URSABLOG: In Two Minds About The Markets?

I think a lot about markets and how they behave and develop. My basic point of reference is of course the dry bulk market in particular and the shipping markets in general over many years. I have a few theories about this based on my observations of the behaviour at different times of the people in them: owners, charterers, clients, shipyards, brokers, bankers, of other market players, and myself. These come under the general headings of psychological and evolutionary.

Firstly, psychological. In making a long-term plan for investing, let’s say, buying a ship, a shipowner will first of all look at what market they want to invest in – sector, size – and then look at design, build, age, price according to their resources. Having defined the parameters based on their resources, they will then start looking in the market for ships that fit those parameters. Having narrowed down their long-list to a short-list of ships that are available, they may decide to inspect and then offer. But in the act of inspecting and offering they move from being spectators to being players, experiencing the game at first hand. And in fact they become part of the game itself, influencing other players by their action.

The difference is fairly clear: spectators are observers, where their actions have a negligible effect on the market, whereas players are agents, whose actions influence the game directly and therefore change it. For any of you thinking about a football match right now – as I am tempted to do so – I would ask you to stop it and imagine instead a game of many different teams, with many different players, some of them working for themselves, some of them working for the team, but all of them competing with each other all the time. Perhaps a better analogy is a cycle race.

The big change when you become a player is in the way the mind works, a switch from a observational, maybe even rational mind, to a reacting one, whose decisions have to be made very quickly, almost impulsively, and where the time taken to consider them is short, and where every second counts. These types of decisions are instinctive, and as often as not come from emotional reactions to the information presented.

Past experience is extremely important in these situations, but so is aggression and speed. Rationality is very much in the background and noise is everywhere. Whether the decision to – let’s say – close a deal or not is successful or wise will only be found out in the future, and the result – whether good or bad – can be rationalised after the event ad infinitum.

Some instincts are hard-wired into us. I like to think that pain is instructive, in as much that once we have felt pain, we will try and avoid whatever caused us pain – consciously or unconsciously – again. This is true of emotional and psychological pain by the way, as well as physical pain. Fear is preventative and keeps us out of trouble, and whether we fight, fly or freeze, the instinct is to overcome, avoid a threat, or hope it does not notice us. Pleasure – whatever pumps dopamine (or whatever) into our brains – shows us the way we can enjoy ourselves and at the same time feed ourselves, bind ourselves into supporting communities and reproduce ourselves, all necessary to prolong the species. All of these can be distorted, in life and in the markets, and can be manipulated for personal gain.

My point is, generally, that although our decisions to enter the market may make sense from a purely rational point of view, the success of the entry will depend on short-term thinking and decision making that may be governed by emotional reactions, or mental, gut-feeling short-cuts, heuristic actions, that depending on the circumstances play an important part on the end result. None of this is right or wrong; I am just putting things into a context that I am sure we are all familiar with.

Secondly consider another way of thinking about the market, which I admit is a little out of the box. Imagine how markets evolve: a lot of small inputs from lots of different players drive the market up, down, sideways and so on. Each of these small inputs cannot move the market by themselves, but together set in train huge movements. There is no intelligent design, no supreme being or controlling institution, that has created the market to be the way it is, it evolved the way it did because, well, it did. It is only our analysis and understanding of the market that is rational. We react to the market, which is evolving all the time, in a rational way, by thinking about it, but our actions when we lower ourselves into the transactional gene pool so to speak, change things in ways that we could not predict, and we may not get the result we wanted.

Evolution is out of our hands even if we understand it in theory, and we will never be able to impose any kind of control over it, individually or severally, because it is everywhere. Top-down analysis – particularly of the patterns we have observed in the past – is no guide to what will happen in the future, because what happens in the future is bottom-up, mindless action and reaction to the environment, from micro (short spot fixtures) all the way up to macro (newbuildings) and beyond (global economics, and geopolitical tectonic stresses).

People once thought – and some still do – that the world was indeed created by one or many gods, and controlled in ways beyond our understanding. It is now generally thought that the world we know today came into being due to processes that didn’t have any rational thought behind them. I would argue that even though we can think about this, uniquely amongst the creatures we share the planet with, we cannot necessarily control the process, mainly because there are too many people thinking about it, and the inputs are too varied, and competitive, to come to any kind of solution that we can all agree on. Man is a political animal after all, and although Aristotle observed this way before the theory of natural selection became accepted, it answers why we can influence the world around us so much, and also how we don’t necessarily make it a better place.

Now combine the two different approaches, the psychological and the evolutionary, to your observations of what your market is doing to do. Immediately you are taking an observer/top-down view, i.e. a rational, computing view. Is this satisfactory? Are you getting much done? Or do you have a strong urge to dive into the thick of things, and see some action (and stop reading this tiresome blog for a start)?

Guess what? You need to do both. The market, any market, is competitive, political if you like, but the tools we use to further our own interests are both rational, long term, slow thinking, and impulsive, short term fast thinking. This is who we are.

So when you wonder why other people are crazy in paying prices for secondhand vessels that are far higher than you are willing to pay, consider first whether you are using the right word. ‘Crazy’ suggests that you are rational and your competitors are not, that you have better knowledge, a better sense of history and the long term, that stopped you competing for the ship. Is this really the case? And if you feel frustrated that your clients would not accept the last offer that you gave them, and are holding out for more because they are ‘greedy’, is your frustration down to a lack of feeling that buzz of pleasure that feeds you as a broker rather than considering the longer-term view that your clients take? These are both expressions – and many more – we hear every day, and are part of the inputs that drive our markets one way or another.

I am not – for one minute – suggesting you change the way you think; that way lies madness. What I am suggesting is that these things are far more important influences of how markets work than we would like to think, and the fact that we are all different and have different balances in our brains at least means that computers and Artificial Intelligence will not replace either the spectators or players in the shipping markets any time soon. 

Simon Ward

www.ursashipbrokers.com