Flash Crash Alert -- Traders Thrive on Procrastination: Books
Procrastinators, rejoice: Frank Partnoy has written a book just for you.
Partnoy is the former Morgan Stanley (MS) banker who brought us “F.I.A.S.C.O.,” a sardonic look at a band of derivatives traders and salesmen who unleashed their killer instincts on rivals and clients alike in the 1990s.
After quitting Wall Street, he took to teaching law and finance at the University of San Diego and penning what he calls “increasingly obscure books that I am increasingly unqualified to write.” The latest is “Wait,” an intellectual romp through the science of how timing influences human decision-making.
His conclusion: Most of us, caught up in the rhythms of modern life, react too quickly. Whether making an apology, sizing up a first date or coping with a trading algorithm gone haywire, “we don’t, or can’t, take enough time to think about the increasingly complex timing challenges we face,” he writes.
Partnoy began examining faulty decision-making during the financial maelstrom of 2008. Seeking to understand why bankers and regulators proved so shortsighted, he plowed through research on psychology, behavioral economics and more. He interviewed more than 100 specialists, including neuroscientist Stephen Porges, tennis coach Angel Lopez and hedge-fund manager Bill Ackman, founder of Pershing Square Capital Management LP.
The book he emerged with presents a medley of evidence showing that decisions can, and often should be, delayed. F-16 pilots outmaneuver opponents by waiting for them to act first. Surgeons reduce death rates by pausing to review checklists.
The best performers -- even among high-frequency traders and tennis pros -- are those who delay their responses, buying extra time to gather and process information, Partnoy writes. Though they operate in milliseconds, they are in a sense behaving like Warren Buffett, who compares buying stocks to hitting a baseball in a game without strikes.
“All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it,” as Buffett once told Forbes magazine.
One of the odder tales related here holds a lesson about the electronic trading spasms that hit U.S. stocks this week, reviving memories of the Flash Crash in 2010.
Partnoy describes how stock-trading firm UNX Inc. shipped its computers from Burbank, California, to New York -- just to shave 35 milliseconds off its trading speeds. The result: Execution suffered, pushing trading costs up instead of down. After testing and retesting, UNXers gave up and slowed the computers to the old trade time. Suddenly everything clicked.
“By delaying trades slightly, UNX avoided the extra costs that arose from the rush of instantaneous trading,” he says. “It got better results by waiting a few dozen milliseconds --by procrastinating at the speed of light.”
Partnoy builds on well-known research showing humans have “two systems” for thinking: One is intuitive, the other analytical -- or “fast and slow,” as Nobel laureate Daniel Kahneman puts it. What’s less understood, Partnoy says, is how our tendency to react too fast or too slow bends our decisions.
“Delay alone can turn a good decision into a bad one, or vice versa,” as he writes with characteristic economy.
Procrastination has provided fodder for generations of moralists and self-help gurus, as Partnoy says. Yet history teems with beloved stallers.
Think of St. Augustine (“Lord, make me chaste -- but not yet!”). Or economist George Akerlof, who famously waited more than eight months before sending a box of clothes from India, where he was living, to a visitor who had returned to the U.S., friend and colleague Joseph Stiglitz.
Years later, Akerlof made Stiglitz’s box Exhibit A in a lecture that struck a blow at the assumptions of classical economics. His conclusion: Humans often make bad decisions even when they understand the future consequences. We intend to stop smoking, boozing and overeating, yet we puff another cigarette, chug an extra beer and reach for that candy bar.
Akerlof is no hardened procrastinator. He just didn’t know how to ship the box without wasting a day navigating Indian bureaucracy. He also figured that Stiglitz had no urgent need for the box, which contained a Nepali wedding costume and other impractical garments. Meantime Akerlof was beginning a research program that would yield “dozens of articles, numerous influential books and a Nobel Prize,” Partnoy writes.
Partnoy isn’t excusing procrastination born of laziness. He is, rather, arguing that good decisions hinge on managing delay. Though evolution has hardwired us to react quickly, it’s better to strike when the moment is ripe.
Whether you’re a fighter pilot or a value investor, his message is simple: Wait.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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