Recently I finished reading Mandelbrot’s The (mis)Behaviour of Markets for the second time. Fantastic book. I think it is a must read for people who are interested in financial markets, and especially for those who work in capital markets. While it stays away from equations and “math”, and prefers to use pictures (or cartoons) to illustrate and show concepts (a method I definitely prefer to obscure math), it does raise a lot of very interesting fundaas.
So last week I was feeling stressed out. I realized that I had worked too hard on Wednesday and Thursday hence I got stressed out on Friday. A couple of months back, I took a couple of days of medical leave because I was stressed out. I reasoned that was because I’d pushed myself too hard the earlier two weeks. And thinking about all this today, I thought the incidence of stress has gone up over the last couple of months. This, I reasoned to pushing myself excessively for over a year now. And if I were to analyze my today’s work, I could probably say that I pushed myself too hard in the afternoon and hence got stressed out in the evening.
Same pattern, you see. At different scales.You get the drift, I guess. And stress is just an example I took. If I think about how my louvvu for my wife has evolved, again same pattern. There is a “global pattern”, and that same “global pattern” repeats itself over shorter intervals over the last two years. Irrespective of the quantum of time I look at, I see that same “global pattern” stretched or compressed to the appropriate time scale. In other words, love is also a fractal.
You can see fractals all around you. You can see self-similarity everywhere. And yet, even when you have small samples. you instinctively try to model it as a normal distribution. Without realizing that the “normal” distribution in life is the Power law.
The basic idea of this post is that interpersonal relationships (not necessarily romantic) need to be treated as balance sheets and not as P&L statements, i.e. one should always judge based on the overall all-time aggregate rather than the last incremental change in situation.
Just to give you a quick overview of accounting, the annual statement typically has two major components – the P&L statement which reflects what happened between the last release of the statement and the currrent point, and the balance sheet which reflects the position of the company at the point of time of release of the statement.
I think Bryan Caplan had made this point in one of his posts, but I’m not able to find it and hence not able to link it. The point is that you should look at relationships on a wholesome basis, and not just judge it based on the last action. The whole point is that there is volatility (what we refer to in my office as “the dW term”) and so there are obviously going to be time periods during which you record a loss. And if on each of these occasions you were to take your next course of action based on this loss alone, you are likely to be the loser.
I’m not saying that you should ignore the loss-making periods and just move on. You do need to introspect and figure out what you need to do in the next accounting period in order to prevent this kind of a loss from repeating. You will need to “work the loss”, not make a judgment to break the relationship based on it. I think a large part of the problems in this world (yeah, here goes another grand plan) stems from people using one-period losses in order to take judgments on relationships.
Another thing is not to generate the accounting statements on a shorter time period. This is similar to one funda I’d put long ago about how you shouldn’t review your investments at extremely short intervals since that will lead to a domination of the volatility term (dW) and thus cause unnecessary headache. You might notice that corporates rarely release their accounts statements more frequently than once a quarter – this has more to do with volatility than with the difficulty in generating these statements.It is similar in the case of interpersonal relationships. Don’t judge too often – the noise term will end up dominating.
One caveat though – very occasionally the last loss may be so bad that it more than wipes out the balance sheet and takes to zero (or even less) the value of the firm. In that kind of a situation, there is no option but to shut down the firm (or break the relationship) and move on. Once again, however, the clincher in the decision to break up has to be the balance sheet which has gone to zero (or negative) and not just simply the magnitude of the last loss.
Life based on a balance sheet view is a balanced life.