Winning with technology – learning from something you disagree with

I recently started following Stephen Duneir’s “Seeds of Thought”, and have developed a healthy respect for Steve’s insights around applying cognitive science toward investment and business decisions.

In a recent article, Steve wrote about technology and investing, and compared the use of technology in investing to home fitness products such as the Bowflex Behavior Modified 2000 – slick, does a lot of cool things, with the promise of getting you a six-pack, but ends up lying unused in your basement after 30 days.

As someone who has seen the cognitive benefits of technology, I found Stephen’s cognitive counter-argument an engaging and worthwhile read. Stephen’s article made me think more about my favorite topic – the intersection of technology, behavior and design in investing.

The main thrust of Stephen’s argument was that use of fintech products, intended to reduce cognitive bias may actually make you more vulnerable. Stephen makes some excellent arguments on how the mere process of buying a complex risk management system may reinforce a false perception of ourselves that we are disciplined and controlled.

However, what I think Stephen missed is that technology can help separate the noise from what matters, helping you focus on those aspects that aid decision making.

Unfortunately, incumbent fintech solutions have tried to codify existing processes that might have been broken to start with. Similar to the famous Henry Ford quote, these providers are focused on trying to build better horse drawn carriages, not realizing that it was the Model T Ford that clients really needed.

Unlike the clunky, expensive and complex financial technology systems with their fifty definitions of VaR and two hundred page report generators, there are new businesses that, to continue Stephen’s analogy with Fitbit, are not throwing sleep analysis charts at you and expect better outcomes, but are focusing on the one small thing that can help you – that little indicator that flashes when you complete your 10,000 steps. These fintech businesses have a better respect for our cognitive biases and limitations, and use design and technology to simplify the complexity around the investment process.

Lets take the example of two companies that I am an investor in – Pellucid and Triyo. Pellucid rightly identified that more time is spent on gathering, cleaning and putting data into powerpoint slides instead of interpreting the information in those powerpoint slides. Pellucid’s solution helps investment bankers and investment professionals organize data, and then visualize this information in a simpler form to aid decision making. They have put a lot of thought into cognitive elements, such as the pattern by which our eyes scan a page, to help people interpret data and make easier decisions. For example, the chart below helps you at a glance identify the variables that matter to you vs. getting lost. Pellucid also reduces the time that an analyst spends on gathering data, cleaning it, updating it and creating a chart from days to hours.

Pellucid.com – Use visualization to focus on the elements you need for making better decisions

Triyo focuses on reducing clutter and noise around collaboration and decision making. In meetings with their clients, I have seen first-hand the pain that their clients go through in trying to collate information from multiple sources and touch points, and approve various tasks, whether its the final pitch book, or expense reports. Lost in email, the decision maker ends up spending more time searching, sorting and asking for information instead of focusing on just what she needs to make her decision. Triyo reduces this cognitive strain by managing the processes in the background, and providing users with a simple dashboard of what they need to focus on when making their decisions. The screenshot below shows a sample dashboard, which filters through all the noise and provides a single, simple interface for the process of collaboration, approvals and audits.

Triyosoft.com – Better decisions through collaboration and simpler organization

Diligence Vault and Upmonth are two other examples of products in the investment management business that aid decision making. For the record, I have no financial relationship with either of them other than perhaps having shared an occasional beer or coffee with the founders. Diligence Vault helps alternative asset managers and those who allocate assets to them reduce the complexity surrounding the process of due diligence, Upmonth uses extremely intuitive design to help find and organize documents and the wealth of knowledge that pile up inside an investment organization.

In his article Stephen states that none of the products he has demo’d does anything that he couldn’t do in Excel for free. In this regard Stephen is probably looking at the wrong metric. Theoretically even Excel is probably doing what can be accomplished using pen and paper. However, the process can be time consuming and error prone, and frankly cognitively exhausting. New tools allow you to better analyze what you need in order to make better decisions. For example, until a few years ago, I used to use Excel for modeling, analysis and backtest of my investment strategies, or analyze my portfolio. The issue I faced was that in the interests of time and computing power, I would make simplifying assumptions around my modeling, often leading to the types of errors and biases that Stephen alludes to in his article. However, over the last couple of years, using basic open source tools such as python and its various open source libraries such as pandas, plotly, scipy, keras etc.have helped me run more complete analysis over longer time periods and various regimes, answering questions that I couldn’t even contemplate asking when I was limited by Excel. For example, a tedious “mean variance optimizer” where I had to adjust my excel spreadsheets and write macros to develop an efficient frontier, can now be replaced by a few lines of code in python. I am now able to analyze the sensitivity to inputs, and as a result the the sensibility of models, in a few minutes, helping me better separate strategies with consistent returns from those where you are “fooled by randomness”.

As anyone who has worked with data can attest, gathering, cleaning and vetting data takes a lot more time than the actual analysis and interpretation of data. Technology can help significantly in getting us to focus on interpreting data, and avoiding basic mistakes like not pasting the formulas properly in excel.

The recurring theme is that highly paid and highly educated investment professionals spend the bulk of their cognitive capabilities around mundane, repetitive tasks that reduce their bandwidth to focus on making decisions. The examples cited above reduce the cognitive clutter in an investment professional’s world, thereby helping them make better decisions.

Stephen hits upon a very valid concern surrounding the potentially false cognitive confidence that technology systems can impart onto an investor’s existing process. The reason I provide these examples (other than shameless promotion of products that I believe in), is to highlight another cognitive bias that even the best of us, including Stephen are guilty of – the fallacy of generalization. We look at a few clunky, expensive tools and generalize across all solutions.

My takeaway from Stephen’s article is that its not the technology that makes us vulnerable, but rather better decisions can be made by taking the effort to identify how technology can help – and we need to make that effort.

As Mike Tyson’s coach Cus D’Amato had said, “The hero and the coward both feel the same thing, but the hero uses his fear, projects it onto his opponent, while the coward runs. It’s the same thing, fear, but it’s what you do with it that matters”. Technology and investment decisions is similar – we can take the easy route and become vulnerable, or we can be smart about how we use it to win.

How do you see technology helping or hindering your process, collaboration or decision making? Do send me a note with your thoughts at amit.sinha@focus262.com.