Portfolio Management – Life, the Universe, and Everything

 

I was thrilled when Cameron sent us Projectmanagement.com writers the theme for October, since it so closely aligned with the extensive research I conducted when writing my recently-released, must-have book, Game Theory in Management (https://www.ashgate.com/default.aspx?page=641&calctitle=1&pageSubject=2064&pagecount=0&title_id=11616&edition_id=11979). Have you ever noticed how often management writers offer up novel or different definitions of the term "portfolio management?" I have, and I believe when writers employ this tactic (known as “showing your machinery”) it is a dead give-away that that particular term has never been adequately defined. Think about it: when the (lucky dog) writers for Sports Illustrated write the first paragraphs of their articles, do they ever take the time to define, say, what a football is?

Think about how many different definitions of “portfolio management” are out there. They all point toward some high-level, all-encompassing function that simultaneously “recognizes” the individual elements comprising the portfolio, while having a clear vision of the so-called big picture. Which is it? And, before you say “It’s both!”, ask yourself: if “portfolio management” is nothing more than some conflation of the micro and macro aspects of project/program management, why are those software packages that pretend to deliver “portfolio management” really little more than project management packages with a few asset management techniques thrown in? (For more on this, see my last blog.)

As I have blogged before, Isaac Asimov’s iconic Foundation trilogy introduced the concept of Psychohistory, discovered by the character Harry Seldon. Psychohistory is a structure that allows the future to be predicted via calculation. Obviously, such a structure has profound implications, most readily grasped by the politicians and captains of industry in Asimov’s projected future. Seldon and a group of scientists are sequestered away to a secret location to safeguard both the insights of Psychohistory and the existing (future) technology, since the galaxy has been calculated to be on the verge of a civilizational collapse. Seldon seeks to shorten the intervening “dark ages” by millennia.

While Asimov provides scant mathematical or theoretical insights into exactly how Psychohistory works, this reader came to the conclusion that it was some combination of game theory, risk management theory, and network theory. Interestingly enough, in the novels the whole scheme is nearly undone by the introduction of the character known as The Mule. The Mule has psychokinetic powers of persuasion, and nearly undoes the entire calculated recovery timeline. Being a mutant, his influence could not have been calculated or accommodated within the Psychohistory structure.

Like Psychohistory, the portfolio management branch of management science theory makes appeals to the capacity to evaluate situations and circumstances that are too complex to reduce mathematically, much less calculate optimal alternatives. Okay, it’s time for a little uncharacteristic (?!) Hatfield bluntness here. The products on the market today that claim to be capable of performing portfolio management are hopelessly inadequate to the task. So, too, is the body of literature that claims to address it (with the exception, of course, of my previously-mentioned, must-have book!). There are simply too many parameters to take into account. Adding to the mythology are several management science tenets that are accepted as absolutely true, but are, in fact, utterly invalid. As long as these tenets cling to portfolio management software and theory like Great Lake lampreys, neither should be taken seriously. Some of the most notable of these tenets include:

·         The point of all management is to maximize shareholder wealth.

·         Risk Management techniques apply to all potential project events, both positive and negative.

·         Quantitative Analysts, or “quants,” on whom the seeming whole of Wall Street investors depend, can consistently generate usable causal analysis of market trends based on observations of thousands of data points pertaining to the various markets.

Okay, let me go ahead and pull the pin on my rhetorical grenade and roll it out on top of the board room table. Each of the assertions in the previous three bullets is demonstrably false. Want to know the truth about them?

Well, to tempt a reputation as a tease, there are two ways for my readers to become informed about this particular topic: either keep reading this blog, or buy my previously-mentioned recently-released, must-have book. The more clever among my readers, who want more on this topic, can post challenging comments and provoke a response -- theoretically.