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What Is the Boyd Model?

Ray Hawk
Ray Hawk

The Boyd model is a method for rapid adaptation to circumstances based on a military strategy developed by Colonel John Richard Boyd, an officer in the United States Air Force who served in both the Korean and Vietnam wars. The acronym most often used to describe how the model works is observation-orientation-decision-action (OODA), or the OODA Cycle. The principle behind it is that adaptation to unexpected challenges before they occur, or more rapidly than the challenges can present themselves, facilitates getting ahead of the curve in terms of mastering unexpected situations. The model has been used for everything from military strategy to library science and stock investing. Boyd used his model to promote the development of the principle that rapid maneuverability of forces, and processing of the OODA decision loop over and over, was a primary function of success and survival in any environment.

For the financial investment arena, the Boyd model incorporated the Black-Scholes formula, which has led to a large increase in options trading in recent years. The Black-Scholes formula is a differential equation initially developed in 1973, which calculates the rate of change of an investment's value based on the rate of change of other factors in the market. The formula is used to minutely estimate the value of a stock option so that the underlying asset that the option is based upon can be bought and sold with minimal risk. Together, both forms of approach to investing caused a large increase in activity in the derivative market, which now appeared to be more mathematically predictable. The derivatives market is known to fluctuate radically depending on many levels of market data, including a commodity's value, currency exchange rates, interest rates, and more.

Man climbing a rope
Man climbing a rope

Using the Boyd model in analyzing corporate finance positions was seen as especially applicable to difficult-to-quantify private equity situations. Where a company is not publicly traded, it doesn't present the open financial reporting that is used to evaluate companies that are. The OODA cycle involved collecting any data available on a company as rapidly as possible using technical investment mathematical formula to analyze it, and acting on the information before it changed. By adapting to predicted valuations and market changes before they occurred, the Boyd model suggested that such actions shaped future events and gave a preparatory advantage to organizations oriented towards that outcome.

Boyd's theory is a sophisticated system built upon a basic premise. Its underlying belief is that anticipation and analysis of likely future outcomes is a more adaptable approach than waiting for events to occur and then responding to them quickly. American author Robert Greene, who focuses on the topics of business strategy, has stated that the OODA approach to problem solving is applicable to any competitive environment, from politics to sports to the natural predator/prey world.

When reality presents rapid changes for which cannot be adequately accounted, organizations and individuals tend to fall back on old methods of problem solving. Where the Boyd model is focused on competitive advantage, its primary aspect is speed and the elimination of preconceptions. It encourages looking at trends, then abandoning foundational ideas about what is supposed to happen and instead reacting to the trends before competitors can. The Boyd model was built based upon the analysis of successful fighter pilots in combat, and is now seen as applicable to any dynamic, fast-changing set of circumstances. The equations used in the financial markets for the Boyd model and Black-Scholes formula are complex, but their primary functions are to illuminate trends that are not obvious even to the trained observer.

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