Saturday, May 5, 2018

Is investment management a science - Use the "narrativeness" test

"Narrativeness" may be defined as the quality that makes narrative not merely present but essential. It comes in degrees, and there are narratives without narrativeness. Since the time of Leibniz, Western thought has favored models in which abstract scientific laws would ideally account for everything in nature and society (the ideal of a social science) and in which narrative would therefore be, at best, merely illustrative. But a number of thinkers have presented forceful arguments that such an ideal of knowledge is a chimera. Darwin, Dostoevsky, Tolstoy, and others have insisted in the ineluctable need for narrative because genuine contingency exists and time is open. 

-Gary Saul Morson, 

Lawrence B. Dumas Professor of the Arts and Humanities; Professor, Slavic Languages and Literatures

Is economics a hard science? What makes the humanities the humanities? Are some social sciences more "science" than others? These are tough questions that academics have been asking for some time. These same questions could be applied to investment management.

An interesting test or thought experiment has been developed by Morson and written about in his book with Morton Shapiro Cents and Sensibility: What Economics Can Learn from the Humanities. The science test is determining the amount of "narrativeness" associated with a discipline. If the discipline can be explained without words or a narrative, then it is a science or has characteristics of a science. If the discipline has to use a narrative to explain itself, then it is not a science. 

There is no value statement in saying some type of study is a science and others are not. There is room or need for narrative. Storytelling helps us be human. However, we can better define a discipline and make a judgment on those that try to pass something off as science when it is actually based on non-testable narratives.

There is emotional attachment and engagement with narrative but not with science. If we gaze upon the night sky and only think about orbital rotation we will not be moved in the same way as a discussion of our smallness in the universe. The narrative will be remembered after the equations are forgotten. People will use the narrative to win hearts and minds when the science may not convince by itself. 

Still, it may be valuable to apply the narrativeness thesis to investment management. Is it science? For some, the quants, it is. For others who are discretionary managers, rules and laws cannot be applied to what they do, it is a narrative. Some investors demand or want only a science. Some managers cannot explain what they do without narrative. Where it gets interesting is when quants use storytelling to explain their models or when storytellers try to suggest their opinions are a model or a theory. Just telling a complex story or using a "model" to explain the current economic environment may not be science. 

The problem in investment management is that it has both the science of testable models and the language of narrative. Additionally, the narrators often use data and the quants often use storytelling. This forces the investor to do the heavy work of separating true data analysis from potential false narratives. In that sense, investment management is a netherworld of near-science. 

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