Lessons from the stock market

Stock markets are ruled by sentiment, where perception often affects reality

Amit Varma
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Saturday, November 6, 2004
4.40pm IST - What you get is what you see?
What were the odds of India beating Australia in the just concluded series between the sides? And what are the odds of New Zealand beating Australia later this year, or England winning the Ashes next year? Whatever your estimation, it can surely not be as high as 473,000,000 to 1. Those are, famously, the odds of George Soros's Quantum Fund performing as well as it did in the stockmarket between 1968 and 1983, when his returns averaged an astonishing 30+% on investment. Soros continued making money at those rates, and is even credited with preventing a recession in England by tilting against the Bank of England in 1992. But why bring him up here, in a cricketing context? Because the prism through which he viewed the stock market, his Theory of Reflexivity, is as relevant to the world of cricket as it is to high finance. Here is how Soros sums it up:
In situations that have thinking participants, there is a two-way interaction between the participants' thinking and the situation in which they participate. On the one hand, participants seek to understand reality; on the other, they seek to bring about a desired outcome. The two functions work in opposite directions: in the cognitive function, reality is the given; in the participating function, the participants' understanding is the constant. The two functions can interfere with each other.
To put it simply, how you look at something can change the thing you're looking at. Consider stock markets, for example. In theory, the value of any particular share should be determined according to the fundamentals of the company in question. But in practice, it is determined by investors according to their perception of those fundamentals, which are often, in any case, mutable and intangible. Soros's theory states that the perception can actually change the fundamentals. This can create what Soros terms as a "self-validating feedback loop", which is what lies behind stock market booms and busts. A classic example of such "self-fulfilling but eventually self-defeating processes" is the recent internet bubble.
Cricket, too, is full of such self-validating feedback loops. Consider what happens when a batsman is out of form. Every early dismissal erodes self-belief, which makes the footwork more tentative and the mind cluttered with worries. Reflexes become slower and that increases the chances of getting out, which, in turn, erodes confidence further. It is a vicious circle, and few batsmen have the strength of mind to not let their failures affect them.
Success can breed a similar feedback loop, with a player's confidence spiralling along with his results - thus that cliched saying about cricket being a "confidence game". Rahul Dravid is said to advise international debutants to stride out to the field believing that they belong there. Your attitude affects your performance, as I touched upon in an earlier post as well ("Shiny Happy Flintoff, and outside-in emotions").
The blue-chip stock
If the cricketing world was a stock market, Australia would be your blue-chip stock, soaring high above the rest. Their strong fundamentals - the talent within their team and their cricketing infrastructure - certainly have a lot to do with this. But, as observers have often commented, there is an extra element to them, an X-factor, a force that makes them more than the sum of their considerable parts. This is especially evident when a new player comes into the side, and starts playing with a confidence that you wouldn't expect from a debutant.
Consider the 2003 World Cup, when lesser players performed remarkable feats that they would normally not be expected of them. Andy Bichel, Andrew Symonds and Brad Hogg were not among the team's superstars, but that Baggy Green on their heads transformed them, making them capable of feats that similarly talented players in other teams might not have achieved. On the current tour of India, Michael Clarke entered the Test area in similar fashion, undeterred by the occasion.
It is hard to put a word to this phenomenon - 'self-belief' only just begins to explain it. These men believe that when they play for Australia, they can do anything that is possible on a cricket field. Their perception of themselves affects their performance, and their performance duly reinforces their perception. And so, in a self-validating feedback loop, Australia keep touching new heights.
What can break this loop? Maybe their fundamentals will change. Their next generation of players could be so weak that even this intangible psychological quality cannot help them sustain their success. Or, as happened to West Indies, currently caught in quite the opposite kind of feedback loop, they can take their performance for granted, and that complacency can alter their mental make-up, the hunger with which they approach the game. But it is equally likely that a better team with better fundamentals and similar mental strength will come along and beat them.
Who will this team be? For a while, it seemed that it might be India. They beat Australia at home in 2001 and almost beat them away as well, drawing the 2003-04 series. But Australia came to India for this recent series high on confidence, after a 3-0 series win against Sri Lanka, having prepared meticulously. They came hard at their opponents, taking it a session at a time, never letting up in intensity, and the Indians cracked. Once they were beaten in the mind, their fundamentals counted for nothing. The dead-rubber Test was important for them, though, as the win there boosted their confidence for the rest of the season, which will be far easier to negotiate.
So will New Zealand, led by the unflappable Stephen Fleming, burst the Australian bubble? Will England, boosted by the emergence of two world-class matchwinners in Steve Harmison and Andrew Flintoff, kick off a revival of their own? It is one thing to talk about self-belief, and another to actually feel it, and it is likely that when these sides begin their first Test against Australia, there will be doubts and hidden fears. The Australians will attack them, aiming to activate those demons of the mind.
There's only so much the mind can achieve, of course, and there is a limit to how much the state of things can be transformed by it. For all of Soros's success in the stock market, he failed to fulfil his overwhelming ambition of the last few years. Soros had pumped in millions of dollars to help remove George W Bush from power, but Bush won the US elections comprehensively, getting more votes than any American president in history. In the capital markets, the clout Soros carries can turn speculations by him into self-fulfilling prophecies, but not so in politics.
That's an important cautionary tale. Self-belief can often lead to self-deception, and reality is a hard pill to swallow when that happens. New Zealand might be mentally strong, but are their players good enough? Australia are benefiting from a self-reinforcing feedback loop, but is their confidence unjustified? Surely something so strong cannot be just a bubble.
Amit Varma is managing editor of Wisden Cricinfo in India.
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