How do you deal with uncertainty? Some will suggest following rules. Disciplined and systematic investing is the best way to deal with the unknown because there is specific action regardless of the environment. Others argue for flexibility. Unknown or surprise events require special action. When faced with uncertainty, it may be best to adapt and adjust to the specific situation. Arguments can be made for both.
This choice between rules and flexibility is not unique to investing. You can think of situational versus absolute ethics. Should we believe in the absolutes of right or wrong, or should each situation be assessed based on the relative facts. It can apply to sports when teams either follow a set plan or adapt to circumstances. This can be described as a problem between using a rulebook or a playbook.
The rulebook approach states that specific decisions should be made regardless of situation. Any new situation may just represent noise and clutter. If you are a trend-follower and the price is above your trend indicator, you will be a buyer. It does not matter what the Fed says. It does not matter what is the latest economic growth number. There is a rule for any defined situations and then there is action. There are no worries or fretting about any situation. There is the freedom and certainty in knowing what action will be taken regardless of the environment. The quant trader is more likely to follow a rulebook.
The playbook approach suggests more flexibility. There are sets of actions that change and adapt to the situation faced. It combines situational awareness with flexibility. Not every situation is unique but responses are based on the various conditions of time and place. For example, the playbook may say that an investor should not buy long duration Treasury bonds if the economy is growing, but there may be an exception if trends are higher. The playbook may have a broader set of "if/then" conditions and allow for more nuances. If rules are simple, plays are complex. The discretionary trader is more likely to follow a playbook.
Is one better than another? This is a matter for the personality of the decision-maker. A decision-maker that understands that he may be slower with taking action in a dynamic environment may be comfortable with rules. A decision-maker that is less comfortable with processing new information may also like rules. Alternatively, a decision-maker who feels constrained by specific rules will prefer a playbook and the opportunity to walk through choices for each unique situation. The decision-maker that likes to think through scenarios will prefer a playbook. The weighing of scenarios is the playbook.
This choice between rules and flexibility is not unique to investing. You can think of situational versus absolute ethics. Should we believe in the absolutes of right or wrong, or should each situation be assessed based on the relative facts. It can apply to sports when teams either follow a set plan or adapt to circumstances. This can be described as a problem between using a rulebook or a playbook.
The rulebook approach states that specific decisions should be made regardless of situation. Any new situation may just represent noise and clutter. If you are a trend-follower and the price is above your trend indicator, you will be a buyer. It does not matter what the Fed says. It does not matter what is the latest economic growth number. There is a rule for any defined situations and then there is action. There are no worries or fretting about any situation. There is the freedom and certainty in knowing what action will be taken regardless of the environment. The quant trader is more likely to follow a rulebook.
The playbook approach suggests more flexibility. There are sets of actions that change and adapt to the situation faced. It combines situational awareness with flexibility. Not every situation is unique but responses are based on the various conditions of time and place. For example, the playbook may say that an investor should not buy long duration Treasury bonds if the economy is growing, but there may be an exception if trends are higher. The playbook may have a broader set of "if/then" conditions and allow for more nuances. If rules are simple, plays are complex. The discretionary trader is more likely to follow a playbook.
Is one better than another? This is a matter for the personality of the decision-maker. A decision-maker that understands that he may be slower with taking action in a dynamic environment may be comfortable with rules. A decision-maker that is less comfortable with processing new information may also like rules. Alternatively, a decision-maker who feels constrained by specific rules will prefer a playbook and the opportunity to walk through choices for each unique situation. The decision-maker that likes to think through scenarios will prefer a playbook. The weighing of scenarios is the playbook.
Understanding how to deal with unique situations is the broad problem. The overarching theme is that the decision-maker needs to know himself. For example, Mike Tyson says, "Everyone has a plan until they get punched in the mouth." Overall, General Dwight D Eisenhower got it right when he said, "In preparing for battle I have always found that plans are useless, but planning is indispensable."
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