a more useful term than bias, because it's insidious, because it is not something you can spot just by looking at human brains and decision makers, r
JB Beckett 31:40
Right
Tom Chatfield 31:41
You can if you take an anthropological approach, you know, that kind of approach maybe equips you rather better, to look holistically at people, you know, to try and identify sources of noise as well as sources of bias. algorithms are great. I mean, they're amazing. They are, when it's done really well, they are much better at specific things than people because they're much more consistent. But you really need to get incredibly good at having the right discussions around. What exactly it is, the algorithms are maximising towards how they are waiting things, what it means to meaningfully, iterate and interrogate them, to make them more transparent, to make them more susceptible to analysis and debate to political debate. And all this kind of good stuff I've talked about. I mean, I feel this is a good direction for tech, you know, high quality conversations around processes that are automated in the execution, but a data informed that they have a lot of people in lots of very well designed loops, having really good conversations.
JB Beckett 32:50
And I'm going to pick up last question before we get to my funny little rapid fire round, which is more more fun than fact. But before we get there, I want to then link that to something you said earlier, which was about dark influence. And and that today, finance, Asset Management essentially exists with the perception that it is only exists within the visible internet and within the visible society. And yet we know that finance also sits in the dark web, whether it's in crypto, or it's through things like money laundering, etc. Yet, my industry only seems to want to talk and perceive the outer rather than the onion beneath that. What one of the dangers then for finance and for my industry, if it doesn't start to appreciate the dark web?
Tom Chatfield 33:50
I mean, there's there's huge dangers, I guess of legitimacy, ultimately, and, and trust and explique ability into this can sound very sort of high handed. But an obligation of explique ability is is one of the sort of fundamental aspects of a of a, of a contract, if you like, or have a lot of the kind of the kind of agreements that people enter into, that you're able to defend your decision. Now. I mean, in a sense, one of the seductions of technology is that you can end up saying, effectively, the algorithm did it, we put in the data, this is what happened, nobody could have predicted this and nobody controlled this. And when it comes to dark activities, like money laundering, and so on, there's a lot of temptations there. For example, there's all kinds of information that it's not illegal to trade on the basis of if you're certain you have access to it, you're a certain kind of entity.
Again, your audience will be far more expert in this area than me. But, you know, if you train a machine learning model on this data, you get hold of some data If you train a machine learning model, and then get that model to sort of make decisions, it's not at all clear in terms of reverse engineering, how that machine learning model learns stuff, you can sort of launder it if you'd like, once you're using the model, the data is potentially invisible or can be made to go real can be disclaimed. Right. And I think, you know, the dark web is is a difficult term, because people use it to mean different things. Some people use it to mean the kind of baddest of the bad, appalling, terrible activities conducted by the worst kind of criminals in the world. And some people use it to talk about, you know, non indexed parts of the internet, dark webs, which are places where you data is stored or kept, but you, you can't just search it and find it. In some ways, I think talking about dark networks is most useful. Because if you want an edge, if you're in the business of, you know, surveillance, capitalism, aggregating data and exploiting it, there's a degree of darkness implicit in that there's an information asymmetry, implicit in that you have the data, other people don't, they can't get it, you get to analyse it, aggregate it, train machine learning on it, and then sell or use that to make money and your edge is your data monopoly.
Now, there are some really big conversations about search engines and their indexes. As to whether, you know, down the line, there is a public interest argument that they should be, if not nationalised, and in a not in private hands, I don't know where arguments like that will go. But I do know that there's going to be some really big I think, cruxes, in terms of legality, in terms of regulation, in terms of trust. And in terms of manipulation. Being on the right side of history, I think means thinking now, about transparency, and explique ability, and accountability. A lot of people see opportunity in the darkness, and may do very well out of it. But I think there are opportunities for leadership, there are opportunities to kind of building trust, a lot of work has been done in the realm of data and AI, around ethical principles, fundamental ethical principles. And these, you know, they converge in an interesting way on things like transparency, non maleficence, which means effectively not having evil aims, you know, trust, accountability, really, in other words, they converge, not on tech solutions, but on oversight boards, governance, structures, obligations around data and ownership. And all this data, you know, we use the word data, it's people's actions, it's people's behaviours, it's people's private details. It's people's histories.
Now. At the moment, a lot of this stuff is just used just to use to create insights and edge. In certain parts of the world, you know, Europe in particular, I think has been leading on this. It may change quite a bit in terms of the presumptions of ownership, in terms of the predictions of how access is granted, and what can and can't be done. What I'm feeling idealistic and hopeful, which is, you know, it's hard to maintain, if you look on the look into dark activities for long. I would like to think, as I say that there's a right side of history to be on, and that it can be, sound, financially, fiscally responsibly, that you can be pro empowering people pro transparency in it for the long term, interested in pushing forward. Ethical models of data handling.
JB Beckett 38:47
Your book, 'This is Gommorrah' was aptly aptly named. I think it's fascinating that my industry exists within this, I guess, naive bubble, that something, this little thing that we call efficient market hypothesis (EMH) exists. It's, it's it's actually real, it manifests, and that, in its strongest form, all information is known in the market. It feels to me that the the existence of dark networks almost guarantees that that can't be possibly true. But as an industry, we view it to be the case because we just view it based on the price changes. We do not think about the potential dark influence, that's belying those price changes, to the point where you don't have to go through the joy of this, Tom, but every year I have to set these mandatory training, you know, computer based training sessions on insider trading, and the industry over the last 50 years that's how it's come to terms worth trying to stop information advantage, but it is so woefully ill-equipped to deal with the dark networks.
Tom Chatfield 40:01
Absolutely. And just generally speaking information advantage, you know, we live in a world in which on the one hand, ordinary people have got, you know, vast amounts of information at their fingertips. And it's genuinely empowering this enormous amounts to be celebrated there. But at the same time, and as part and parcel of this, you know, it's a feature, not a bug with the business models and the way it's all done. other entities have vast amounts of privileged private and asymmetric information, and they get it in advance. So you know, if I'm running a platform that allows ordinary people to do stuff online, buying and selling, and so on, and taking action, collectively, my business model is going to be not only taken, taking a cut, but also at least potentially knowing what they're going to do. And selling intelligence or details about that, in advance to other people, just like, you know, high frequency trading (HFT), is entirely predicated on the idea that, you know, tiny time delays, tiny bits of advanced knowledge, leverage into, you know, potentially enormous gains.
And so, we have, you know, the twin problem that the speed at which people know things is very asymmetric. And what they know, and what they can do with it is unbelievably asymmetric. Everything is priced eventually, but if you like what the market is efficiently pricing and presenting us with is, it is very efficiently pricing a world in which small numbers of players with access to certain kinds of information, have outlandish amounts of influence. And bubbles will spring up both from a combination of mass behaviours, but also the manipulation and exploitation of those mass behaviours. It's it's part and parcel.
It's extraordinarily hard to deal with smarter people than me have plenty of suggestions, but a lot of these suggestions boil down to various kinds of restraint, an obligation of saying, you know, we have to have checks, chokes balances, and if you look at disinformation, and what, what works when dealing with disinformation or misinformation, no one thing solves it, you have to take a kind of, you know, holistic ecosystem view, you have to slow it down, you have to slow down, you have to choke the flow of information, you have to stop the kind of crazy virality and you have to cut off the head so to speak, you have to go for the influencers for the small number of accounts or sources that are having the largest amount of influence. The same is true of trying to solve behind the scenes problems, instead of choking and slowing down looking at power and influence. And it's, you know, it's very dark terrain.
Orson Wells [Clip] 42:54
Ladies and gentlemen, we interrupt our programme of dance music to bring you a special bulletin from the Intercontinental Radio News, at 20 minutes before a central time, Professor Farrel of the mount Getting's Observatory, Chicago, Illinois, reports observing several explosions of incandescent gas occurring at regular intervals on the planet Mars, the spectroscope indicates the gas to be hydrogen and moving toward the earth with enormous velocity. Professor Pearson of the observatory at Princeton confirms Farrell's observation and describes the phenomenon as quote, like a jet of blue flame shots from a gun unquote. We now return you to the music of [...] playing for you in the meridian room of the park Plaza Hotel situated in downtown New York.
JB Beckett 43:55
Yeah, I feel we've we've got ourself into some dark wormhole. So apologies for that. Let me let me lighten the mood. Let's finish with my rapid fire round of 10 incredibly easy questions which you know, we will just rattle through aplomb. Let us get started on the first question. Bull or Bear?
Tom Chatfield 44:21
My Goodness me. This is I gotta say, I'm gonna say I'm going to say Bear. And I'm going to say in the sure knowledge that this is the least informed answer you will have had to question...
JB Beckett 44:32
The next question Bogle or Buffett?
Tom Chatfield 44:36
I thought Buffett was gone.
JB Beckett 44:38
No, no no Buffett Buffett says still weathers Bogle, John, unfortunately 'Jack' Bogle is no longer with us. Rest in peace.
Tom Chatfield 44:45
Okay, well, I I got to go for the Sage of Omaha and his pithy wisdom,
JB Beckett 44:51
Profit or planet?
Unknown Speaker 44:53
Oh, planet. I mean, in the end, it's all we've got, right?
JB Beckett 44:56
Absolutely. I'm sorry. I have to check. myself, I'm supposed to be neutral here.
So divest or engage?
Tom Chatfield 45:04
Hmm. That's a nice tricky one. You know, I think I like divest. I think that I think that speaks loudly it's like on Facebook, you know? Do you keep Trump on there? You divest. divest yourself. I mean, if it's bad enough, divest?
JB Beckett 45:22
Yeah. I wonder how many people will still follow Trump just to satisfy the their morbid fascination of their Id? You know, just to just see what he comes out with next. Yes, we will go with divest. Next question, lower cost or better value?
Tom Chatfield 45:38
Hmm. He said, I want to make all of these complicated. These are simple questions that I want to make complicated.
JB Beckett 45:43
Well as the proverbial 'outsider'. In this season one of the the new fund order, you can you can be that devil's advocate,
Tom Chatfield 45:54
well, I know, I'm gonna say better value, because who can argue with better value, you know, if it if it's cheap, but it doesn't work? I want I want better value, because because I want value to me? Because value presumes that it's great, right?
JB Beckett 46:08
So we'll go with better value. Great stuff.
Tom Chatfield 46:09
Yes, let's do that.
JB Beckett 46:11
The next one references to the size I guess of the of the asset firm or indeed the the asset manager concentration. The, I guess the pooling of assets into these kind of vast mega structures is something that's hotly debated. So the next question is supertankers or boutiques?
Tom Chatfield 46:31
I'm an I'm going to say boutiques, because I think if you're talking about robustness, then ultimately I'm a I'm a kind of statistical believer in plurality.
JB Beckett 46:40
Yeah, plus, I think, supertankers haven't got a particularly great rap right now after the Panama Canal incident, but...
Tom Chatfield 46:48
Reality has lots of things to say about real supertankers. Generally speaking, if you're looking for a metaphor, I think, absolutely massive diesel burning ships carrying oil around the world very slowly. Is. is probably is probably doing a lot of metaphorical work.
JB Beckett 47:03
I think if the Martians were to land tomorrow, they might just pick us up on that one.
Tom Chatfield 47:08
And they say, Hey, guys, you know, a couple of recommendations.
JB Beckett 47:12
The next one, I guess refers to some of the, I guess, the psychology of fund selectors and how they choose the fund managers. The next question is star managers or team players?
Tom Chatfield 47:24
Team plays every time.
JB Beckett 47:26
Good.
Tom Chatfield 47:26
Yeah, that's, you know, with my strong, uninformed opinions, the kind of thing I tell other people not to have, I think, you know, what's the star player, a star player is a statistical anomaly. It's a star player, is someone lucky. That's it. If you I think if you pay for a star, or you're paying for luck,
JB Beckett 47:43
Next question refers, I guess, to the nature of markets, rather than necessarily your own persona. But the question is public or private?
Tom Chatfield 47:53
I mean, I like public, if it's done well, I think I think public is... private, you can do a lot, right? You can do more, perhaps, and you can maybe even be more long term. But I think with public, you can take a deep interest in, in maybe, what public does mean? could mean, should mean, and and how we can do it? Well, is that is that a non answer?
JB Beckett 48:14
I think you've leant towards public. Yeah, you've shown some more conviction than some of these answers from some of my previous guests... I'm not naming...
Tom Chatfield 48:21
But that's probably because because I know less that's the thing
JB Beckett 48:26
Second from last question, is high growth or stable income?
Tom Chatfield 48:30
Oh, well, you know, depends, doesn't it? I, I, you know, I would go for strong and stable, because because I'm a boring person, if I can have a stable income, I think it's probably fair to say that, from the philosophical point of view, if you're interested in happiness and well being and having a stable income, is a great thing. Having high growth is either a good thing, or when it all goes wrong, a very bad thing. So I'm deeply interested in the asymmetry between risking rumination versus having a certain certain guaranteed level of security.
JB Beckett 49:10
Well, if we take two extremes if we just observed what's happening in society right now, the the burgeoning popularity and momentum of Bitcoin, which we might describe as the high growth versus the, the lack of popularity of those old fashioned annuity contracts, which give you stable income, we can see that, you know, the populas has really lent very heavily now towards speculation, I think over over investment.
Tom Chatfield 49:42
Yeah, there's money to be made that there's a lot of money to be made. But it is to me made ultimately off the back of, you know, kind of hype and hype, broken promises and, and bullshit. You know, the way people talk about blockchain and so on. It is a festival of bullshit.
JB Beckett 49:58
...that's, that's the quote that's going in the trailer.
Tom Chatfield 50:04
All this nice philosophy and when we come we come down to come down to that...
JB Beckett 50:09
Marion Laboure at Harvard... I think she described a slightly more slightly more softly as the "Tinkerbell effect". But I like I like the way you put it. And this brings us to my favourite question before the the one question bonus round, which is coming shortly. The last main question is socialism or free markets?
Tom Chatfield 50:31
Oh, dear. Am I allowed to say no, there's no such thing as a totally free market. Right. And there's no such thing as perfect socialism. I mean, I, I lean towards the left. For all the immense historical problems with people doing the left, I feel that in planetary terms, the idea of having riches in common is compatible with resisting vast riches in private, in person, that there's a there's a deep tension there. And, and interestingly, I think in some ways, you know, you look at things like universal basic incomes and so on. It's not necessarily wholly policies of the left. But I think I think there was a lot more scope for good to be done around the communal than there is around the allegedly free market. A market is never left free, is it? It's, it always has particular... it always has particular weightings, you know, the freest markets in the world tend to tend to be aggressively non free when it comes to their kind of borders and tariffs. And those they do or don't extend particular freedoms to?
JB Beckett 51:55
Well, we are allowed to be utopian about this Tom. So we can you know, as you say, that
Tom Chatfield 52:00
I think cheerful, well, let's be cheerful, and I think let's be cheerful and utopian,
Let's say let's say that a kind of a vivified socialism with free market features, let's say,
JB Beckett 52:07
Not subject to corruption. Absolutely.
Tom Chatfield 52:09
You know, that's right. You know, people are gonna get better. And I'm, if history teaches you one thing, it's that human nature changes, and people are basically nice.
JB Beckett 52:18
Well, we can so get into Nietzsche, a Nietzsche debate about that one but.
Tom Chatfield 52:22
Can we make a serious point, though, because we've had a great we've had a global pandemic, yes, it's been absolutely awful. But we're not we're not living in we're not living in an apocalyptic movie. Most people have made huge sacrifices and treated each other with amazing compassion, and decency. I mean, terrible, terrible, terrible things have happened. But, you know, people have come out of this. I think it's like human nature One, total cynicism Nil, frankly, you know, if you if you'd made predictions about epidemic concerns, you know, people will make the sacrifices, they will behave in these ways they will, they will, they will do these things for the benefit of others. You'd have been called out as a 'utopian idealist'' and they just said 'no no there'll be there'll be anarchy and war and conflict', you know, people, given a chance people are much better than our worst fears.
JB Beckett 53:09
Now, we were just one last bonus question. If you could pick a number between 11 and 40
Tom Chatfield 53:16
12.
JB Beckett 53:17
Question 12. Go Global, or go Local?
Tom Chatfield 53:22
I think getting local is? Yeah, is the best way to it's the best way to have a good global.
JB Beckett 53:29
Yeah, great stuff. I do you know what I've, I've now tried to set in our house. It's so hard. Now I've taken this.... this world we live in, particularly with, with with technology. But anytime we're trying to buy things we think, can we buy it locally sourced? If we can do that, can we buy it in our local country? If we can do that can be buy it within the UK? Can we then buy it within Europe? And we basically go down the sequence of, you know, how close what's the close proximity we can we can procure that, at the very end of that list is okay, do we have to click Amazon? but we've, we've cancelled our amazon prime subscription. And yet, I'm just, you know, I have high hopes that different countries around the world can integrate ecommerce in a way that gives back as much as it takes, which is doesn't feel like that's the world we live in right now.
Tom Chatfield 54:21
No, and this is one of the joys of technology actually, isn't it that you can you can use it to, you know, make it easier to think about who you're giving your money to, or some of your money to, because you're still using the platforms. And I do think, you know, I've tried to give up buying new things, you know, occasionally I'll buy some new stuff, most of my food is new. But, you know, it's been quite a long time since I bought new clothes or new electronics. Because, you know, it's much of the time is not necessary. And as you say, just just having some really good heuristics around, who would we want to give him money to and why and where, is a really powerful thing and it may be something that pandemic has, has helped us with, in a strange way, you know, sitting at home on our screens, deciding how to spend our money, we've given a lot of money to Amazon. But I'd like to think that nothing is inevitable that we can you know, we can change more in the long term.
Great stuff you so would have wanted to picked... Let me see... question 26 I think you would have looked at question 26 was 'space travel or time travel?' Which I thought..
oh my goodness,
JB Beckett 55:28
I know. Some good ones in there.
Tom Chatfield 55:30
Time Travel gets messy it's got to be space travel really because time travel...
JB Beckett 55:33
Paradox
Tom Chatfield 55:34
At the time my grandmother is killed my grandfather with me or something? You know, then then we're pretty we're pretty messed up at that point.
JB Beckett 55:43
Good stuff, mate
Look hey we went way over the time I really appreciate you taking the taking some extra time. It's just been it's just been a great having a chat with you to be honest.
Tom Chatfield 55:51
Well, likewise, well, I I went into it with no particular talking points or expectation. So I really hope that what you get from it is a good, is a good episode for your audience.
JB Beckett 56:06
Please don't forget to like and share and subscribe you know, click the subscribe button. new podcast every two weeks with a new guest. Stay tuned.
A big thanks to you dear listener for tuning in. Brought to you by my sponsor, Allianz Global Investors. A warm thanks to today's guest. Legally, I am compelled to remind everyone that all views of this podcast are of course independent and do not belong to any affiliation or organisation. Just in case that was in any doubt.
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Computer 56:42
the new fund order.
JB Beckett 56:44
Please subscribe, share, like and comment. Let me know what you think. What you'd like covered in future episodes. Until then, stay safe. And keep it left.
Orson Wells [Clip] 57:02
[Clip from War of the Worlds recording]
Transcribed by https://otter.ai