Monday, September 26, 2011

Stenosophism: Short term smart, long term stupid.

One of the findings in Dorner's book is that human beings seem to have a hard time recognising temporal relationships. Causal relationships which are closely linked in time are far more easily recognised that events that are separated by weeks and years. Most human beings are short term orientated, concentrating on the concrete, here and now and the ability to abstract and take the long term view seems rare.  I am unaware of any mainstream political or economic theory which takes this into account, which is strange because of obviousness to anyone who has to deal with the public. (which makes me think that many theoreticians have limited public contact, especially with the proletariat)

The extinction of the Passenger Pigeon is an interesting example that illustrates this phenomena. No one actually set out to exterminate the Passenger Pigeon, a bird of once amazing superabundance,  but each hunter with a gun and each farmer 'who destroyed its habitat on his own private land, ensured that i the species became extinct. It was a classic tragedy of the commons result.

It's a phenomenon that doesn't seem to get much intellectual attention from the Right, especially from the free market advocates, which is a shame.

Many of the intellectual Right harbor the same intellectual pathology of the Left, namely, that of the assumption of the rational man when modelling human choice. Political theory, much like economic theory does not spend much time discussing the reality of the stupid man, which is a shame, since many of the problems in these disciplines are better understood by assuming that the bulk of the actors in question are morons.

It needs to be remembered that Dr Dorner's experiments were done on college graduates, people from the right hand side of the bell curve and his findings make for depressing socio-political prognosis. If the smart half of the bell curve has a hard time understanding things, what hope in hell does the left hand side of the curve have? Dorner's findings show that even with the assistance of instruction, many people can't grasp even moderately complicated issues, especially if they're temporally separated.  The end conclusion of his work-and anyone who has spent any time try to explain complex subjects to the public-is that the the vast bulk of humanity is cognitively limited.

Now, we need to understand what is meant by cognitively limited. It does not mean low IQ, what it means is the inability to see inter-relationships amongst disparate variables. It's the inability to perform multiparamentric analysis that marks the cognitively limited. The "small picture" takes precedence over the big one, because the big one is unable to be grasped. (And here we're not even talking about ill will, just simple lack of ability). This has important financial implications.

The problem lays with the concept of rationality. The man with limited cognitive ability acts rationally with regard to the data that he has but he has an incomplete data set: He operates within a smaller, more local universe.  The problem then with rationality is that it needs to be qualified.  Rationality for most most people is "small picture" rational,  and very few people are "big picture" rational.  As far as I'm aware, no one seems to have given a name to this limited from and rationality, which I  propose be called Stenosophism: (gk steno=narrow, sophia=wisdom)

In a completely free market, the price discovery mechanism is the end result of the transaction between the seller and the buyer. In such a system, capital is dynamically allocated according to expected profit, and as such, the capital structure will reflect the cognitive abilities of the participants. Short term success is incidental to long term sustainability since the factors that influence long term sustainability have not even been grasped. Herein lays the origin of the business cycle.

Bubbles arise because the stenosophists literally don't see the bubble forming. Ponzi schemes appear perfectly rational to the cognitively limited, as today's small profits are more real than tomorrows abstract massive losses, and capital is allocated according to their limited understanding of events which is ultimately unsustainable. The small pool of people who do see the bubble are ignored and the very forces that unleash the bubble prevent it from being stopped. (The Austrian concept, that artificially low interest rates send the wrong "price information" to participants certainly fuels the fire, but smart investors can arrive at their own determination of the true interest rate. It's the unthinking that accept them at face value).

The tragedy-of-the-commons type of outcome comes about from the "stenosophistic" utlisation of the commons.  The long term sustainability of the common is not even entertained by the user, rather the here and now is all that matters. No one actually set out to wipe out the Passenger Pigeon, yet everyone did.

Now, because the vast majority of market participants are stenosophistic, it means that most market decisions are "small picture" decisions and long-term-big-picture type of market goods have a hard time surviving is a stenognostic market place. Alfred Kahn wrote about it with regard to the "tyranny of small decisions". Here lays a paradox of the free market, being completely free to chose might mean less choice. It's called market failure.

Ferdinand Bardamu copped a lot of heat from Chuck Ross with regard to his defence of the public ownership of private utilities. I feel that Ferdinand's position is, to a degree, justified by the stenognostic nature of the market. Apart from monopoly concerns( A different and yet important issue) most shareholders are short term orientated. Today's CEO do not usually have lifetime commitments to their companies and are rewarded on short term performance, and most customers are seeking to switch to the provider who will provide initially the cheapest short term supply. The entire market place is geared toward short term profits at the expense of long term economic sustainability. Investment in maintenance and contingency capital are long term expenses which are frequently sacrificed for short term boosting of profit. The net result that that the service becomes unreliable and run down, and given the monopolistic nature of utility provision, expensive.

This also raises the subject of economic efficiency.  What do we mean by efficient? For the stenognostic it means short term efficiency, and such a man can always find "savings" in any traditionally run business by cutting away all the "fat"; except the that "fat" is frequently long-term essential, and all the stuff that was trimmed ends up eventually needing to be replaced (always at greater expense). Corporate restructuring, thy name be stenognosis. The saga of the Boeing Dreamliner is a classic example of this form of corporate stupidity.  (The link in the story is definitely worth a read.). Note, the CEO who made the decision to outsource has gone to Ford. Boeing is stuck with the costs of his decisions.

The problem is fundamentally that certain necessary utilities, because of their common-good-nature, need to be managed in such a way to ensure their long term provision in an environment that rewards and punishes in the short term: The market has to be protected form itself and therefore a degree of regulation of the market is necessary to stop it from doing stupid things, especially with regard to common-good community assets. In a free market, ownership of a community-vital asset is not contingent on having benevolence and wisdom.  It stops being of of purely personal interest when it becomes an essential community interest.

Sunday, September 18, 2011

The Logic of Failure.

Let me first begin by saying that this is a very good book, not for its writing style but for the scientific data it presents with regard to human cognitive limitations. The problem with authors that write well, is that frequently their books are more appreciated for the quality of their expression rather than the subject matter dealt with. Two authors particularly come to mind: Orwell and Mencken, both of whom seem to be remembered more as literary figures rather than political theorists. This is a shame since both had made profound insights into modern "populist" politics which seem to be overlooked, as the authors are considered more writers than theorists: their writing considered more "art" than "science".

Dietrich Dorner's writing style ensures that he will not suffer the fate, as his book reads more like a technical report on human cognitive limitations rather than a literary work, and as such, is less likely to be dismissed as opinion rather than fact.

David Foster at Photon Courier, to whom I'm indebted for bringing to my attention this book, has a very good review of it over at his site which I would suggest that you read. He gives a good rundown of some of the experiments that Dorner ran and of their results. My interest is mainly in his conclusions and with the sociological implications of the results.

If we could summarise Dorner's findings they would be:

1) Most people are terrible at dynamic multiparametric systems analysis. Even when there are only a limited number of variables, most people can't get it right.

2)People have a terrible time in understanding events that are related but are temporally separated. If action x results in result y immeadiately, the cause and effect link is grasped relatively easily, but the further the separation of effect from cause, the less likely the link is to be grasped.

3)People have a hard time keeping situationally orientated, tending to focus on the big picture at the expense of the details, or vice versa.

4) Most people have a hard time understanding the situation. Either acting too  quickly, acting too slowly, ignoring data that doesn't fit their mental model or making data up to provide a coherent model. In both cases the mental model is chosen over the reality of the situation. Reality denial, in some form or other is integral to many people's cognitive model of the world.

The bottom line is the most people trying to understand reality do it poorly. The real kicker in Dormer's studies is that the participants are university graduates and professionals, people from the right hand side of the IQ curve.  While he did not explicitly study IQ vs multiparametric task performance, he noted that there seemed to be no correlation between IQ and task success. (Personally, when this matter is looked into, I feel that Muliparametric ability will peak at about the 120-130 range, dropping off rapidly at either end: either stupid or Aspergy, See Roissy, Question 15.)

Another interesting finding in Dorner's book was with regard to what happened when attempts were made to help people overcome their cognitive limitations through training and instruction. Dorner describes the experiment in detail:
We divided the Greenvale participants into three groups: a control group, a strategy group, and a tactics group. The strategy and tactics groups received instruction in some fairly complicated procedures for dealing with complex systems. The strategy group was introduced to concepts like "system ... .. positive feedback," "negative feedback," and critical variable" and to the benefits of formulating goals, determining and, if necessary, changing priorities, and so forth. The tactics group was taught a particular procedure for decision making, namely, "Zangemeister efficiency analysis."'

After the experiment, conducted over several weeks, the participants were asked to evaluate the training they had received; figure 39 shows the results. The members of the strategy and tactics groups all agreed that the training had been "moderately" helpful to them. The members of the control group, who had received training in some nebulous, ill defined "creative thinking," felt that their training had been of very little use to them. The differences in the evaluations are statistically significant. If we look at the participants'
actual performance as well as at their evaluations of the help they thought they got from their training, however, we find that the three groups did not differ at all in their  performance.

Why did the participants who had been "treated" with certain procedures think this essentially useless training had been somewhat helpful? The training gave them what I would call "verbal intelligence" in the field of solving complex problems. Equipped with lots of shiny new concepts, they were able to talk about their thinking, their actions, and the problems they were facing. This gain in eloquence left no mark at all on their performance, however. Other investigators report a similar gap between verbal intelligence and performance  intelligence and distinguish between "explicit" and "implicit" knowledge.' The ability to talk about something does not necessarily reflect an ability to deal with it in reality.

You can't put in what God's left out.

If we think about this last experiment for a minute, its findings are profoundly disturbing. It would appear that theoretical problem solving knowledge does not necessarily translate to practical problem solving knowledge.  Buisness school graduates do necessarily make good businessmen. Perhaps one of the reasons why Western economies are faltering at the moment is because there are thousands of graduates from business schools occupying positions in senior management who can "talk the talk" but cannot "walk the walk".

Dorner's book also has implications for political theory: Take for example democracy. It would appear that the average man is suited to understanding simple and immediate problems and such would vote intelligently on such issues, but what about complex issues with long term consequences? Democratic government, given human cognitive limitations, is surely to fail over the long term since the bulk of men are not able to grasp the long term consequences of even moderately simple decision. Democracy (even tyranny) is ultimately corrupted by its own stupidity. Indeed as Dorner points out earlier in his book:
Can we as citizens ever have a complete understanding of the issues on which we are asked to pass judgment on Election Day? We would have to spend all our time reading, studying, and reflecting to reach sound decisions about nuclear power, military spending, immigration, economic policy, health-care reform, and so on and so on. No one can do that. We have to work, eat, and steep sometime, as well. And it Is not just the normal citizen who lacks time to gather information. Politicians faced with the need to make a decision will rarely have time to digest even readily available information, much less to pursue new lines of inquiry.
And yet, it is vital that citizens, or a least the people that make the decisions, do have an understanding of reality, otherwise the wrong decisions are made and civilisations eventually collapse. The problem is though, as Dorner has shown, that even if you limit your decision making to the right side of the bell curve there is only a small number of people that can think appropriately. The ability to perform dynamic multiparametric systems analysis is rare. In a democratic system, where it ultimately boils down to mob opinion,  the system is biased toward the stupid, or more charitably, the intellectually limited. Each iteration of the democratic process more accurately reflects the mob mindset. To quote Mencken:
The larger the mob, the harder the test. In small areas, before small electorates, a first-rate man occasionally fights his way through, carrying even the mob with him by force of his personality. But when the field is nationwide, and the fight must be waged chiefly at second and third hand, and the force of personality cannot so readily make itself felt, then all the odds are on the man who is, intrinsically, the most devious and mediocre—the man who can most easily adeptly disperse the notion that his mind is a virtual vacuum. The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart's desire at last, and the White House will be adorned by a downright moron.

Mencken wasn't being cruel or vindictive in his quote, rather the a reflective consideration with regard to the operation of cognitive limitation in a democratic system leads to the same conclusion. Conservative thinkers are rightly concerned with the subject of human nature, but area that has been neglected is human cognitive limitation.  Our constitutions are designed to thwart malice, but there's no defence against stupidity. 

Monday, September 12, 2011

Unintended Economic Consequences.

From the book Before the Deluge: A portrait of Berlin in the 1920's.

The survivors smile now at the madness of 1923[Ed: Wiemar Hyperinflation], but the destruction of an economy brings considerable suffering to the poor and the helpless, and even though the inflation made everyone poor, it made some people poorer than others. Louis Lochner, who arrived in Berlin during this period and eventually became bureau chief for the Associated Press, got the usual first impression of "cafe's crowded with stylishly garbed ladies" but soon found a different story on the side streets off the fashionable boulevards. "I visited a typical Youth Welfare Station," he said later. "Children who looked as though they were eight or nine years old proved to be thirteen. I learned that there were then 15,000 tubercular children in Berlin; that 23 percent of the children examined by the city health authorities were badly undernourished." The old were equally helpless. One elderly writer named Maximilian Bern withdrew all his savings, more than 100,000 marks, and spent them on one subway ticket. He took a ride around Berlin and then locked himself in his apartment and starved to death. "Barbarism prevailed," said George Grosz. "The streets became dangerous. . . . We kept ducking in and out of doorways because restless people, unable to remain in their houses, would go up on the rooftops and shoot indiscriminately at anything they saw Once, when one of these snipers was caught and faced with the man he bad shot in the arm, his only explanation was, 'But I thought it was a big pigeon.'"

The fundamental quality of the disaster was a complete loss of faith in the functioning of society. Money is important not just as a medium of economic exchange, after all, but as a standard by which society judges our work, and thus our selves. If all money becomes worthless, then so does all government, and all society, and all standards. In the madness of 1923, a workman's work was worthless, a widow's savings were worthless, everything was worthless. "The collapse of the currency not only meant the end of trade, bankrupt businesses, food shortages in the big cities and unemployment according to one historian, Alan Bullock. "It had the effect,which is the unique quality of economic catastrophe, of reaching down to and touching every single member of the community in a way which no political event can. The savings of the middle classes and the working classes were wiped out at a single blow with a ruthlessness which no revolution could ever equal.... The result of the inflation was to undermine the foundations of German society in a way which neither the war, nor the revolution of November, 1918 nor the Treaty of Versailles bad ever done. The real revolution in Germany was the inflation." [Ed]

"Yes, the inflation was by far the most important event of this period," says a seventy-five-year-old journalist, a woman who still lives in Berlin. She is white-haired and rather large, and she nibbles cookies as she talks, forgetting that it is already two in the morning. "The inflation wiped out the savings of the entire middle class, but those are just words. You have to realize what that meant. [Ed]There was not a single girl in the entire German middle class who could get married without her father paying a dowry. Even the maids-they never spent a penny of their wages. They saved and saved so that they could get married. When the money became worthless, it destroyed the whole system for getting married, and so it destroyed the whole idea of remaining chaste until marriage.

"The rich had never lived up to their own standards, of course, and the poor had different standards anyway, but the middle class, by and large, obeyed the rules. Not every girl was a virgin when she was married, but it was generally accepted that one should be. But what happened from the inflation was that the girls learned that virginity didn't matter any more. The women were liberated."
(Before the Deluge, Otto Friedrich)

I don't imagine that there has been an economics textbook which has linked the supply of money with the promotion of chastity, and yet in 1920's Germany it did have an effect. The economic theory of the time did not predict it, neither would it predict it today. But that's what happens when a specialty takes too reductionist a view of it's operation. It's not just about prices and efficient capital allocation, it's also about people.

Wednesday, September 07, 2011

Whittaker Chambers: Epilogue.

Whittaker Chambers died in 1961, never completing his epilogue to Witness. After his death, his wife and his friend Duncan Norton-Taylor,  rummaged through his correspondence and papers and collated some of them into the book Cold Friday, which I imagine was their attempt to finish what Chambers eventually meant to do. The book received some moderate praise from the right but overall it received a lukewarm reception, and like Chambers, was quickly forgotten.

The rejection of Chambers on the Left is easy to understand, as the Left's ideological position is based on the rejection of God. Of course there are many Christian Leftists, but that is simply to acknowledge that there are many stupid Christians who are unable to follow a train of thought to its logical conclusion. The real worry is why Chambers is effectively ignored by the Right.

It's my opinion that Chambers failure to gain traction on the right stems from the fact that Chambers was preaching a message no one wanted to hear: The West was dying because it turned it's back on God. This of course is an incomprehensible and in fact repugnant message to the majority of men, of both Left and Right, who view the world through the twin lenses of Positivism and moral relativism(i.e uncritical tolerance).  The sad fact of the matter is that the majority of the Right is just as Positivist as the Left, where they differ is on how best to implement their vision of a better society.

Lip service is given to the religious "fundies" of the right, but essentially every social reform that has weakened Western society, divorce, promiscuity, abortion, sexual license, militant feminism, multiculturalism etc, have not been checked, even when Conservatives have achieved power. The fact of the matter is that for many conservatives these things don't matter. All that matters is the economy (materialism) the rest is window dressing. Religious invocations for most Righties are practically irrelevant if not repugnant. The modern Right is part of the disease.

The thrust of Chambers message is that there will be no revival of the West until men turn back to God and Chambers's value lays in showing why this is so. However a  return to traditionalism will not suffice since its inability to react to the technological and social changes of the late 19th and Early 20th Centuries was intrinsic to the turning away from God in those times and in the embracement of ultimately ruinous ideologies.

Whilst Chambers felt that he left Communism to join "the losing side" it appears that he did not loose all hope.  Amongst his papers was found what is presumed to be the forward to the book he never wrote:
Spring has come to us again-a spring that I scarcely expected to see. Twice at night the wild geese have passed over. There may have been three such flights, since one night I dreamed that I saw hundreds flying overhead, so in the way we bear so much without ever quite waking to its meaning, I may have heard these wild geese honking without waking. The first flight, the venturesome, was small and the cries so faint that I was scarcely certain at first that I heard even them. The second flight was much bigger and so loud that I roused up, and I saw my wife already standing, listening, in the moonlight at the window. I said: "You hear the wild geese?" and fell asleep again. So my wife and I learned that, somewhat unaccountably, we had lived into another spring.

I began this book deliberately with spring as the point of resurging life because this is a book, in general, about death-the death of an age and the death of a man and what relationship, if any, the experiences bear to each other.
Chambers felt that the West could survive, but only if it returned to its religious roots, and he was under no illusion of how impossible the task seemed. He certainly offered no solutions or plan. The task then of the modern conservative is then to rebuild the temple which he must first do within himself. As the Master said:
But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.