My Disrespect for Financial Services

Usually, my opinions have some balance. Logic and emotion have a place, and I can trace back where an opinion comes from. But I find I lose balance when considering the modern industry that is financial services, comprised of banks, analysts, advisors, hedge funds, traders, accountants and all the rest. Every time I hear a speech of a plan to punish or belittle these people, I inwardly cheer. This doesn’t happen with many other groups.

So I thought I had better work out why that is. And to do that, I tried to recall my experiences with this industry, to see why they led to such a visceral disrespect.

When I was growing up, financial services meant banks and accountants. Our local town had the major banks in the middle of the high street, all in the best locations. The bank manager was hidden behind layers of walls and staff, and my mum treated a visit there as like one to her doctor or priest or head teacher. He (it was always a he) was responsible for judging our character and standing in the town. He led the rotary club, golf club, round table, free masons, everything else.

Even as a child, I could see through this. At least the plus was that this character assessed loan risk using people assessment and not just business plans, and clearly had the customer’s welfare in mind as well as the banks. Good. But if ever there was an embodiment of conservative (small and big C) establishment and prejudice, this was it. Bank managers were posh people with rich parents and establishment attitudes, and supported people like themselves.

Since then, a lot has happened, most of it, unbelievably, for the worse. Nowadays, the whole industry is driven by its own greedy values, and customers are just suckers to be abused. Some examples are in order.

I was lucky enough to start banking at a time all the banks were offering very generous inducements to new customers. Like all my friends, we switched often to capture these special offers. The banks had just received some market research that a high proportion of customers never switched bank, and concluded that attracting new youngsters would give them a high lifetime value. Brilliant, except that their response killed their own golden egg by creating a generation of switchers.

I was mis-sold a mortgage, just like millions of others. I was clearly told that mortgage protection insurance was obligatory. Unfortunately, I could not recall account numbers or clear evidence to recover any money. But it still happened.

I was smart enough to miss out of the other great rip-off of the time, endowment mortgages. I could never see the point, and was proved right when the whole edifice collapsed.

Twice I had high interest savings accounts. When some crisis or other arrived, the interest was reduced to 0,001% overnight. Fair enough, but what was evil was that they omitted to inform me, and they stopped sending statements too.

Shell in the US started a promotion with a credit card company, whereby discounts on gasoline would be offered to people signing up for credit cards. The only problem was, most of the loyal Shell customers were rejected for cards, because, wait for it, their finances were too good. Card companies only want people who do not pay on time and build up debts. Their whole model is based on this. Have you wondered why nowadays paying by credit card is actually cheaper than cash, at least in the US? Why is 30% of our mail trying to get us to take up new credit cards? It is shameless, part of the conspiracy to drive us into unsustainable debt. My daughter is currently struggling to get a mortgage for much the same reason.

I cannot for the life of me open a bank account in the UK, since I do not have a residential address there, even though I am a British passport holder. Bank staff are defeated by their computers and the option menus. Only standard, low-cost customers are welcome. I am reduced to offshore or nothing.

Someone used to visit Shell expats trying to sell financial packages. The only true value they offered were some structures to evade tax. This value was far less than the exorbitant fees being charged, which were invariably hidden deep into the small print. All the shadiest, most dishonest, unpleasant sales people I have ever had the misfortune to meet have been in financial services.

For some years, my finances have been complicated by international factors. It is not a strategy, simply a consequence of moving around. I have no particular interest in optimization, merely in simplicity, common sense and being honest. Yet can I find anyone to advise me? Lots of advisors are happy to charge me handsomely to optimize tax within any one national regime, none across borders. One guy told me on the phone that I would never find anyone as it was far too complicated a challenge. I laughed, and quietly replied that I, the naïve customer, had no choice but to face up to the challenge.

Occasionally, I read articles trying to offer financial advice. Gradually, I learn that they are almost always full of rubbish. I have started buying shares over the last couple of years. So far, I have managed to beat the markets by a few percent. My secret (no doubt with a comeuppance in store someday): trade rarely, hold for the long term, rely on fundamentals. As an example, anyone can see that Easyjet has a winning business model while BA is a losing one, or that firms with some monopoly advantages serving older folk are likely to do well. This does not require genius, but such analysis is completely absent from financial pages, and seems to be enough to beat the market.

Conversely, whenever I have invested in managed funds or unit trusts, I have done worse than the market. Why? Simple. Their investment knowledge is similar to mine, but they have mountains of greedy staff requiring huge fees. Steer well clear, I say. Trust yourself, they are not so much smarter than you.

Increasingly, the only way they can be smarter than you or I is to cheat. What exactly is trading edge? I reckon it usually lies very close to the border of insider trading. The courts and other evidence seem to back up this hypothesis.

Enough personal examples? In every case, my experience is that the industry is stupid or unscrupulous. The people are the same: male, middle class, privileged. The job they do is one of the simplest on earth. It is much simpler than for the bank-managers of old, who were supposed to use judgement. Now they just look for suckers, type in numbers into computers, connect with their buddies on the edge of the law, take advantage of simple international arbitrage, and pay themselves vast fortunes. The ugly face of capitalism, where senior salaries bear no relation to reality, started with finance.

I should try to offer some balance. Actually, only in the UK is my experience so dire. The internet banking in Holland is wonderful. In Portugal I still receive an old fashioned personal service. And in the US, Chase have what seems an impressive system to control fraud.

So, what are the lessons from this rant? I can think of a few.

First, if you are starting out, be deeply suspicious of anything from the industry. Especially avoid inducements into debt, or claims of investments that will beat the market. In both cases, their only motivation is their fees, so give them none.

Next, don’t buy the PR sound bites about how brilliant these people are. They are important, as the world needs a financial system, but they are far from brilliant. Perhaps, if you are young, middle class, and motivated by money, you should join the circus yourself. Just try to avoid your own hype, maintain external activities to keep a moral compass, and jump out into something less parasitic once you have enough cash to earn a real life.

Next, don’t read any financial pages. Analyst reports are not bad, but are generally hard to get at. Buttonwood in the Economist is brilliant. You need nothing else.

Next, let us all lobby for the Tobin tax. There is no better win-win-win available to the world currently, and all the greedy monopolists know it.

Finally, if you find your blood pressure rising every time an industry is mentioned, it is a good plan to work out why. Then you can make some choices to avoid some of the things that annoy you, and you can learn to calmly laugh at yourself for some of the others. Staying away from the UK might be one idea. 

Algorithms are good

I have read a few articles recently about algorithms. I think someone has written a book about them, and usually the articles have been scare stories, talking about how dangerous algorithms are and how they are taking over our world. Well, I disagree. I love them.

What is an algorithm? The free online dictionary defines it as a step-by-step problem-solving procedure, especially an established, recursive computational procedure for solving a problem in a finite number of steps. I think we had algorithms before computers, but the word has gained currency in the last half century as computers have become more prevalent.

Essentially, an algorithm is a way of modeling complexity. Any problem that has a lot of available data, and where a model or set of rules can help to make sense of the data can benefit from an algorithm. As computers have gained power, so algorithms have been able to become more complex and process more data.

I see a clear parallel between a computer algorithm and the models, assumptions and stereotypes we all use to simplify our lives. Should I cross the road here, or there? Our brain goes through lots of steps very quickly. How tired am I? How far would the diversion be? Can I trust the signal “walk” signal? How courteous are drivers around here? Am I wearing visible clothes? Do I have kids with me? How much of a hurry am I in? Are there any shady looking characters about? The brain will process all these questions and make a decision for us. In “Rain Man”, the autistic Dustin Hoffman found this sort of complex processing of uncertainty too difficult, and made a mess of the challenge. But most of us can judge the risks and subtle choices quite well. The human brain is immensely powerful.

What has happened is that computers are gradually catching up with our brains, through sheer force of data. This is something to celebrate, not fear.

When I look back at my career, algorithms have played a major part. Working at the boundary of strategy, marketing and analytics, I have faced many challenges where a slightly better model of complexity could lead to competitive advantage and business value. I was lucky to do this at a time when we were facing many of these challenges from first principles, and I found them very interesting.

My first paid job was for a company trying to develop software to help logistics companies plan their depots and truck routes. It was called Vanplan, but our software did not really deal well with the vast data and complex variables involved so it did not sell well, and wags in the company rechristened it Truckfuck. Inside Vanplan was a database of all the main junctions and roads in the UK and their average speeds. We had to build this from scratch using maps, and paid part-timers to create this. There was an elegant algorithm, that I tried to improve and run faster, since the computer power at the time was a major constraint. Then Vanplan had other related algorithms, which also needed tweaking to make them reliable and faster and to deal with real-world variables like rush hours and driver habits. It was fascinating.

It is hard to credit that this was only thirty years ago. Now Google have coded the same data globally with far more accuracy, and the equivalent of Vanplan is offered online as a cheap application, computing in a second what used to take us hours. I call that progress.

I can quote many other examples. I developed or interpreted or simply applied many algorithms. I allocated stations to sales reps, defined sales rep territories, optimized depot structures, and sought locations for new stations. I tried to model petrol station pricing, and optimize the location inside stores for categories and items. I built models of costs and incomes, for my own firm and competitors. I tried to model an insurance scheme whereby we would guarantee an engine cold-start performance, based on weather patterns and where trucks typically were parked overnight. I tried to model the financial impact of alternative advertising media and campaigns.

All of these required algorithms. They were imperfect, having to model data and assumptions, and were limited by the computing power available at the time. It was fun. I was blessed, in the right place at the right time with the right skills and experience and motivation.

The only thing that has happened since is that data has become more widely available and computers have become immensely more powerful. This means the algorithms are better, more reliable, and more usable in more areas. Good.

Actuaries always tried to assess pension risks and returns. Now they can do it more accurately. Banks always tried to assess loan risks. Years ago it was based on the biases of the bank manager, now they have better systems and data. The police always used models to try to catch criminals, choosing Friday nights to hang about outside pubs. Now they have wonderful profiling and contextual algorithms. Intelligence agencies always tried to find terrorists and spies, with comical ineptitude. Now they are rather better, even if still as dishonest. Brokers always tried to pick stocks, based on dubious knowledge and bias. Now they have data to spare. Doctors always guessed ailments based on symptoms and test results. They still, do, but have become much better at it. When I was interviewed for Shell in 1982, I got in based on a combination of science, prejudice and luck. The same three factors would apply today, but the science would weigh far more heavily. Finally, traffic planners always tried to position lights and lanes to keep traffic moving. But recently, on one miraculous morning, I drove from Forest Hills to the Queensborough bridge through a total of 62 lights, and stop at just one of them.

This all can make our lives better. We have GPS, we have wonderful knowledge sources, we can shop around to get good coverage and prices based on our own habits and characteristics. If we have nothing to hide, we can feel safer with the smarter policing. We can expect more medical breakthroughs. We can still use our brains to make even better personal models and use our own computing power to test them. Algorithms are good.

So why all the fuss?

Partly we are scared of things we don’t understand. Partly it is journalists and authors looking for a story. Partly we are trained by sci-fi to be scared of computers and big brother. And there are one or two consequences of algorithms that do require control.

First, the finance world needs some brake on velocity of trading. If everyone has similar algorithms, you risk events like the flash crash of 2010. My solution is simple: charge a Tobin tax on transactions. Built into algorithms, that on its own would reduce velocity of trading, as well as creating many other benefits. Problem solved.

Controlling big brother is nothing to do with algorithms, and everything to do with law and transparency. If the spooks had to own up to what they were doing, they might still do it, but they would need stronger justifications, and we could exercise some choices too, such as not using US technology companies.

The final issue that I can see is excess discrimination by segment. It is good that groups that offer better risks should have cheaper car or medical insurance, but somehow everyone must have affordable insurance. It is good that the police can target neighbourhoods and certain demographics, but it should not be cost-free, and people need an escape route from a disadvantaged segment.

Most of this is about smart welfare. Obamacare helps, but is not enough. Imagine someone with a criminal record and former addiction: their route to health and honesty is hard enough already, without imposing all the added costs that algorithms would calculate. So let the providers use the algorithms and charge the higher costs (though don’t let them refuse coverage) and then make sure the overall welfare package offers a fair chance and great incentives and enough support, through clinics for example. Unfortunately, this line of thinking is hardly mainstream in the USA, even though it would certainly pay for itself.

What about black youths whose lives are made a misery from police harassment? Well how about the police having to pay a token amount per search when no suspicious behavior is discovered? The payments could be dependent on other socially desirable actions, such as looking for work, no truancy by kids, and up-to-date maintenance payments by single fathers. That way everyone gets an incentive to behave better, police included, while the power of the algorithm can still be utilized. Hopefully, succeeding generations of algorithms will be so smart that more and more innocent sub-groups can be eliminated from target populations.

So, let us not be scared of algorithms, let us embrace them. The world would be a less efficient place without them. But, in a few specific cases, let us think about the possible consequences, and put humane remedies in place.

Keep challenging those Assumptions

I think this is my favourite life advice to people. It has worked well for me.

We have to make assumptions to deal with complexity. We try to make the best assumption we can to fit with the evidence, and to enable us to take some action, form some opinion or make some decision. Without assumptions, we would be lost. We could not even cross the road, for fear that every car would jump the lights.

So assumptions are good. But assumptions can be wrong. Over time we can gain additional evidence. Too often our assumptions become blind beliefs or prejudices. We have to force ourselves to challenge them all the time.

A good example came up on the lovely music courses I attended during July. On the first one, the poor conductor was trying to improve a huge scratch chorus of over two hundred people. She was excellent, clear, concise, relevant, and actionable in all she did. Yet somehow the same faults kept appearing, again and again. Why might this be?

When I thought about it, I realized it was probably to do with people failing to challenge their assumptions. Most of the people in the choir were good singers within our own communities, probably the leaders in our local choirs. That is why we thought we were good enough to go on a course. Some of us might even have been directors or conductors ourselves.

At home, our conductors make the same sort of observations that Karen Davis did, whether it might be about American R’s, or late entries, or long vowels. In our local choirs, we know this doesn’t apply to us. We are the leaders. We can point to any number of other singers demonstrating these faults. Occasionally the conductor might even approach us for a bit of sympathy, bemoaning the fellow singers.

The problem is that we took that assumption with us to Berkshire. When Karen asked for some improvement, we assumed she did not mean us. How could she, we are the leaders? The result was two hundred souls blithely ignoring almost everything she said. Improvement was slow indeed. We had failed to challenge our assumptions.

I notice that I do this myself in choirs. At the beginning, I sense every word the conductor utters is directed at me, that I am the one dragging down the sound. Then, too soon I often move to opposite mindset, that everything is really intended for others. It is lazy, insulting, and prevents development.

In these days of lobbyists, we have to challenge everything we hear and everything we are tempted to assume. I have become a bit obsessive about it recently, living in the land of the lobbyist and the sound bite. In the current mayoral contest in New York, the opinion polls seem to exactly correlate the name recognition of the candidates, which is pretty well correlated to how much money they spend. At least this held true until the latest allegations against Anthony Weiner showed that not quite all publicity is good publicity (though before that he was in the lead despite confessed failings). I wish I could discern some policies to help make a more informed decision, but so far all I have learned is that, strangely enough, all the candidates seem to favour more jobs and secure streets and opportunity for all. Who would have guessed it?

The most dangerous assumptions are those that become mantras, almost folklore. A couple of recent examples really shook me. A couple of months ago, my daughter was studying the history of the Berlin Wall and discovered a quote from Maggie Thatcher. She was vehemently opposed to German reunification, as she feared the dominance of Germany in Europe again, either for selfish reasons or from memories of World War two. Now, looking back only twenty-five years, that quote seems ludicrous. How could someone claiming to represent liberty possibly want to suppress reunification? Yet she did, and no doubt much of the British establishment supported her. Our assumptions about her brand and our parents’ prejudices prevented many of us from challenging such a disgraceful position.

Another example I read to today. Finally, Alan Turing, a war hero who did much to solve the Enigma code, has been pardoned. I did not even know he had been convicted. But apparently he was homosexual, and was hounded by the law, and eventually committed suicide.

We look at these examples, and we can rightly celebrate progress. The blogosphere and transparent news and global sources have helped a lot, though the lobbying curse has worked the other way. After celebrating, we must then be vigilant. What are today’s injustices perpetuated by lazy lack of challenging assumptions?

Some are obvious. It is not hard to see through the claims of the NSA that mass snooping is required to prevent terrorism. Some are a bit more engrained. What about America as the land of liberty? Recently, I was at a school career day and got chatting to a New York cop. I asked about what might be done about the massive per capita prison population in the US. The reply? We have to have so many in prison in order to defend our liberty. Think about it. And think about how close you are yourself to accepting this sort of argument.

In Britain, we are somehow brought up to believe in a British sense of fair play. I’m not sure where it originated, but in my experience, it is just rubbish. I find the British the most willing to cheat and bend rules. Germans, for one, are far more wedded to fair play, for good or ill.

So what might today’s lazy assumptions be? Work should be from college to somewhere in one’s 60’s, forty hours per week for a few companies? GDP is a good measure of economic success? There will always be corruption? The previous era was a golden age and things are getting worse? I suspect these and many other statements might look just as daft as Maggie’s twenty five years from now.

This is a fun game to play at macro level, but the real value lies with ourselves. What folklore about our family needs a good challenge? My sister recently did me the service of looking up some long lost relatives, and, sure enough, family folklore was not reliable.

Over the years, I have accidently learned some things about my own character, usually through unintended feedback (for example overhearing someone talking about me). I used to think I was a funny public speaker, for example. On the positive side, someone last week described me as jolly, whereas I have always thought of myself as rather somber. We all have skills, often we have more than we think, but we also all have blind spots too.

One good place to look for blind spots is in the areas where society is changing. Just like when we hear the choir director, we often assume that such messages are for others, that we have already graduated. Truly valuing diversity may be one example. I used to think I did, until I learned that I hadn’t been – luckily via a situation where I learned to value it more. How many of us can really proclaim we are no longer racist, ageist, sexist? You don’t have to be a UKIP supporter to have lessons to learn. If we stop challenging our own assumptions, we will fail to learn them.

How can we avoid the trap of lazy assumptions? Being aware of it is the first answer. Without becoming a conspiracy theorist, actively doubt things that others seem to take for granted. Be especially skeptical of so-called national characteristics or the sort of platitudes politicians love to promote. Reading widely is a great antidote. Try reading publications that challenge your own dominant logic, or blogs or articles by people from different cultures. Doubt all lobbyists and lobbyist-induced sound bites.

The other thing we can do is be on the lookout for quality feedback. I miss very little about having a regular office-based work life, but one loss is the opportunity for structured and unstructured feedback. Like many things in life, the ones who receive the best feedback are also the ones who learn to give it, so practice that. There is a time and place, and an art to giving feedback, so study it and develop the skill. Just starting with compliments can be good. The world seems sunnier when someone offers an authentic smile from compliments you give, so why not try to do that more often?