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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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Sun Tzu's Art of War
Andrew Moe analyzes the relevance of the Chinese classic for today's speculator.
Though written over 2000 years ago, the Art of War by Sun Tzu is an oft quoted text describing a model for waging war. It is said to be the source of Mao Tse Tung's strategic theories. The complete model is long and complex, but is made up of individual rules that are simple and clear. What is most interesting to me is the survivability of the model. Written in a time when war was waged with four horse chariots and mailed troops (gladiator style), the model works perfectly today. Recent discussions here got me to pull out my old copy and handicap the way the US, Al-Queda and Iraq were waging war. Then I began to think in the context of the markets.
From a systems or modeling the market point of view, #14 and #28 and the author's footnote are particularly interesting. Many simple calculations are performed to model a complex system (war). We speak of simplicity and complexity within our models. Here is one that incorporates both into a model that has survived over 2000 years of ever-changing cycles in warfare.
Below, I have copied parts of the first chapter for your review. For the most part, I leave you to draw your own conclusions, but I expect certain risk managers have already done a full study. In the end, we fly our own flags into battle each day.
Chapter 1. Estimates
1. War is of vital importance to the state; the province of life or death, the road to survival or ruin.
2. Therefore, appraise it in terms of the five fundamental factors and make comparisons of the seven elements later named. So you may assess its essentials.
3. Theses factors are moral influence, weather, terrain, command and doctrine.
4-13. (Details the five factors)
14. I will be able to forecast which side will be victorious and which will be defeated. (by calculating the 5 factors)
15. If a general who heeds my strategy is employed, he is certain to win.
16. Having paid heed to the advantages of my plans, the generals must create situations which will contribute to their accomplishment.
17. All warfare is based on deception. (made famous in Wall Street)
18. Therefore, when capable, feign incapacity, when active, inactivity. (perhaps the derivatives expert?)
19. When near, make it appear that you are far away; when far away, that you are near.
20. Offer the enemy a bait to lure him, feign disorder and strike (this tactic would seem to work well for the US in both Iraq and Afghanistan).
21. When he concentrates, prepare against him, where he is strong, avoid him.
22. Anger his general and confuse him.
23. Pretend inferiority and encourage his arrogance.
24. Keep him under a strain wear him down. (bleed him - also consider the derivatives expert's comments)
25. When he is united, divide him.
26. Attack where he is unprepared.
27. These are the strategist's keys to victory.
28. Now if the estimates made in the temple before hostilities indicate victory, it is because calculations show one's strength to be superior to that of his enemy. If they indicate defeat, it is because calculations show that one is inferior. With many calculations, one can win. With few, one cannot. How much less chance of victory has one who makes none at all! By this means I examine the situation and the outcome will be clearly apparent.
(author's footnote to 28) * In the preliminary calculations, some sort of counting devices were used. The operative character represents such a device, possibly an abacus. We do not know how the various factors and methods were weighted, but obviously the comparison of relative strengths was a rational one. It also appears that two separate calculations were made, first on a national level, then on a strategic level. I have the edition translated by Samuel B. Griffith. It contains lots of additional material illustrating the use of each of the concepts in war throughout the ages.
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