Taking A Worm’s-Eye View

Gillian Tett opens her book Anthro-Vision with two quotes:

“The least questioned assumptions are often the most questionable.” — Paul Broca

“Research is formalized curiosity.  It is poking and prying with a purpose.” — Zora Neale Hurston

Neither Broca nor Hurston would be considered a typical source of investment wisdom, yet the principles they reference and the others explored in Tett’s book should be foundational for those doing investment work.

Previous postings in an ongoing series on evaluating organizational cultures have examined pension funds and two functions of investment banks.  This one looks at anthropology as a discipline before focusing on the financial crisis and exploring ideas about how the precepts of that discipline can inform the process of due diligence.

A worm’s-eye view

Tett is known for her work at the Financial Times, where she is now chair of the editorial board and editor-at-large, US.  Prior to that, she earned a Ph.D. in cultural anthropology.  In the book she effectively relates her fieldwork on marriage rituals in a high mountain village in Tajikistan to the study of other groups.  “All cultures are strange,” she notes, even though the ones with which we are familiar don’t seem exotic to us at all.

Cultural learning is possible, which is the point of anthropology.  Tett refers to her field as a “cult of compulsive curiosity;” that spirit ought to be at the heart of due diligence too.

As with the authors cited in the other postings in this series, Tett describes the methodologies of anthropology (and related specialties) and how they can be used to analyze organizations, industries, and societies.  She argues for the openness that is inherent in the approach:

Neat — bounded — models are poor navigational guides in this world; we need lateral, not tunnel, vision.

Our goal should be to see things as they are, so it’s no surprise that vision-related themes abound in the book.  One vivid metaphor is the difference between taking a worm’s-eye view of the world versus a bird’s-eye view.  Anthropology primarily deals in the former, being concerned with the observation of details, of up-close views of how things work.  That kind of qualitative information is “thicker” than quantitative data, and therefore is an essential counterpart to the top-down analyses that are common in this era of “Big Data.”

Quantitative analysis is quicker, easier, and (usually) cheaper, so it’s no surprise that most research and decision making rests heavily upon it.  (Plus, people tend to find numbers more persuasive.)  But the dynamics of human systems are resistant to data capture — and simple assumptions about how things work can make conclusions wildly off the mark, especially during times of change.

Tett casts a wider net than the other books reviewed so far, providing examples of cultural analysis inside and outside of financial services.  For example, the pandemic showed the need for both data and cultural insight; better data and an understanding of the beliefs of different groups and nations are essential for effective mitigation of threats, and the shortcomings in each hampered the response to the coronavirus.  Among the other topics examined are globalization, corporate culture, consumer behavior, Donald Trump, Cambridge Analytica, work from home, and sustainability/ESG.

(A brief section about Xerox photocopiers is instructive, illustrating the different perspectives and experiences of those who use the machines in offices, the repairmen who fix them, and the engineers who create them.  It is a case study in the problems that can arise when the designers of a product don’t see the whole picture and don’t really understand how the machine is used in practice.  Those kinds of gaps are endemic in any culture.)

One universal principle, according to Tett, is that “in every society, there is a divergence between what people say they do and what they actually do.”  Anthropologists are “devoted to peering into cracks” to see the reality of things.

The financial crisis

Tett begins her chapter on the financial crisis “in the back row of a darkened conference room in a modernist municipal hall in Nice, on the French Riviera, feeling stupid.”  That securitization conference in 2005 featured presentations with “equations, charts, Greek letters, and acronyms such as ‘CDO,’ ‘CDS,’ ‘ABS,’ and ‘CLO’ on them.”  She realized:

An investment banking conference is just like a Tajik wedding, I thought.  A group of people were using rituals and symbols to create and reinforce their social ties and worldview.

As a journalist wanting to understand what was going on, she found that:

the sector was swathed in so much jargon that it was difficult for an outsider to make sense of what was going on.

There was no readily available data about the size of these new submarkets, or manuals or an idiot’s guide to what the jargon meant.

A different village — a “Bloomberg village” this time — seemed inscrutable.  The lack of available information and the terminology made it a difficult story for a journalist to tell.  Eventually Tett found that those involved in the trade were willing to talk to journalists because they wanted to know what others were saying, even within their own firms:

Information flows between different desks inside the same bank were often poor, because the bankers were paid according to how their team performed, and thus had overwhelming loyalty to that team.

Because those involved in securitization “were such a close-knit intellectual tribe, with little external scrutiny, they could not see whether their creations were spinning out of control.”  Those creating and trading the products were in their own (very profitable) little world:

It also seemed unremarkable to the financiers that they were the only ones who understood the jargon of their craft and that this baffling language scared others away.  And since financiers conducted their trades on electronic screens, using abstract math, it did not seem odd that their minds — and lives — were utterly detached from the real-world implications of securitization.

As Tett started writing articles that questioned the tenets of the securitization bubble that was building, she received “enormous kickback” from the bankers involved, who thought she was being too negative about their work.  At Davos in 2007:

One of the most powerful people in the US government at the time stood up on the podium and waved my article[s] . . . as an example of scaremongering.

We know how the story ended.  The insular clan led us down a path of financial destruction.  The skeptics were right, and some who took a worm’s-eye view made legendary profits, including one who was profiled in The Big Short, who “went to Florida and bumped into a pole dancer who had taken out multiple mortgages she could not possibly repay.”  Those sleuths were few and far between; most of the investment world was oblivious to the disconnects, as were the regulators.  (When Tett ran into Alan Greenspan at a conference in 2011, he asked “where he could find a good book on anthropology.”)

Due diligence lessons

Anyone doing due diligence — of asset managers, advisors, counterparties, companies, etc. — can benefit from Tett’s book.  Some ideas directly addressed or triggered by it:

~ The prototypically immersive approach of an anthropologist doesn’t fit well with the practical limits of most due diligence situations, but the theories and tactics still can be applied to good effect.  Displacing some of the normal investment chatter, which usually adds little of lasting value, is a good trade-off.  Learning about the quotidian aspects of work can unfurl a culture in ways that answers to technical investment questions can’t.

~ The rush to judgment which is built into many functions of the investment industry stands in contrast to the child-like, observation-without-prior-judgment approach that characterizes information gathering in anthropology.  Resisting the pressure to make quick judgments allows for deeper understanding, but many jobs aren’t currently structured for that.

~ Narrative capture is the biggest risk.  Closing the gap “between what people say they do and what they actually do” is difficult, and it is not a skill you learn in investment courses.

~ Along that line, informal structures in organizations are often much different than those shown on an org chart.  Discovering the real organization is a valuable use of time.

~ Beware the “dirty lens” problem.  We all have biases that cloud our view.  We need to recognize that, be conscious of our biases, attempt to offset them by getting other perspectives, and “remember that our personal lens will never be perfectly clean, even if we take the first three steps.”

~ Pure observation is difficult because your presence changes the circumstances at hand.  Extended access can help but is impractical in most situations.

~ It is essential to pay attention to the language used in the group you are analyzing.  Every industry and every organization has its own words, meanings, and ways of communicating.

~ Talking to people who aren’t normally interviewed can be especially revealing.

~ What are the social silences, the things people don’t talk about (and that they don’t address clearly when questioned about them)?

~ What don’t you see (or aren’t allowed to see)?  What don’t you understand?

~ The continued integration of artificial intelligence into investment processes will create substantive changes in organizations.  For those doing due diligence, being able to understand the implications of those changes (which are bound to vary considerably by firm) will be critical.

~ Recent experience has provided a great example of a general tendency:

In times of stress, it is easy to forget the need to widen the lens.  A lockdown and pandemic forces us — quite literally — to retreat to the safety of our own group and look inward.  So does an economic recession.  But that is precisely when we need to widen, not narrow, the lens, during and after a pandemic, however counterintuitive this might feel.

A valuable mindset

Tett’s training as an anthropologist was great preparation for her work as a journalist:

The best journalism is done when reporters have the space, time, training, and incentives to ask questions like “What am I not seeing in these headlines?”  “What is no one talking about?”  “What is wrapped up in this scary jargon we shy away from?”  “Whose voice am I not listening to?”

With the exception of the word “scary,” that’s a good starter kit of due diligence questions.  Further layers of inquiry of that type — and the honing of strategies to get answers to the questions — are the essence of good due diligence.  You can ask specific investment questions all day, but if you don’t figure out who the people are and how the organization really works, your assessment will be superficial and thin.