“Cybernetics was defined by Wiener as ‘the science of control and communication, in the animal and the machine’—in a word, as the art of steermanship.”
–W. Ross Ashby
CYBERNETIC TRADE CONTROL SYSTEMS
Cybernetics embodies a multi-discipline theoretical framework which focuses on goal-directed systems. These systems use information, models, and control actions to steer towards and maintain a predefined objective while attempting to counteract anything which detracts from this objective.
Perhaps the most fundamental innovation of cybernetics is its explanation of purposiveness, or goal-directed behavior.
Cybernetics and Fund Management
“Goal-directed behavior” is particularly critical in the world of investment management.
A fund manager’s goal is simple:
- To generate the best possible return given prevailing market conditions
- To control the risk of loss
Hence the advantage of a systematic trading methodology designed to mitigate risk and optimize returns. Achieving this goal, however, while safely navigating the Marketplace—itself a complex adaptive system—is no easy task. Our constant immersion in subjective phenomena—the temporary consensus of values exemplified by changing stock prices—necessitates a scientific and objective goal-directed trading methodology, counter-intuitive as this may seem.
Goal-Oriented Behavior
Cybernetic trade control is characterized by its systematic pursuit of the fund’s objective, resisting internal and external obstructions from the environment which deviate from these goals. Such a system forces the fund manager to operate within a very strict and highly regulated set of rules, the main benefit being the prevention of fund failure and catastrophic losses. Thus, goal-directedness implies the regulation of—or control over—trader response (internal/controllable) to market conditions (external/uncontrollable).
Cybernetic thinking has impacted my investment philosophy by compelling me to seek:
- Scientific and objective means to identify the inception or existence of high-probability trends
- Scientific and objective criteria to enter, exit, and if need be re-enter those trends, while
- Never incurring greater than predetermined % of risk against total trading capital for any single trade.
This requires a systematic approach to trade management which minimize the impact of subjective, emotional, or impulsive input on the part of the trader.
The net effect is a systematized goal-oriented discipline imposed on the trader that in principle is very similar to that imposed on the pilot of a jumbo jet. In fact, I feel this is an appropriate metaphor and mind-set for a fund manager–insofar as his or her successful implementation of a system-driven approach has a dramatic impact on the lives of perhaps hundreds of people.
"ASEAN heavy, we confirm high-probability long-term trend. You are cleared for take-off."
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E. M. M.
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