Some thoughts on decision-making and processes in investment management.

We frequently hear the claim that we need more long-term thinking and that we have to move away from making short-term decisions. For example, from a sovereign wealth fund:

Or from a corporate perspective:

In a corporate setting, these comments make sense because they address the incentive structures that cause people to only focus on the short-term. If you only think about the next period you won't take into account the option-value of R&D, or developing long-term corporate capabilities, or decisions that increase your risk of insolvency. Hence long-term thinking will be valuable.

In an investment setting, it is not quite as obvious. One of the functions of the financial markets is to aggregate our current information about the future into the prices of securities. As such, longer-term predictions become very weak and we need to use adaptive thinking rather than long-term thinking. This is because the long-term is difficult to predict in financial markets.

For example, I always wonder about theme-based funds (renewable energy, water, AI, etc). What makes investors in these themes believe they can better predict the future trajectories of the underlying stocks than the market?

Adaptive decision-making

The relevant framework for adaptive decision-making is information, models, and actions. Specifically:

• How fast are your taking in relevant information?

• How good is your modelling and interpretation of that information to develop insights (predict the future)?

• How fast can you act on those insights?

In other words, it is a learning framework that is constantly accepting new information, updating understandings and taking actions. I won't say Bayesian but you know I mean it.

Now, adaptive decision-making is likely to be in service of long-term objectives, but the use of information and the decision-making are adaptive rather than static.

Therefore, and somewhat ironically, if investment managers want better outcomes, they need to take a long-term view and invest in people, processes and technologies in order to make better short-term decisions!

Or they could partner with and learn from someone that already does this.

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