Why Zebras Don’t get Ulcers.




One of the book which I read few times in “ My Book List “  was the one called “ More Than You Know “ from Michael J. Mauboussin , other than “ The Most Important Thing “ from Howard Marks.

According to Wikipedia : Michael J. Mauboussin  is managing director and head of Global Financial Strategies at Credit Suisse, where he advises clients on valuation and portfolio positioning, capital markets theory, competitive strategy analysis, and decision making. 


He is also an adjunct professor of finance at the Columbia Business School and chairman of the Board of Trustees at the Santa Fe Institute.
He is also the author of three books, including More Than You Know: Finding Financial Wisdom in Unconventional Places, named in the The 100 Best Business Books of All Time by 800-CEO-Read. 


In this book, he relate the story of stress and portfolio performance from another book call “ Why Zebra Don’t get Ulcers”., a book from renowned brain researcher and stress expert Robert Sapolsky.





Below quoted from Michael on his interview with CNN with regards to above symptom : " The different in how we as human being manage stress and animal is that , if you are an animal, what causes you stress? The answer is typically a physical stressor, so you are a zebra hanging out, a lion chases after you. Of course you start pumping blood, adrenaline rushes, and you try to get away. However, when that threat passes, you settle back down to some sort of stasis, so you kind of relax and the stress goes away.



Human beings have physical stressors as well, but that is really not what gives us most of our stress. Most of our stress in this day and age is psychological stress. How is my last investment going to work out? Worries about relationships, what have you. The point Sapolsky makes is that psychological stress, unlike the physical stress, never goes away. However, it does give you the same physical reactions, so people that are chronically stressed have things like problems with their stomachs, they have reproductive problems, they have elevated blood pressure. All these things are symptoms of high stress.

From an investment perspective, I think the most important thing is that stress tends to make you very short-term-oriented. If you are a zebra being chased by a lion, you are not worrying about next week. Likewise, investors that are really stressed out are saying, "Gee, I don't have the luxury to think about a three- to five-year perspective for this stock. I need to do something that works now." When you get into that mindset of trying to find things that work immediately, it often can lead to sub-optimal decision-making. “

Also , as he mentioned in his book : “ The problem is the psychological stress that we experience today triggers the same “ Physiological “ responses. The source of our stress is different, but the reaction is the same. Psychological stress ,if chronic , can lead to severe health and performance problem because it throws our bodies out of balance. What kinds of things do we do in response to stress ? In his book , Sapolsky notes that our reaction are “ generally short-sighted , inefficient and penny wise pound foolish. “
Of course , other than stress and emotional reaction , the sub-optimal of portfolio performance could also be attributed by others factors , such as lack of understanding of the fundamental of invested asset class , psychological biases e.g “overconfidence / loss aversion/ confirmation & hindsight biases etc. “












Below are few more quotes from Michael J Maubossin .


“Success in a probabilistic field requires weighing probabilities and outcomes—that is, an expected value mindset.”


“Risk for a long-term investor is permanent loss of capital, and probably the most tried and true way to think about that is Ben Graham’s concept of margin of safety.


“The only certainty is that there is no certainty… With uncertainty, the underlying distribution of outcomes is undefined, while with risk we know what that distribution looks like. Corporate undulation is uncertain; roulette is risky…”


“We tend to listen to experts, although it’s been well documented that expert predictions are quite poor. But they’re authoritative, so we listen to them.”


“Increasingly, professionals are forced to confront decisions related to complex systems, which are by their very nature nonlinear…Complex adaptive systems effectively obscure cause and effect.  You can’t make predictions in any but the broadest and vaguest terms.”… “complexity doesn’t lend itself to tidy mathematics in the way that some traditional, linear financial models do.” The life of an investor would be far simpler if one could assume that people behaved as physics would predict in the case of an electron.  Mauboussin writes: “Security returns are not normally distributed, but exhibit high kurtosis and fat tails.” Extreme events are inevitable and not thinking in terms of both negative and positive Black Swans is a very bad idea.


Concept explain : Complex Adaptive System


A complex adaptive system is a "complex macroscopic collection" of relatively "similar and partially connected micro-structures" formed in order to adapt to the changing environment and increase its survivability as a macro-structure.

 They are complex in that they are dynamic networks of interactions, and their relationships are not aggregations of the individual static entities, i.e., the behavior of the ensemble is not predicted by the behavior of the components. They are adaptive in that the individual and collective behavior mutate and self-organize corresponding to the change-initiating micro-event or collection of events.
The term complex adaptive systems, or complexity science, is often used to describe the loosely organized academic field that has grown up around the study of such systems.

Typical examples of complex adaptive systems include: the global macroeconomic network within a country or group of countries; stock market and complex web of cross border holding companies; social insect(e.g. ant) colonies; the biosphere and the ecosystem; the brain and the immune system; the cell and the developing embryo; manufacturing businesses; and any human social group-based endeavour in a particular ideology and social system such as political parties, communities, geopolitical organizations, war, and terrorist networks of both hierarchical and leaderless nature. The internet and cyberspace—composed, collaborated, and managed by a complex mix of human–computer interactions, is also regarded as a complex adaptive system. 

As I mentioned in my previous blog , in " chaotic system " a small change could trigger a huge impact in a non-linear system , same for stock market and global macro-economics , a small change in a variable could lead to huge impact or " black swan " event eventually . 

As above quoted , forecasting of economic trend or company's future growth are challenging task but we tend to believe in such forecast because of " authoritative bias " we have with those so call " expert ".

Cheers !!




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