May 3, 2019

Gaze Heuristic in Retirement

I was reading a tidy little blog post the other day by Dr Cameron K. Murray on the Gaze heuristic (Improving 'Neoclassical man' with a gaze heuristic Thursday, February 12, 2015) and thought it quite relevant to retirement finance. With a proviso, of course, that I want to modify it a bit. 

Here's Cameron quoting Gigerenzer on how a ball might thought to be caught:
The gaze heuristic is the simplest one and works if the ball is already high up in the air: Fix your gaze on the ball, start running, and adjust your running speed so that the angle of gaze remains constant. A player who relies on the gaze heuristic can ignore all causal variables necessary to compute the trajectory of the ball––the initial distance, velocity, angle, air resistance, speed and direction of wind, and spin, among others. By paying attention to only one variable, the player will end up where the ball comes down without computing the exact spot. [emphasis added] 
Here is Cameron explaining the distinction between economic rationality and the heuristic: 
Below I summarise the basic difference in behaviour between neoclassical man, who makes a choice at a particular point in time based on expected probabilities, and dynamic uncertainty women, whose behaviour responds to the dynamics in her environment.

Neoclassical man observes the ball, develops a probabilistic expectation of where it will land, and instantaneously positions himself at the most probable position. Dynamic uncertainty women observes the ball and begins running from her current position towards the ball, linking her run to the ball’s trajectory by fixing her angle of gaze.  
We can think about the ball as the environment our catchers respond to. Neoclassical man sees the ball’s position and generates expectations, ignoring its dynamics of velocity and acceleration, or merely developing some expectation about them. In economic models, such behaviour is reflected in static optimising on price levels based on expectations. But to dynamic uncertainty woman, the position of the ball has no effect on her behaviour. Her own velocity is tied to the ball’s velocity through the fixed gaze angle, no matter what her starting positions or progress in her run. Only as the ball accelerates does her action change, and she will accelerate her run as the ball accelerates towards the ground (including changing directions when the ball drifts). In economic terms, the ball is the business environment and each individual catcher is making their running investment decisions in response to that dynamic environment. Using a gaze heuristic this implies matching running speed (investment rate) with the balls speed (rate of change in real demand). [emphasis added]

This is useful and makes a very similar point to the one I made in a past post (Process 5 - Continuous Monitoring and Management Processes) where I tried to make the case that we will never be able to know the exact real future position of retirement finance. On the other hand, knowing velocity and acceleration of key metrics that are embedded in a running process can be more useful. I can't remember how I termed it but it was something about second-derivative thinking.  That's what is at play above, too, and I think that helps in our ret-fin perspective.  Think of it this way: if you happened to be someone that believes in fail rates (and I don't really, but let's call it a "position" for now) you probably know somewhere in the back of your head that it is somewhat of a total fiction. But knowing, on the other hand, the movement of a fail rate over time (let's call that velocity which can be constant, declining or rising) and the movement of the movement (acceleration) probably is meaningful in a "get off your ass and fix this now" sense.

That's a usefully strong heuristical metaphor I think. But it's still wrong when using the ball-catching example. That's because the ball obeys the laws of physics, even when it drifts due to wind, which can be compensated for.   We should know by now that finance is not physics. Something like Newtonian laws of motion do not obtain in finance (or economics or sociology or...). Because human behavior is involved, markets will move in ways that are unlike gravity or other physical phenomena. And that's before we get to spending which can be observed to have non-probabilistic behaviors.  So to make the above example more complete we'd have to have the ball be able to make unexpected and discontinuous changes in direction, speed, and acceleration.  A simple adjustment to the illustration might look like this:

My adjustment to Cameron's illustration
to reflect the nature of retirement

So it's not only that we can have a hard time getting a firm grasp on the probabilities of the positional outcomes, and not only is the gaze heuristic idea deficient (useful, though), but it also looks like we are going to have one hell of a time catching this thing.  But then again we're human. We'll figure it out...because we have eyes and feet and hands and a brain. 

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