The previous posting explored some structural attributes of organizations and how network analytics might be used to assess the relationships and flow of ideas within them. This one considers the networks that go beyond the boundaries of the organization.
Our networks
We are all parts of multiple networks, from those at the places that we work to our webs of family relationships, social connections, and affiliations spawned by hobbies, cultural activities, political persuasions, faith communities, etc.
In our investment-related duties, we have external networks as well as internal ones. While a few organizations could be considered isolationist in their approach, in general the range and quality of those external networks are critical factors in determining what ideas are considered. They also are a main driver of the social pressure that motivates many decisions.
Even in today’s wired world, cultural and geographic differences linger, although they are more muted than they were in decades past. For example, how people thought about and approached global investing used to vary quite a bit depending on whether they were in the United States or Europe. And there was a noticeable clustering of investment styles and strategies by city, often because they were the specialty of the dominant firm or firms in the region. The propagation of ideas was natural — people went to the same meetings (most of which were oriented to the established interests of the biggest players), migrated from firm to firm within the area, and socialized together.
Analysts and salespeople from investment banks and research firms, while in many ways less influential than they were in the past, are conduits for a lot of ideas. Their conferences have served for years as gathering places where networks are strengthened and extended (we’ll see whether they retain their significance post-pandemic), and the corporate access that they provide has become more important than ever (despite Reg D).
In an industry of specialization, it isn’t surprising that most networks are based upon commonalities in investment strategy, organizational type, or functional role. They provide opportunities for learning and establishing new connections, surely, but they also create reinforcement loops of belief that can inhibit independent observation and analysis. It’s a social system, and security analysts, asset owners, investment advisors, and all of the other kinds of investment professionals are susceptible to the pressures of the crowds around them.
One other type of network arises from the technology platforms that we use. The platforms that include a communication element within them (think Bloomberg) can shape who you interact with — and all of them influence your world view, primarily by virtue of how investments are categorized and analyzed. Standardized tools yield standardized views.
Analyzing the networks
The previous posting held out hope that some network analytics might provide data that is useful for considering how an organization works. External networks present different challenges.
Information that flows into an organization (electronically) from the outside can be tracked, just as it can be internally, allowing a better understanding of where ideas come from and how they develop. But the privacy issues highlighted in the last piece get even more complicated. While an employee who understands how their digital exhaust will be used can decide whether the promised benefits are worth it, what about someone sending a business email from the outside? Does an organization have a right to track and analyze the contents of it, given that the sender has no understanding of those practices? (And, since personal and business matters often get mixed together in messages, where should the lines be drawn as to what is analyzed?)
However you address those kinds of questions, you have less ability to evaluate external networks in a systematic way than internal ones, given that the electronic evidence is limited to points of exchange. But that doesn’t mean you shouldn’t try to understand the quality of the networks that lie outside; they are (usually) where the seeds of your actions originate.
With that in mind, how would you judge the quality of your personal external network (when it comes to investment pursuits)? What about the whole range of those networks that your organization relies upon?
One place to start is by pondering how uniform the networks are. Innovations in methods and ideas usually come from recombining concepts and applications in new ways; that’s much more likely when there is diversity in the sources of information and opinion. There are benefits to imitation, but alpha comes from differentiation, and too many investment networks are tribal echo chambers.
This comes from Social Chemistry: Decoding the Patterns of Human Connections, by Marissa King:
When Yo-Yo Ma, an iconic classical musician, looked around, he noticed that “the most interesting things happen at the edge. The intersections there can reveal unexpected connections.” Within ecology, this is known as the edge effect. Where the edges of two ecosystems meet, there is the greatest biodiversity.
Ma’s interest in fostering new musical amalgams might seem far afield from the investment world, but the same principles apply. Combinations occur at the edges of asset classes and strategies, creating new categories. Insights from other disciplines offer the potential to improve investment theories, tactics, and organizations, but are often untapped, since (despite its dynamism in other respects) the investment industry is quite insular and slow to change.
Searching for quality
One aspect of the autonomy provided in most investment organizations is that you can build your outside networks on your own without much interference. That hands-off approach ignores the fact that many of us aren’t very good at building diverse networks of quality. That creates weak spots for an organization; helping people analyze and improve their network of sources should be an important concern, but it rarely is. We fend for ourselves — and usually develop narrow and conventional networks that deliver narrow and conventional ideas.
The standard inference is that if there is good performance then there is a good process behind it — and a good network which feeds it. But conditions change and a network that is optimized for one environment can be totally out of sync with the next, missing the transition from one to another.
While a diversity of inputs is essential, assessments need to be made about the quality of work done by those in the network. That requires looking beyond the surface level of the current idea flow (and performance); a good network is built on an understanding of how your contacts do their work and what beliefs and incentives motivate them.
That depth of knowledge takes time and comes not from osmosis during the normal investment discourse, but from purposeful inquiry of a different sort. That is a rare and valuable practice.
This posting is part of “The New World of Investment Work” series.
Published: December 11, 2022
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