{"id":12325,"date":"2014-08-14T14:23:01","date_gmt":"2014-08-14T18:23:01","guid":{"rendered":"http:\/\/n2value.com\/blog\/?p=12325"},"modified":"2014-08-14T14:28:32","modified_gmt":"2014-08-14T18:28:32","slug":"what-medicine-can-learn-from-wall-street-part-4-portfolio-management-and-complex-systems","status":"publish","type":"post","link":"https:\/\/n2value.com\/blog\/what-medicine-can-learn-from-wall-street-part-4-portfolio-management-and-complex-systems\/","title":{"rendered":"What Medicine can learn from Wall Street – Part 4 – Portfolio Management and complex systems"},"content":{"rendered":"

\"attrib:<\/a>Let\u2019s consider a single security trader.<\/p>\n

All they trade is IBM.\u00a0 All they need to know is that security and\u00a0 its included indexes. \u00a0But start trading another security, such as Cisco (CSCO), while they have a position in IBM, and they have a portfolio<\/strong>. \u00a0 Portfolios behave differently – profiting or losing on an aggregate basis from the combination of movements in multiple securities. \u00a0For example, if you hold 10,000 shares of IBM and CSCO, and IBM appreciates by a dollar while CSCO loses a dollar, you have no net gain or loss. \u00a0That\u2019s called portfolio risk<\/a>.<\/p>\n

Everything in the markets is connected. \u00a0For example, if you’re an institutional trader, with a large (1,000,000 shares +) position in IBM, you know that you can\u2019t sell quickly without tanking the market.\u00a0 That’s called execution risk<\/a>.\u00a0 Also, once the US market closes (less of a concern these days than 20 years ago) there is less liquidity.\u00a0 Imagine you are this large institutional trader, at home at 11pm. \u00a0 A breaking news story develops about a train derailment of toxic chemicals near IBM\u2019s research campus causing fires. \u00a0 You suspect that it destroyed all of their most prized experimental hardware which will take years to replace. \u00a0Immediately, you know that you have to get out of as much IBM as possible to limit your losses. \u00a0However, when you get over to your trading terminal, the first bid in the market is $50 lower than the price that afternoon for a minuscule 10,000 shares. \u00a0If you sell at that price, the next price will be even lower for a smaller amount. \u00a0 You\u2019re stuck. \u00a0However, there is a relationship between IBM and the general market called a\u00a0beta<\/a>\u00a0which is a correlation coefficient.\u00a0\u00a0Since you cannot get out of your IBM directly, you\u00a0sell a defined number of short S&P futures in the open market to simulate a short position in IBM. \u00a0You\u2019re going to take a bath, but not as bad as the folks that went to bed early and didn\u2019t react to the news.<\/p>\n

A sufficiently large portfolio with >250 stocks will approximate broader market indexes (such as the S&P 500 or Russell index) depending upon composition. \u00a0It’s beta will be in the 0.9-1.1 range with 1.0 equaling a perfect correlation coefficient (r)<\/a>. \u00a0Traders attempt to improve upon this expected rate of return by strategic buys and sells of the portfolio components. \u00a0Any extra return above the expected rate of return of the underlying is alpha. \u00a0 Alpha<\/a> is what you pay managers for instead of just purchasing the Vanguard S&P 500 index<\/a> and forgetting about it. \u00a0It’s said that most managers underperform the market indexes<\/a>. \u00a0A discussion of Modern Portfolio Theory is beyond the scope of this blog, but you can go here<\/a> for more.<\/p>\n

So, excepting an astute manager delivering alpha (or an undiversified portfolio), the larger & more diversified the portfolio is the more it behaves like an index and the less dependent it is upon the behavior of any individual security. \u00a0Also, without knowing the exact composition of the portfolio and it’s proportions, it’s overall behavior can be pretty opaque.<\/p>\n

MAIN POINT: The portfolio behaves as it’s own process; the sum of the interactions of its constituents.<\/strong><\/p>\n

 <\/p>\n

\"Courtesy<\/a>I postulate that the complex system of healthcare delivery behaves like a multiple security portfolio. \u00a0It is large, complex, and without a clear understanding of its constituent processes, potentially opaque. \u00a0The individual components of care delivery summate together to form an overall process of care delivery. \u00a0The over-arching hospital, outpatient, office care delivery process is a derivative process – integrating multiple underlying sub-processes.<\/p>\n

We trace, review, and document these sub-processes to better understand them. \u00a0Once understood, metrics can be established and process improvement tools applied. \u00a0The PI team is called in, and a LEAN\/Six Sigma analysis performed. \u00a0Six sigma process analytics typically focus on one sub-process at a time\u00a0to improve its efficiency. \u00a0Improving a sub-process’ efficiency is a laudable & worthwhile goal which can result in cost savings, better care outcomes, and reduced healthcare prices.\u00a0 However, there is also the potential for Merton’s ‘unintended consequences<\/a>‘.<\/p>\n

Most importantly, the results of the six sigma PI need to be understood in the context of the overall enterprise – the larger complex system. \u00a0Optimizing the sub-process when causing a bottleneck in the larger enterprise process is not progress!
\nThis is because a choice of the\u00a0wrong metric<\/a>\u00a0or overzealous\u00a0overfitting\u00a0may, while improving the individual process, create a perturbation in the system (a \u2018bottleneck\u2019) the negative effects of which are, confoundingly, more problematic than the fix. \u00a0Everyone thinks that they are doing a great job, but things get worse, and senior management demands an explanation. \u00a0 Thereafter, a lot of finger pointing occurs.\u00a0 These effects are due to dependent variables\u00a0 or feedback loops that exist in the system\u2019s process. \u00a0Close monitoring of the overall process will help in identifying unintended consequences of process changes. \u00a0I suspect most senior management folks will recall the time when an overzealous cost-cutting manager decreased in-house transport to the point where equipment idled and LOS increased.\u00a0 I.E. The .005% saved by patient transport re-org cost the overall institution 2-3% until the problem was fixed.<\/p>\n

There is a difference between true process improvement and goosing the numbers<\/a>. \u00a0I’ve written a bit about this in\u00a0real vs. fake productivity\u00a0and my post about\u00a0cost shifting<\/a>. \u00a0I strongly believe it is incumbent upon senior management to monitor middle management & prevent these outcomes. \u00a0Well thought out\u00a0metrics\u00a0and clear missions and directives can help. \u00a0Specifically – senior management needs to be aware that optimization of sub-processes exists in the setting of the larger overall process and that optimization must also optimize the overall care process (the derivative process) as well. \u00a0 An initiative that fails to meet both the local and global goals is a failed initiative!<\/p>\n

It’s the old leaky pipe analogy – put a band-aid on the pipe to contain one leak, and the increased pressure in the pipe causes the pipe to burst somewhere else, necessitating another band-aid. \u00a0You can\u2019t patch the pipe enough – too old. \u00a0The whole pipe needs replacement. \u00a0And the sum of repairs over time exceeds the cost of simply replacing it.<\/p>\n

I\u2019m not saying that process improvement is useless – far from it, it is necessary to optimize efficiency and reduce waste to survive in our less-than-forgiving healthcare business environment. \u00a0However, consideration of the ‘big picture’ is essential – which can be mathematically modeled. \u00a0The utility of modeling is to gain an understanding of how the overall complex process responds to changes – to avoid unintended consequences of system perturbation.<\/p>\n","protected":false},"excerpt":{"rendered":"

Let\u2019s consider a single security trader. All they trade is IBM.\u00a0 All they need to know is that security and\u00a0 its included indexes. \u00a0But start trading another security, such as Cisco (CSCO), while they have a position in IBM, and they have a portfolio. \u00a0 Portfolios behave differently – profiting or losing on an aggregate […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[8,2,3,6],"tags":[],"class_list":["post-12325","post","type-post","status-publish","format-standard","hentry","category-finance","category-healthcare","category-physician-executives","category-process-analytics"],"jetpack_publicize_connections":[],"aioseo_notices":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4mtfP-3cN","jetpack_sharing_enabled":true,"jetpack_likes_enabled":true,"_links":{"self":[{"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/posts\/12325","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/comments?post=12325"}],"version-history":[{"count":6,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/posts\/12325\/revisions"}],"predecessor-version":[{"id":12333,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/posts\/12325\/revisions\/12333"}],"wp:attachment":[{"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/media?parent=12325"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/categories?post=12325"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/n2value.com\/blog\/wp-json\/wp\/v2\/tags?post=12325"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}