This article first appeared in Forum, The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

We all make decisions, such as on asset allocation, based on available information. Recently, Harvard professor Andrew Abbott brought up a very important point differentiating “knowing” from knowledge.

There is a lot of knowledge out there, discovered by different people and recorded in books and digital media, and a lot now is available on the web. But there is so much discovered knowledge that we are limited to our “knowing”. First, our brains cannot download all the information and process them like a supercomputer. Second, we have to trust some expert to tell us what they know and we may rely on their judgements for making decisions. Of course, they may also be wrong. Third, even with rapid scientific advances, there are “unknown unknowns”, so we can only make decisions based on our limited “knowing” and make tactical short-term decisions, or we may choose long-term strategies and wait for better opportunities.

Life is not always a two-player game like chess. The rules and steps are mechanically defined. The stock market is a game played by the individual against many, such as big-time institutional investors, hedge funds, investment banks and other retail players. Although market regulators claim that they aim for a fair, transparent and competitive market, the reality is that size, resources and knowledge of the players are very different. The hubs such as top investment banks and asset managers have distinct competitive, scale and knowledge advantage over other players, especially the retail investors.

The behavioural economist Daniel Kahnemann basically says that we have fast and slow thinking, essentially through what psychologists call fast heuristics (rules-of-thumb) or slower but deeper strategies that need more time to evaluate and consider over a longer horizon.

In an uncertain market, the difference between decision, tactics or strategies is to Know Your Business or Counterparty, essentially a trust issue. If you trust your broker or adviser, you reduce your risks. In a market, you are not playing chess or checkers where you figure out the mind of your single opponent. You are playing against the multitude of very different players with different resources and mindsets. John Maynard Keynes, a very successful speculator who made and lost several fortunes, made the important observation that investing in financial markets is like picking the winner in a beauty contest. It is not who you think will be the winner. Your guess is who you think the rest of the spectators or judges will choose as the winner. You are not playing against a single mind, but the collective mind.

This is where every player tries to outsmart the market. Hedge funds in supercomputers make decisions using artificial intelligence (AI) and big data that can make transactions and decisions faster than any others. Other players “front-run” the market by buying data from the stock market that is nano-seconds faster than everyone else and can therefore trade ahead of the rest. Other brokers who trade on behalf of the big players simply follow their lead. If Warren Buffett buys stock A, just follow and the market will rise because everyone else thinks that Buffett is a smarter stock-picker than the rest.

Retail investors are too small, lacking market power and first-hand information. They can only pick positional plays, knowing that they will never catch the lowest price, nor sell at the market highs. The smart player is not too greedy and not that easily panicked. You learn as you go. If you continue losing, you may no longer be a player.

There is a big difference between mechanical tactics and organic strategies. Mechanical tactics are very simple hard-and-fast rules. You can simply set it as buy at price X and sell when you make 10%. If the market operates on such simple rules, and you can read that rule, you can outsmart the market.

I recently participated in a discussion between economists and international relations experts, trying to figure out how to model or theoretically think about the US-China geopolitical rivalry. The economist was trying to have a competitive market model of demand and supply for global goods, in which competition from the strongest wins. The international relations social scientist pointed out that with military force, the outcome is zero-sum, with one ultimate winner or hegemon. That is why Great Powers generally have a hierarchical structure, with the hegemon at the top and clear number two, three and middle powers.

War is all about tactics and strategy looking for zero-sum outcomes, whereas economics and peace are not zero-sum. The linear, mechanical view treats zero-sum as I win-you lose, whereas organic cooperation and competition seek a win-win outcome.

In peacetime, policymakers deal mostly with economic, political and social issues, because national security and defence operate in their own silos. Economic and social calculations are easily calibrated, because differences are measured in money, with side deals and bargains that enable resolution of conflicts.

However, as geopolitical rivalry, terrorism, migration and domestic instability risks escalate, national security moves up the policy agenda. War and conflict operate with zero-sum outcomes and a very different mindset. There is only one perceived winner, and in most conflicts, it ends up as in stalemate or protracted conflicts and skirmishes. Diplomacy can be conducted at the margin, like a market with side-contracts and bargaining. Military outcomes have stochastic shifts because the winner can enforce rule-based behavioural changes on the losers. The weaker power may cede or yield positions or resources with no quid pro quo because the stronger power can force it by threat or actually inflicting huge losses. This results in international relations behaviour that sometimes do not make economic rational sense, but follows realpolitik logic.

Ecologists and animal psychologists who study the animal kingdom have found that there is a complex relationship between predator and prey. When the predator eats up too much prey, such as wolf packs destroying the deer population, they end up reducing their food supply and their own population goes down. If there are no wolves, the deer population explodes, overeat the grass and then also suffers population declines.

Nature organically creates self-regulation — the lion will kill to eat, but no more than necessary. Mankind unfortunately has no natural predator and so has consumed or abused the natural environment by destroying the natural habitat where the animals, fish, trees and marine life cohabit with each other. The pandemic is nature’s revenge, in which an animal virus (coronavirus) makes a zoonotic jump from animal hosts to humans which threatens to cut down the human population. Until, of course, the invention of vaccinations.

The survival game is therefore not a simple economic theory of perfect competition or even oligopolistic behaviour. It comprises many players whose tactics and strategies for survival or domination involves allies, enemies, predators and victims. Social scientists, zoologists and ecologists, other than economists, already know that “the market does not know best”. This is because the whole environment is changed not just by the behaviour of the stakeholders (all living things on the planet), but also inter-planetary events, such as sunspots, meteorites and changes in gravitational fields that impact life on earth. As the old saying goes, man proposes and nature disposes, or, as a Chinese proverb puts it, human calculation cannot beat heaven’s calculations.

The bottom line is that human behaviour depends on a model of thinking that does not always reflect reality, only perceptions of reality, which could be very different for each individual or group. If all players behave rationally, the group outcome may be rational. But if some are irrational, then the outcome is not completely predictable.

That is why life is so interesting and full of surprises. An organic approach means that you look at life with all its fluidity, constantly changing, sometimes radically, but if you understand how to read the patterns of nature (of which linear and mechanical responses are part but not everything), then you can cope better with the ups and downs of life and crises.

Nature teaches us all about humility in that there is no finality, only constant change. We need to respect, share and care for each other, including Nature, which is both living and comprises all of us. Protect one and protect all. The opposite is true. Destroy one and we may end up destroying us all.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.