My new book Trend Commandments tackles financial news head on. An excerpt where I analyze a CNBC interview with trend trader David Harding:
Joe Kernen is not devoid of academic intelligence. He holds a bachelor’s degree from the University of Colorado in molecular, cellular, and developmental biology and master’s degree from Massachusetts Institute of Technology. He worked at several investment banks including Merrill Lynch. I am no Harding fanboy or apologist, but I have spent time with him. That research time, coupled with his public career and track record, make him one of the most learned trend trading voices of the past twenty years. It is clear to me that Kernen had a preformulated agenda [in the interview]. His questioning was a transparent attempt to marginalize Harding and trend following. Why would Kernen do that? Imagine if the interview started like this:
“We at CNBC believe in efficient markets and the use of fundamental analysis. Our business model requires viewers to watch. Today, we have a guest on who has made billions with trend following trading, which does not require fundamental analysis or CNBC. Would you like to know how to make money without ever watching our channel again? Welcome David Harding!”
So was Joe Kernen really that clueless before interviewing David Harding? Or was his apparent lack of knowledge regarding trend following done on purpose to try and marginalize Harding?
Robyn Williams: So what’s the risk? Last week we spoke to David Spiegelhalter about Paul the octopus and the maths of probability. This week, what’s behind his actual job, Professor of the Public Understanding of Risk at Cambridge?
David Spiegelhalter: Whatever you think about them, this was a hedge fund that paid for this post in Cambridge. It was a very enlightened move, I think. David Harding who runs it, they make a lot of money and they give quite a lot of it away. And so he supports various mathematical charities in particular and he decided to support this post in Cambridge. One of the nice things is that it pays for my salary, and there is absolutely no guidance or pressure whatsoever to work on any particular topics, and the last thing I do is financial work, I have no idea about financial risk. But I do work in many other areas. I come from a background of medical statistics so I concentrate on medical and health issues. But of course with a job title like this you get pulled into all sorts of stuff, so suddenly you find you have to be an expert on volcanic ash and child safety and you have to be an expert on cycle helmets and things like that. So I am desperately trying to learn up about all these issues all at the same time.
Robyn Williams, CC Wikimedia
Robyn Williams: In general is the public (and I suppose you’re talking about Britain) more leery about risk, about going out, about just being in the world, than it should be?
David Spiegelhalter: That’s a difficult question. One of the things I often get asked by people with a very strict scientific attitude is to say, well, tell me how hopeless people are at dealing with risk, how irrational they are. And I refuse to follow that line of questioning because you just have to think about yourself, about myself; I am not like a rational human being who weighs up everything mathematically, I’m an emotional person who acts largely by their feelings, and that’s how people have dealt with risks since the beginning of time.
The whole mathematics of risk, of probability and ideas like that, are very recent on the scene, they’ve only been around for a few hundred years and we can’t really think that everyone before that was completely stupid and irrational. I think there were probably some quite wise people around who understood, using their feelings, about what uncertainty meant and how to deal with it. We have to deal with uncertainty in our lives all the time.
So saying, I think you could say that there has been in this country (and I’m sure in many other places) far too much of a concentration on trying to say, well, something bad has happened, we’ve got to stop it ever happening again. And this of course is nonsense. Things will always happen, bad things will happen, but there comes a point when actually it’s not worth doing any more because the harms of trying to reduce that risk might easily outweigh the benefits. And the natural area of this of course is in terms of child safety. There comes a point where we must say that we can’t protect our children from everything bad that might happen to them, and sadly this means that on occasions, very rarely, a bad thing will happen to a child.
On the other side of that of course is that if you do try to protect them too much, what other harms are you doing to them in terms of reducing their feeling of adventure, the possibility of learning from failures, of essentially being able to pick themselves up and start again when things go wrong? We can’t protect people and actually it’s not doing them any good to try to protect them too much.
Robyn Williams: Have you crunched the numbers on various aspects of a young child’s life, like walking to school or playing sports where they might get a tonk on the head?
David Spiegelhalter: I haven’t done the sports stuff. One of the difficulties of course is just the data on injuries, for example, it’s ropey because there is no standard way of reporting these things. Sadly of course we can count the bodies because the one thing that is recorded is deaths, and we can look at those statistics. I looked at some recently because of some issues that came up in this country on a father who was being threatened with being reported to social workers because he was allowing his daughter to walk 20 yards to catch a school bus and crossing a road. So here was a seven-year-old girl…it’s extraordinary, seven-year-old children are unbelievably safe, they’ve never been safer. I mean, it’s sad, but something bad will happen to some of them; one in 12,000 seven-year-old girls will die before they’re eight, of all causes. But that means all causes, of illnesses and everything else. If we look at, for example, kids being knocked down, pedestrians, in this country, England and Wales, 50 million people, 1.5 million girls between the age of five and nine, in 2008 one was killed on the roads as a pedestrian. That’s a terrible tragedy, and it was quite a lucky year, and boys have twice the risk of girls, that’s well established…
Robyn Williams: That’s still only two.
David Spiegelhalter: Yes, normally there are a bit more than one, normally it is more than one, it’s just to show that out of 1.5 million, it’s a very small number. So it comes to a point when obviously these are tragedies but things will happen, and surely it’s really important to encourage children to be out and about, to be roaming, to have a life of freedom et cetera.
Robyn Williams: What happened to the father who let his kid go 20 yards to the bus? Was that okay?
David Spiegelhalter: I think the council relented rather. People are fearful, there is a fear of litigation that if something happens somebody is to blame, and schools are very cautious about school trips, and this sets up a very pernicious environment which can just lead to a lack of adventure, lack of risk. The trouble is risk, it’s got bad press, the word ‘risk’ but there are such things as good risks. We take risks. Maybe a better phrase would be that we take ‘chances’, that’s got a better connotation of the fact that taking a chance because something good might happen, we might fail, it might not work, so maybe we should be thinking of risk assessments as chance assessments so we can really think of the fact that when we are uncertain about what might happen, that includes the fact that something good might happen as well as something bad might happen.
Robyn Williams: I suppose one of the terrible things, looking at that, is the sheer cost. You mentioned litigation, of all the former filling-in to see whether someone can get the permission to go out on a school hike or go to places where there might be a cliff-top or, one of the Australian examples, a colleague of mine had to fill in a form which went through five layers of management because there might have been snakes in a suburb of Sydney. I mean, you can get snakes anywhere in Australia but the chances are unbelievably remote, and the snakes are probably hiding. But the cost of litigation and the cost of bureaucracy, has it gone out of control?
David Spiegelhalter: What’s very interesting is that this new government in our country just yesterday has announced that they are going to have a war on unnecessary health and safety bureaucracy, and they’ve got a report that has been written, and they’re hoping to dismantle much of this and to try to stop litigation in these circumstances as well. So things are on the move here, there is a process of change that is going on that’s supported by the government, it’s going to be very interesting to see what happens.
Robyn Williams: So far you’ve mentioned how life is safer than many of us perceive. What about where there are risks that we are rather too blithe about?
David Spiegelhalter: The trouble is the risks we are all so aware of are the horrible things that are going to kill us today, you know, the risk of children being murdered, of car accidents and things like that, yes, we’re really anxious about those. But the bigger risks are often going to be longer term risks and they are not so easy to see. It all sounds rather tedious because people have gone on about it so much, but just our lifestyles, obesity, the way people eat, the lack of exercise, and of course the harm to the environment, the energy security, of what might happen, all these things are much more difficult to put a number on for a start. They are also delayed. We’re talking about things a long time in the future. If we are thinking about climate change of course were talking about things for future generations that we need to be concerned about.
And so you’ve got this difficult balance between what you might call acute risks, things that are going to get us today, and what you might call chronic risks that actually we don’t notice at all at the moment, you know, I can just go around stuffing my face with all sorts of food imported and flown from around the world…I mean, I don’t notice any difference, but I will by the end of my life, there’s a very good chance of that, and my children might notice even more. So this is difficult to do mentally. I know people have trouble with it, I have trouble with it.
Robyn Williams: When the volcano in Iceland (whose name you will immediately tell me) went up, what did you tell the people who were phoning you about the risk to do with flying?
David Spiegelhalter: I try not to say anything at all, and I then got invited onto the government advisory committee on volcanic ash, which was an extraordinary experience, it was very interesting because I’ve just started to get more involved in this disaster committee, which has now carried on to trying to work out the chances of a similar event happening in the future. In the UK now they started a thing called a risk register on which the threats to this country which will require some sort of civil planning are supposed to be recorded, and their rough idea of how bad they are going to be and how likely they are to happen is recorded. That’s quite tricky, you’ve got to work out the chance of another eruption by one of these other Icelandic volcanoes over the next five years and how severe it might be. And we got some data on that.
It’s very interesting analysing data that goes back to about 900 on the intervals between volcanic eruptions, and of course they’re very erratic. We know that predicting volcanic eruptions is unbelievably difficult. So it always has to be a mixture of some statistical analysis where you can say, well, we know roughly what the interval is, that we can state roughly what the probability of it erupting again over the next five years is, but there is inevitably going to be a lot of judgement coming into it as well, and that’s why it has to be teamwork between meteorologists and vulcanologists and statisticians. I think that has proved to me that the business of making these judgements about what the risks are is never just a matter of statistical analysis and mathematics, and you have to bring in scientific judgement, and that means acknowledging scientific uncertainty, the fact that we don’t know what’s going on.
We don’t know what’s going to happen. People are quite happy with being able to…they recognise we can’t say exactly what’s going to happen, but to admit that we don’t even know what’s going on at the moment is quite tricky, and yet that is really what scientists have got to do. They are slightly fearful about it. They look at the climate change debate and they see that, oh my goodness, if we admit we’re not quite sure, we’re going to get pounced on and people will say these scientists don’t know what they’re talking about. I have this naive confidence that if scientists really do actually own up, which they do of course amongst themselves all the time, and if they do that more in public and say, well, we’re not quite sure about everything, it doesn’t mean you shouldn’t act because people act all the time in the face of when they’re not absolutely certain of everything, we’ve always had to do that in our lives. But maybe there are some things we’re not sure about, some things we are sure about.
And I’ve been fortunate enough to be involved with a team in the Royal Society that has written a document on the climate change science which really emphasises the uncertainties and which says, well, we’re pretty sure about this stuff but we’re not so sure about this stuff, and this stuff frankly we haven’t got too much idea about at all. And I feel very happy to be involved in that kind of project where we have an open acknowledgement of where we are. It’s difficult, ignorance is a difficult thing to admit. I think embrace your ignorance, own up, say we don’t know. But then we’ve got to try to find out more.
Robyn Williams: Having looked at the risk of regarding climate change and the uncertainties, how would you assess the reasonableness, the wisdom of doing nothing?
David Spiegelhalter: I’m not a climate scientist so I had to take all my evidence second-hand from what other people have told me, what I’ve read, and discussions I’ve had, and the people I’ve talked to are very clear about the inability to make any precise statements about what’s going to happen. However, the weight of evidence is towards that I’d be very surprised if some pretty severe changes were not going to occur over the next 100 years. And so my feeling is that this is a gamble that I’d rather not take, to be honest, and that we should be doing all we can to try to ameliorate it in any way we can. And just because we’re not totally sure, doesn’t mean we shouldn’t do anything. We act all the time when we’re not totally sure of what’s going to happen.
Robyn Williams: Going to gambling and magic, how do you think people are fooled so easily in that kind of showbiz world?
David Spiegelhalter: I love the cons, we’ve got this guy Derren Brown who does all sorts of illusions, he picks lottery balls, he does all sorts of stuff, and it’s so convincing. He does a lovely trick that we use in classrooms all the time where he stands up and says I’m going to flip a coin ten times in a row and it’s going to come up heads every time. He stands there and he flips a coin and it comes up heads every time and you think, wow, isn’t that cool. Later on in the program he shows how he did it. Of course what he did was stand there for nine hours flipping this coin thousands of times until he finally did ten in a row, and they only show that bit of film.
So this is a really good lesson for the kids, the fact that someone tells you a story and you say, whoa, this is really cool…think ‘what am I not seeing?’ It’s really difficult to think ‘what am I not being told?’ So an example I use is you see a hole-in-one on YouTube, of course you know that they hit this damn golf ball thousands of times before they got a hole-in-one, but they only show that bit of film, and we know that in that situation. But of course we might read on a website about how eating this will cure cancer, or some magical cure; ‘I did this and then I got better’. Well, hang on, what about all the stories of people who did this and they didn’t get better? I want to know all the failures, and we don’t get that information. So this is just one of the many psychological biases we have, it’s just one, it’s a really good one, that we only hear what we hear and it’s really difficult to think about what am I not hearing.
Robyn Williams: David Spiegelhalter is the Professor of the Public Understanding of Risk at Cambridge and, as you heard, was one of those working on the Royal Society’s recent publication on climate.
There are people (read: intellectual twits) who don’t understand the value in this article because the date is “2005”. They think, “It’s 2010, no good now!” The people who think like that are the same people who trust their money to the buy and hold insanity of Fidelity. Everyone gets what they want, right? Off my soapbox and onto a a great excerpt from that article:
“I [Harding] went to Sabre [first firm] because I didn’t want to sit in an investment bank and make money. I wanted to know if you could do it from outside the markets looking in. “Could you be on a desert island and make money trading?” was the question I was asking myself.” Partly this was Harding the scientist exerting an influence, as the efficient market hypothesis was a hot topic amongst academics that studied markets…”With the EMH under consideration I was very interested to know whether the very antithesis of that, technical analysis, had any truth in it. So I went to Sabre very much in the spirit of intellectual curiosity.” According to Harding the prevailing thinking at places like Wood Mackenzie was that there was no intellectual respect for technical analysis. There were a hundred analysts there, consisting of various types of serious people, and the technical analyst was isolated at the end of a row in an out-of-the-way part of the office. His craft was considered intellectually light-weight by his peers and the press. ” I remember being visited by the FT’s Barry Riley in 1988. Within a week there was a side-swipe in print along the lines of “that’s more than the whizzkids with computers can manage,” ” recalls a somewhat wearisome Harding. “But the thing is he and all the other serious investment professionals nodding sagely in agreement were wrong. No amount of looking knowledgeable and smug will make you right if you are wrong in the first place.” This attitude was something that Harding was to get used to over his career. “For eighteen of my 25 years in markets I have received intellectual scorn and derision from everyone – business school professors, senior investment professionals to experienced journalists. But thankfully now it’s different: the battle is won. The enemy is routed. All we are doing now is mopping up the stragglers.” David Harding spent two years at Sabre Fund Management, each day drawing hundreds of charts by hand, like a true craftsman. Every chart was bound into big leather folders, and in turn each chart pattern was copied into other folders. He likens it to an old-fashioned publishing house. Harding noted without irony that the company was run by accountants, and that “there certainly was method in what was done there.” He continues “I certainly regard my time there as the foundation stone of my credentials as an empiricist. There is nothing like drawing thousands of charts by hand to fix them in your mind. In fact I regard this phase of exhausting taxonomy of technical analysis as being like the relationship used to be between biology and taxonomy in the life sciences. Until something like 1830 you had gentlemen scientists collecting leaves and putting them into folders, and it wasn’t until Darwin that he and others started putting some order on it. Only by arranging data and putting it in order can you get any pattern out of it. What AHL and others have done is go beyond the taxonomy and turn trading into a real science.”
Continuing:
“Our sort of approach to markets is a science. It is an unpublished science, but it is a real one. You could get the thick leather bound volumes of papers on it if there was a willingness to “open the kimono”, as the horrible modern expression has it.” “The process of trading our system is like repeatedly drawing different coloured balls from the statisticians apocryphal bag. As we draw out a ball it becomes part of the track record, and we put it back in the bag, but there is no guarantee that the balls will come out in the same order in future.”
