Frank Partnoy is a professor of law and finance at the University of San Diego. After working as a derivatives structurer at Morgan Stanley and CS First Boston in the mid-1990s, Professor Partnoy published best-seller F.I.A.S.C.O.: Blood in the Water on Wall Street, which documented his time at the two firms.
Prof. Partnoy recently published another work, Wait: The Art and Science of Delay. In it, Partnoy tackles the notion of snap decision-making (going “with your gut,” in other words), demonstrating its detriment not just in finance and trading, but in everyday political and social life. Countering conventional wisdom, Prof. Partnoy advocates for procrastination and argues that the “ability to wait is the path to happiness.” We sat down with Prof. Partnoy to discuss his new book and how best to implement some of his observations.
DA: Your previous work has dealt primarily with financial regulation; what prompted you to write a book such as this that combines so many different disciplines?
FP: Two things. One is that I’ve always been a big procrastinator, and I’ve felt guilty about it, and wanted to look for a vehicle to explore that. But really the media impetus for the book was some research I did after the financial crisis. I interviewed some of the senior executives of Lehman Brothers, and found out they had created a decision-making course they asked their top four dozen executives to take. They took them over to the Palace Hotel on Madison Avenue, holed them up there with Max Bazerman, from Harvard Business School, and some leading psychologists. They designed a custom implicit-association test for them to try to help understand their biases; they brought in Malcolm Gladwell, who had just published Blink. It the fall of 2005.
And they were very much in the Blink mindset. The president of Lehman was passing out copies of Blink on the trading floor. So they took this course, and then they marched quickly back to their headquarters in Times Square and proceeded to almost blow the financial markets, to make the worst snap decisions in financial market history.
And so that got me thinking, because I teach decision-making, that the course they took is exactly the opposite of the course that they should be taking. So I wanted to spend a few years exploring what they should have learned, what people generally should have learned. As I started researching the project just got bigger and bigger, and more general. It’s not just about the financial markets—yes, Wall Street responded too quickly; yes, regulators responded too quickly, there are problems like that with Dodd Frank… but that it’s more general. It’s really about the human condition, that we’re hard-wired to respond very quickly, but that we’re better off when we manage delay and take our time with decisions. So that was the path that I took.
DA: Do you think there needs to be more robust reform? Changing the system itself in a fundamental way? So that the kind of snap behaviors we saw during the financial crisis can be regulated out?
FP: No, I think we can try. The problem is that the political reality is not open to radical solutions. But there are a lot of radical solutions.
One of the simple ones that I propose in the book is to have a lunch break for trading. We don’t need to be trading continuously throughout the day. We can have an auction market where you open the market once in the morning for a very brief period, close it, then open it again in the afternoon for a very brief period, and all trades have to occur in those two time periods. This arrangement would rationalize a lot of investors’ behavior; it would eliminate day trading where people are following the markets all day long, to their detriment, and sort of destroying themselves. So I think there are a bunch of things that can happen, but I’m not particularly optimistic that they will.
Going back to first principles from the regulation we had in response to the 1929 crash, the basic pillars are: increase the mandatory disclosure of risks and material facts; and number two: a robust private write-up action. [Could you elaborate?] Those two things are what I’ve been pushing over the last several years, but there isn’t much appetite in Congress for either.
And we weren’t successful in Dodd Frank in implementing either of those. So I’m not optimistic these things will change, but in terms of what I would put on the agenda, I would have those pillars be at the very top.
DA: Moving back to the core of the book: It’s not so much about merely waiting or delaying, but a kind of calculated, optimized delay. You speak about this optimized delay in the context of financial markets as it applies to high-frequency trading — is there another aspect of the financial markets in which optimized delay could be useful?
FP: I think so. The biggest one is the fundamental investment decision about buying and selling stocks. The first step is to figure out what time-world you’re living in, so you can determine how long you have to make this decision. And then the second step is: wait as long as you possibly can within that time frame. There’s a section about Jim Cramer and Warren Buffett, talking about how they make investment decisions, and how Buffett will delay indefinitely. Bill Ackman took a position in MBIA, betting against the company for seven years until the truth finally got out there.
So part of it is emulating that behavior; for investors also, most people are investing for their kids’ college, or their own retirement. They have a ten-year to forty-year investment horizon. They should be explicit about that and not succumb to the need to trade constantly and give in to this sort of instant stimulus.
It’s kind of like the four-year-old kid who’s offered one marshmallow now or two in fifteen minutes. We’re better off if we can delay our investment decisions. And people who follow Jim Cramer’s advice, for example, don’t do very well. Studies show that although his stocks go up by 2 percent instantaneously, people end up buying at that higher price. So if they follow his recommendations, the top quintile of his recommended stocks end up under-performing in the market over the next 30 days.
My advice to people is to understand that you’re being subjected to an onslaught of stimulus and to resist it, put up the stop sign, take a deep breath. Don’t give in to this the same way you wouldn’t give in to other kinds of snap impulses that lead us astray.
DA: And how does that apply to the media cycle, and the daily barrage of information, political, cultural, etc.?
FP: Yes, again, it’s disastrous for decision-making. You’ve got constant email, constant social media. There was overwhelming coverage of the Supreme Court’s healthcare decision. We saw people waiting, salivating on Twitter for the opinion. We were getting ready to instantly digest what the opinion said. And one of the things I want to try to persuade people to do is to take a step back: “Okay, here’s our initial reaction, but you know what, we’re going to take our time; it’s a complicated opinion, we’re going to talk to the experts, we’ll know in three days. It’s going to take us a while to figure out what the real import of this is.” It’s a more nuanced, thoughtful process. The media has moved to a more rapid pace than anytime in history. Some of that is good, because we have access to information instantaneously, but some of it is really dangerous and polarizing.
DA: Is there an institution in American society, a group of people, or even an individual commentator that follows this model?
FP: I think ProPublica does. Some journalists do; some people in government try to. The rule making of Dodd-Frank was supposed to be this way, to take one or two years for the problem to be thoroughly studied. The problem is that often you’re giving an excuse for people to just dig their heels in, and take too long, and not get the job done. So there needs to be a firm deadline. One of the major problems implementing Dodd-Frank was that the deadlines weren’t firm; the FCC blew a lot of these deadlines, and the CFTC did as well. There haven’t been any consequences to that. Use sports as an analogy: If you’re returning a tennis serve, you have 500 milliseconds. If you take 600 milliseconds the ball’s gone by. So you’ve got to figure out what the time frame is, then act within that time frame.
DA: What did you make of the House Financial Services Committee’s recent questioning of various regulators?
FP: There’s so much politics infused in it. It’s very partisan, and ultimately now it’s about the budget. Republicans are trying to construct any argument they can to whittle away at the regulatory imprint that the FCC and CFTC have. These two agencies are fighting for their lives, facing budget cuts, facing new mandates. They’re scrambling to keep up. It’s become much too politicized, and the election cycle is just making it worse.
DA: One of the really interesting discussions in your book is this rethinking what metrics we use to measure progress in human societies. Obviously, there’s a lot to consider, but since the book’s been published and you’ve been chatting with the press, have you thought more about what those measurements might look like? Should we turn away entirely from traditional metrics, GDP, GNP, etc.?
FP: Those kinds of metrics need to include broader measures of human happiness, of human well-being, as well as the income inequality skew. These measures should capture not just how well off society is overall in terms of productivity numbers, but how well off the worst elements of society are, and what the gap is between the highest paid and the lowest paid. We’ve lost sight of the importance of that. It’s not just about fairness; it’s that to be a well-functioning society that gap needs to be reasonably narrow.
Plato had this basic idea of a five times multiple between the highest paid person in society and the lowest paid person in society. We’re nowhere close to that. Within companies now, the average CEO is paid 250 times the median income of a family.
When Nicolas Sarkozy proposed this idea [to use alternative measures of societal progress], everything was in place to have a kind of long-term perspective, to think it through, to have a bunch of smart economists write this document and then implement it. But the reality he faced was an election challenge, and you simply can’t talk about this in the 24-hour media cycle in the context of an election. It’s partly because of money in elections, and partly because of our own hardwired snap-reactions.
Take the U.S. election coming up. I’m not optimistic that the important issues are going to debated at all. Once again, Wall Street, Finance, is not really on the agenda; it’s a lot of personal attacks, it’s very partisan. And part of the problem is that the time frame is 24-hours: It’s “What speeches are the two guys giving today? What is the news media focusing on today?” We might be a lot better off if we just decided to tune out whatever happens over the next three months. We won’t lose anything. Then we’ll tune back in in three months and see. I think Republicans who followed the nominations might have been better off had they just ignored the race. The back and forth of who’s going to be the nominee, it’s almost like people just enjoy it as consumption value. It’s almost like going to the casino and enjoying pulling the slot machine handle, right? So, I’m not particularly optimistic that we’ll have a robust substantive discussion in this election.
DA: What I love about this book is its attempt to address an obviously enormous systemic problem, that has to be fixed, but at the end of the day it’s the individual who will read the book, and you seem to be speaking to a person on that level. In other words, you explain the small, incremental steps a person can make. Was that sort of the idea going into it?
FP: Absolutely. The goal, initially, was to try to slow down the world. Which is, I know, overly ambitious, but the way to do it is one person at a time, to show people that they’ll be better off personally and professionally if they take more time to make their decisions. This can work if they understand their own biases and limitations, if they get what all of the crush of technology is doing to them in terms of their capacity to make decisions.
What I hope is that each person will read this book, and find in it some useful information to help manage delay in their lives, to procrastinate if that’s the right thing to do, and not be caught up in what’s become this sort of obsessive compulsive media rat-race. Which is making us all less human.
There’s a dog on the cover of the book, balancing a bone on its snout, and showing us, as best it can, how it can delay gratification—that it can smell this bone, that it would love to eat it right away, but it’s delaying. It’s hopefully a message for us that delayed gratification can make us happier and contribute to better decision-making. There are hundreds and hundreds of studies that show that people who can delay gratification are happier, have better marriages, make more money, and are less likely to be obese or addicted to drugs or alcohol.
And the other thing that I like so much about the dog is that it’s just a dog. That we as humans can do a lot better. There’s a study published this year that showed that a dog could hold a chicken chew treat in its mouth for ten minutes for the prospect of a chicken chew treat eight times larger. That’s a long time for a dog, ten minutes.
And we say “Wow.” But human beings can think a lot further into the future than dogs, and often we don’t. That’s why we’re here, that’s what human beings are uniquely capable of doing. The main point of the book is that we should do this far more often than we currently do.