Apr

11

 When you maneuver a ship, there are controllable forces, such as propeller and rudder effects. There are also uncontrollable forces, such as wind, current, sea conditions. Moreover, each vessel has different characteristics and reacts differently. You have also to take into account the characteristics of your ship that may not be constant and given, such as ship loading and hull conditions. As a result, a captain works in an environment where a ship's behavior is not observed in exactly the same way and each situation is different from another. A maneuver is a dynamic process. You have your plan and when you execute it, you want to have a continuous update to understand the effect that your order has achieved and the next course of action in order to be able to follow your plan. Each time you find yourself in situations where your ship reacts differently due to everchanging combinations of speed, rudder, wind, current, sea state.

You need to be adaptable to the environment. Often, a too frequent assessment of your orders is not good because you need some time to let the ship react to your order because of its inertia. At the same time, if your feedback cycle is too slow, you might not have enough time to correct your action. You might end up not being able to follow your plan any more. In that case, the wisest thing you can do is give up and start again the maneuver from scratch instead of trying improbable corrections.

In markets, you do not have controllable forces, but you have expected crowd behaviors. In this context also each situation is different. A trader establishes a plan and during the trade execution, as new data come in, he/she assesses the market's behavior. The frequency at which this feedback process is done is critical. Traders may overreact and be deceived by the short term noise (you need time for the trade to develop), or they may be too slow to realize that the trade is not going as expected. How much data do you need, how often? How is the behavior different from what is expected is an interesting parameter. What is the threshold that makes you realize the trade went wrong? A ship maneuvering characteristics can be modeled mathematically, but in real life captains have to apply their experience and judgment to work in an observe-evaluate-decide-act cycle, which is very similar to what a trader does in a real time environment. Similarly, the market can be modeled, but most of the times expected outcomes require judgment and interpretation. It is all about the human dimension, where the action-effect cycle is matched against broad assessments of a generic "system" behavior.

Jeremy Smith comments:

“Consider how often a vessel must change its course in leaving a harbor, yet once on the high seas a single heading may bear it to its destination. Only
a major navigational hazard could change it.”

 – Louis Auchincloss, The Embezzler [1966]

J.T. Holley adds:

In the spirit of Patrick O'Brian I would have to disagree or at least add to this quote. Pirates, Enemies and Gov't can cause navigational changes in both the ships directions and destinations as well as in the markets. Seamanship by David Dodge is a excellent book that discusses the navigational patterns as well that the U.S. Navy utilizes. Having served onboard the U.S.S. Stark I can assure you that rarely is "a single heading" utilized to reach a destination. Sure it is the broad direction, but there are other directions that are in between when going from point A to point B.

Pitt T. Maner III writes:

Let me add a nice quote from The New Dictionary of Thoughts (1963). I wish I knew who "Anon" was:

A smooth sea never made a skilful mariner, neither do uninterrupted prosperity and success qualify for usefulness and happiness. The storms of adversity, like those of the ocean, rouse the faculties, and excite the invention, prudence, skill, and fortitude of the voyager. The martyrs of ancient times, in bracing their minds to outward calamities, acquired a loftiness of purpose and a moral heroism worth a lifetime of softness and security. Anon.

The pdf of the book is searchable and many a fine old quote can be found there. 

Jim Sogi adds:

Jeff is right. A sailing ship in particular will sail the best course made good, rather than rhumb line. For example, it will take the best angle to the wind, for the ship best speed, even though off rhumb line, for best course made good. A catamaran, for example, will go faster tacking down wind, zig zagging rather than shortest distance. I think day traders know this instinctively. It's quantified in markets in the absolute volatility numbers, or in Sharpe result numbers.

Another curious effect is when there is a strong current setting the vessel down. The vessel aims at a different point than where it intends to go, and 'crabs' along its course. This is hard for people to understand, as they can't really see the current, but one has to be aware of the motion of the ship in relation to the course, which is a derivative function. I suppose this might be thought of as Sharpe as opposed to gross dollars in trading or percent.

Another odd effect I experienced last weekend up in Alaska skiing was during a white out, a sense of vertigo. There is no visual reference point to balance, and its easy to lose balance in total white out conditions. While standing still, a small avalanche passed by, and though I was standing still, seeing the snow pass by gave the impression of motion, and threw me off balance. Or there is the feeling of standing still, then all of a sudden hit a bump and realize the skier was moving, but couldn't see it. The idea is that sometimes the perception is not correct and some other reference is needed. Pilots know this. This was one of the main points in survival. Loss of a reference point often lead to panic and death. In the markets, it's easy to lose reference. Chair's international numbers, I believe, are an attempt to get some sort of reference point. I had guides skiing up in the wilderness, who have a lifetime of experience and reference. Like markets, if you lose your reference point, you'll be dead in short order. 


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4 Comments so far

  1. Luigi Mauro on April 8, 2009 2:42 am

    Hi Paolo, interesting parallel between a ship and the market! Not very appropriate though.

    First it is not true that in markets one cannot control forces. In fact keeping your example, in markets one has the power to control his/her own propeller (money - with limitations - to put in) as well as he/she makes a decision on where/when to invest (control the rudder).

    Yet, there’s a far more relevant asimmetry in your analogy. A ship (or its behavior) and the markets (or again their behavior) can hardly be compared. Modelling the behavior of a ship surfing the ocean subject to the “uncontrollable” forces of the Nature does not seem to me very useful for modelling the behavior of the markets. A single captain observes, evaluates etc. and finally makes a decision affecting a single ship. A multitude of captains instead do their own assessments and make their own decisions in the markets. It would therefore be more apppropriate to think of the “global fleet” as an analogy with the markets. Any ship - different in size, etc. - would be governed by a single captain. Each captain behaves differently. And so on.

    Luigi

  2. Steve Leslie on April 8, 2009 8:18 am

    I think I understand the point that Paolo is trying to represent. I tried to make a similar point about sailing a week ago. In the ocean there are incredible dynamics at work. Complex weather patterns, wind and waves all confound the captain of any ship and can cause its demise. One need only to read the story of the Edmund Fitzgerald which sank in Lake Superior in November of 1975 and was immortalized in the song by Gordon Lightfoot. http://www.ssefo.com/. Better still one can read the book The Perfect Storm by Sebastian Junger or watch the movie with George Clooney and Mark WAhlberg. http://en.wikipedia.org/wiki/The_Perfect_Storm. Best yet, The Chairman has written exhaustively on this subject referencing the great series of books written by Patrick Obrian and study the character of Captain Aubrey of which his son is named after. For a wonderful cinematic experience, I recommend the movie Master and Commander nominated for 8 Academy Awards and winner of 2. So in short summary remarkable similarities and lessons between sailing and speculation exist.

    In sailing one needs to be constantly aware of the environment of which they are thrust into. Speculators must also be aware of the "market environment" of which they are in. Both are extremely dynamic very treacherous and entirely unforgiving. They are also no respecter of persons. It is of no consequence to the market as to which person has which position, it is going to act according to its makeup.

    With respect to his statement "In markets, you do not have controllable forces, but you have expected crowd behaviors." Whether this statement is accurate or not is argumentative and detracts from the overall message of this post. In my opinion one should stay with the theme of this fine submission that Mr. Pezzutti has presented and work intensively to grasp the great qualitative value that such study will bring.

  3. vniederhoffer on April 8, 2009 3:59 pm

    I must enter in here as a layman. In reading O'Brian, I find a thousand similarities between the mangement techniques and forces faced by Aubrey and those faced by every speculator, especially me. Perhaps most important is having the escape route fixed before the attack, and always changing the tactics in the heat of the battle as the tide shifts and the adversary leaves just one part vulnerable. The constant awareness that only a piece of wood separates you from death, and the everchanging forces of the ocean and the weather reminds one of what one faces with the economic and political tides. And the problems with the admiralty, the politicking that influences everything, oh no…. the nepotism, the promotion from within, of my goodness… the blood curdles. vic

  4. legacy daily on April 12, 2009 10:20 pm

    One similarity between speculator and captain seems to be the constant evaluation of expected outcomes and as a result optimal actions given the current knowledge in addition to the expectations of future events and their impacts.

    What role do experience, bias, attitudes and qualities play here? Do they limit or blind us or support us?

    To complicate things, how are we affected by the herd experiences, bias, attitudes, and qualities? And, how is the government (group of individuals subject to above whose actions we try to anticipate) affected by all these?

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