Political shocks: We need a new form of legitimacy, not just economic growth

For once, the results of the first round of the French election lined up with the polls, with Macron and Le Pen through to the final round.  As always, most of the media gets obsessed with the horse race aspects of such elections. But there is no disputing CNN’s conclusion:

The result upended traditional French politics: Neither candidate hails from the establishment parties that have dominated the country for decades.

The previous order is already overturned, in yet another election.

What is going on here? This latest election, and the Trump and Brexit results, is most often talked about in terms of nationalism (or populism) versus globalism, or “closed” versus “open.”   But it’s something much deeper than a dispute over jobs or  trade or refugee policy.  It’s not a dispute over technique, or efficiency, but about goals.

I think it’s better understood as a dispute over legitimacy: what the state is for.  Electorates feel ignored and betrayed, both on the left and the right. The defenders of the current status quo, are faltering.

Let’s take a longer-term perspective, instead of getting hung up on the latest headlines. The US Constitutional Scholar and former National Security Council Official Phillip Bobbit wrote a history of the relationship between strategy and legal norms over the past 500 years, The Shield of Achilles: War, Peace, and the Course of History, in 2002. The nature of the state kept changing, he said, sometimes in response to political upheaval, sometimes in response to military change such as universal conscription. He traces the development from princely states to monarchical states to ‘state-nations’ to ‘nation-states’ to the current ‘market-state.’

The trouble is each transition between forms of state legitimacy happened through an epochal war.  Conflict and legal norms are intertwined, he argues. Each of those disruptive wars was resolved with a peace settlement, such as the Treaty of Westphalia or Versailles, which reset the norms of legitimacy for the next period.

Yet all constitutions also carry within themselves the seeds of future conflict. The 1789 US Constitution was pregnant with the 1861 civil war because it contained, in addition to a bill of rights, provisions for slavery and provincial autonomy. Similarly the international constitution created at Westphalia in 1648, no less than those created at Vienna in 1815 or Utrecht in 1713, set the terms for the conflict to come even while it settled the conflict just ended. (p xxiv)

Our own current system is the market-state. Its legitimacy, he said, is based on maximizing the opportunity of its people. The market-state is good at setting up markets, of course.  But:

unaided by the assurance that the political process will not be subordinated by the most powerful market actors, markets can become targets of the alienated and of those who are disenfranchised by any shift away from national or ethnic institutions.

In other words, every settled idea of political norms tends to wear out after five to ten decades, as the settlement of the previous great war recedes into history and political realities and military and strategic necessities change.  But politics gets stuck and the result is often a massive conflict, an epochal war, which shakes the international system to its core.


Since the 2008 crisis, it is obvious to many that the market-state is not delivering on its fundamental promise: maximizing opportunity. At the same time, its universalist notions of human rights (often perhaps developed as a rebuke to the Soviets in the Cold War) is redrawing the fundamental nature of democracy itself through massive demographic change and a fraying welfare state.  No wonder we’re seeing increasing conflict.

I’m not a believer in deterministic cycles. However,  history can sensitize us to the fact that no set of institutions lasts forever, and so we need to adapt.

The answer to the current turmoil is not to go back to the previous system of nation-states that itself arose on the ruins of empire. But neither is it to grimly defend a set of norms that made sense in 1945, or in an amended way, in 1970.  Many of those norms are cherished principles. On the previous record, that is likely to produce another epochal war – and the seeds of such extremism already seem to be flourishing.

We need to go forward instead. That requires a lot more creativity.

By | April 24, 2017|Adaptation, Current Events, Europe|Comments Off on Political shocks: We need a new form of legitimacy, not just economic growth

Let’s ban forecasts in central banks

People should learn from their mistakes, or so we usually all agree. Yet that mostly doesn’t happen. Instead, we get disturbing “serenity” and denial, and we had a prime example of it this week. So it is crucial we develop ways to make learning from mistakes more likely. I’d ban forecasts altogether in central banks if it would make officials pay more attention to what surprises them.

The most powerful institutions in the world economy can’t predict very well. But at least they could learn to adjust to the unexpected.

The Governor of the Bank of England, Mark Carney, testified before Parliament this week to skeptical MPs. The Bank, along with the IMF, Treasury, and other economists, predicted near-disaster if the UK voted for Brexit. So far, however, the UK economy is surprising everyone with its resilience.

So did Carney make a mistake? According to the Telegraph,

If Brexiteers on the Commons Treasury Committee were hoping for some kind of repentance, or at least a show of humility, they were to be sorely disappointed. Mr Carney was having none of it. At no stage had the Bank overstepped the mark or issued unduly alarmist warnings about the consequences of leaving, he insisted. He was “absolutely serene” about it all.

This is manifestly false and it did not go down well, at least with that particular opinion writer.

Arrogant denial is, I suppose, part of the central banker’s stock in trade. If a central bank admits to mistakes, then its authority and mystique is diminished accordingly.

I usually have a lot of regard for Carney, and worked at the Bank of England in the 1990s. But this response makes no sense. Central banking likes to think of itself as a technical trade, with dynamic stochastic general equilibrium models and optimum control theories. Yet the core of it has increasingly come down to judging subjective qualities like credibility, confidence, and expectations.

Economic techniques are really no use at all for this.  Credibility is not a technical matter of commitment, time consistency and determination, as economists often think since Kydland & Prescott. It is much more a matter of whether people consider you are aware of the situation and can balance things appropriately, not bind yourself irrevocably to a preexisting strategy or deny mistakes.  It is as much a matter of character and honesty as persistence.

The most frequent question hedge funds used to ask me about the Fed or other central banks was “do they see x?”  What happens if you are surprised? Will you ignore or deny it and make a huge mistake?  Markets want to know that central banks are alert, not stuck in a rut.  They want to know if officials are actively testing their views, not pretending to be omniscient. People want to know that officials aren’t too wrapped up in a model or theory or hiding under their desks instead of engaging with the real world.

It might seem as if denial is a good idea, at least in the short term. But it is the single most durable and deadly mistake in policymaking over the centuries. The great historian Barbara Tuchman called it “wooden-headedness,” or persistence in error.

The Bank of England, like other monetary authorities, issues copious Inflation Reports and projections and assessments. But it’s what they don’t know, or where they are most likely to miss something, which is most important. Perhaps the British press is being too harsh on Carney. Yet central banks across the world have hardly distinguished themselves in the last decade.

We need far fewer predictions in public policy, and far more examination of existing policy and how to adjust it in response to feedback. Forget about intentions and forecasts. Tell us what you didn’t expect and didn’t see, and what you’re going to do about it as a result. Instead of feedforward, we need feedback policy, as Herbert Simon suggested about decision-making.  We need to adapt, not predict. That means admitting when things don’t turn out the way you expected.

By | September 10, 2016|Adaptation, Central Banks, Communication, Decisions, Economics, Forecasting, Time inconsistency|Comments Off on Let’s ban forecasts in central banks

“Everyone was Wrong”

From the New Yorker to FiveThirtyEight, outlets across the spectrum failed to grasp the Trump phenomenon.” – Politico


It’s the morning after Super Tuesday, when Trump “overwhelmed his GOP rivals“.

The most comprehensive losers (after Rubio) were media pundits and columnists, with their decades of experience and supposed ability to spot trends developing. And political reporters, with their primary sources and conversations with campaigns in late night bars. And statisticians with models predicting politics. And anyone in business or markets or diplomacy or politics who was naive enough to believe confident predictions from any of  the experts.

Politico notes how the journalistic eminences at the New Yorker and the Atlantic got it wrong over the last year.

But so did the quantitative people.

Those two mandarins weren’t alone in dismissing Trump’s chances. Washington Post blogger Chris Cillizza wrote in July that “Donald Trump is not going to be the Republican presidential nominee in 2016.” And numbers guru Nate Silver told readers as recently as November to “stop freaking out” about Trump’s poll numbers.

Of course it’s all too easy to spot mistaken predictions after the fact. But the same pattern has been arising after just about every big event in recent years. People make overconfident predictions, based on expertise, or primary sources, or big data, and often wishful thinking about what they want to see happen. They project an insidery air of secret confidences or confessions from the campaigns. Or disinterested quantitative rigor.

Then  they mostly go horribly wrong. Maybe one or two through sheer luck get it right – and then get it even more wrong the next time. Predictions may work temporarily so long as nothing unexpected happens or nothing changes in any substantive way. But that means the forecasts turn out to be worthless just when you need them most.

The point? You remember the old quote (allegedly from Einstein) defining insanity: repeating the same thing over and over and expecting a different result.

Markets and business and political systems are too complex to predict. That means a different strategy is needed. But instead  there are immense pressures to keep doing the same things which don’t work in media, and markets, and business. Over and over and over again.

So recognize and understand the pressures. And get around them. Use them to your advantage. Don’t be naive.


By | March 2, 2016|Adaptation, Expertise, Forecasting, Politics, Quants and Models|Comments Off on “Everyone was Wrong”

Market Turmoil: Looking at the wrong things

The whole global economy is unravelling, if you believe some recent media claims. But oil and commodity price swings,  weaker emerging markets, or even renewed recession worries are not that unusual. In fact, this kind of news is completely normal and routine, as are the the scale of  share price falls so far Even a dip into recession in the US is a very normal occurrence. So why the air of panic?

I suggested in the last post  the underlying deeper concern is  whether policymakers have any “ammunition” left in the locker. The fear is any setback will feed on itself and turn into a downward spiral.  We are already at the zero bound on monetary policy, and we are still suffering a fiscal hangover from the 2008 crash. There are growing doubts among the public across the world about the competence of policymakers, which is also showing up in revolts against “the establishment.”  If there is another  downturn or any kind of problem, perhaps the policymakers can’t cope.

Let’s focus on economic policy, and leave the political side for later.  Are policymakers really out of options if there’s another market slide?  The answer is … actually yes, there are few effective policy options left. But the economy isn’t like a simple machine in which you can pull levers anyway. It’s complex, evolutionary and (mostly) resilient.  That means looking at the problem in a different way.

Avoiding Quackery

Central banks can always find something to do to appear busy or engaged. So we have seen the introduction of negative rates by the Bank of Japan last week, as well as talk of another round of QE by the Fed if recovery falls apart.

There were even rumors going around the other week that the Fed was intervening indirectly to affet the VIX, an index of market volatility, which is likely absurd.

In the end, the Fed could finally hire the helicopters Friedman and Bernanke mused about, and throw hundred dollar bills out the door in a new city every day to stimulate the economy. Would it help?

If a doctor doesn’t know what’s wrong with a patient, there are  always things which give the appearance of useful action, from trying random drugs right up to amputating limbs.

The question is whether the unconventional cure works, or perhaps has such severe side effects it makes things worse.  You can always try giving an aspirin to cure a heart attack, but it might not help much. If you get too unconventional in economic policy, just like in medicine you can end up in quackery, with snake oils, balsams and elixirs that promise to cure everything – with no actual effect.

And sometimes there is just nothing more even the most advanced medicine can do for a patient, despite the shiniest machines and telegenic doctors dramatically applying the defibrillator and yelling “clear!”  They give electric shocks to the patient .. .  while watching the screen trace flatline.  The same might be true in economic policy if the disease is serious enough.

The reality is the normal tools and cures are mostly played out. At best, the current “unconventional policy” central bank cures are very imperfect substitutes for cutting the main policy rate in a usual downturn. Sure, monetary policy can always increase the quantity of money, or try to push people into riskier assets by making riskless assets like bank balances or short-term bonds less attractive, or inflate away some debt claims. The markets mostly firmly believe that QE boosts the equity market (for a while.)

The problem is transmission from the financial sector to the real economy.  Or, as it sometimes called,  the old problems of “pushing on a string” or liquidity traps or animal spirits.   If there’s no demand for credit then the price of credit is irrelevant. If corporations are retaining profits and more focused on share buybacks than any new borrowing, then they don’t care about bond market conditions.

Also, it is hard to affect longer-term cycles or stock problems by acting on short-term flows. Ray Dalio argues we are at the end of a 70-year credit cycle, for example.

Buying time, not jump-starting the economy

Smarter central bankers know that there’s a limit to what they can do, or at least do effectively.  Just like most other economic phenomena, there is  diminishing marginal utility to most policy tools. The more realistic thinking behind the scenes  is at best they can buy time for other  processes to work themselves out, or perhaps offset some of the pain of restructuring and recovery in the real economy.  Central bankers can still stop bank runs or Bagehot-styles liquidity panics, but they can’t jump-start a whole economy.

And in any case perhaps, they sometimes think,  they are just letting politicians off the hook anyway. Monetary policy just enables the lazy politicians to avoid making tough decisions.  For example, fiscal policy – more government spending –  would be more effective than simply reducing the cost of money.

The trouble is fiscal policy has definite limits too (although the Paul Krugmans of the world have difficulty recognizing that.) Japan has spent trillions on stimulus and building infrastructure in the last two decades, running its debt to GDP up to more than 245%. There is plenty of concrete to show for it, but not a lot of vitality or growth. Bond markets more generally are potentialy fragile.

Getting Real

So if there are limits to stimulating demand, at some point you have to focus on the health of the real economy itself and the deeper sources of vitality and growth.  That  is where we need to look. The conventional economic answer here is you need to push through structural reform – more flexible labor markets, deregulation, more efficient tax collection, the usual range of things that the IMF always recommends.

Politicians have not been particularly good at that. Europe is always ducking such structural reform. A thousand initiatives to build “the next Silicon Valley” in Southeast Asia or Northern France or the Gulf States have faltered.

Economic Resilience

So here’s another thought:  perhaps even if the policymakers have no ammunition left, it might not matter so much.

The critical underlying assumption is this: how resilient is the economy anyway? How likely is to fix itself regardless of the policymakers?

Indeed, there is a long-standing and ferocious  argument that central bank intervention has usually made things worse. Attempts by the Fed to “fine-tune” the economy have usually led to errors and mistiming and moral hazard.  Central banks have a tendency to hit the accelerator just when they should be braking, and vice versa (in retrospect.) The belief in a “Greenspan put” or bank rescues has just made Wall Street reckless and greedy.

Indeed, until the 1930s, economists generally believed in laissez-faire. Intervention could only make things worse, delay adjustment and prolong the pain.  Andrew Mellon, Hoover’s Treasury Secretary, notoriously thought pain was necessary to “purge the rottenness in the system.”

Many libertarians still take this view, advocating a return to the gold standard or free banking. (I have got cornered by rich former used car dealers at the Cato Institute in DC arguing precisely that. At length.)

The Keynesian revolution denied all that. Sometimes the economy could get stuck in a much less desirable state or equilibrium and policymakers have to act.  And modern electorates flatly will not accept it. As Karl Polanyi argued, the gold standard would be impossible now because voters would revolt.

There is also the “BIS view” that the Fed in particular has overstimulated for two decades in order to avoid confronting the real problems. I’ll look at that another time.

I doubt the economy is inherently stable or that we can put much faith in equilibrium or simple “optimal control” ideas about policy.  But the economy is more resilient than we sometimes think.

So the most urgent question, we now see,  is what makes economies resilient?  And are we in trouble on that basis?    Maybe the economy isn’t like a machine where we can easily pull policy levers to make it change course. We’ve been looking for answers in the wrong places. It needs a different kind of thinking about economic policy, which involves complexity and leverage. Next.



By | February 7, 2016|Adaptation, Central Banks, Economics, Federal Reserve, Monetary Policy|Comments Off on Market Turmoil: Looking at the wrong things

Unlearn what you know, or go extinct


People can show remarkable dexterity (or self-deception) at deferring blame when a situation goes badly wrong, like a company collapse, or a foreign policy crisis. Or the FBI knocking on your door, asking for hard drives with top secret e-mails on them. How could someone have foreseen it? It was business-as-usual, everyone did it, it was tried and tested. The problem was impossible to see and therefore no-one is to blame. Or just bad luck.

Unfortunately, that's almost never true.

In every crisis we studied, the top managers received accurate warnings and diagnoses from some of their subordinates, but they paid no attention to them. Indeed, they sometimes laughed at them.

That’s the conclusion from one of the classic studies of organizational failures, Nystrom & Starbuck in 1984. Some people in a company generally always see problems coming (we’ve seen other research about “predictable surprises” here). But senior managers find it extremely difficult to “unlearn” parts of what they know.

Organizations succumb to crises largely because their top managers, bolstered by recollections of past successes, live in worlds circumscribed by their cognitive structures. Top managers misperceive events and rationalize their organizations’ failures. .. Because top managers adamantly cling to their beliefs and perceptions, few turnaround options exist. And because organizations first respond to crises with superficial remedies and delays, they later must take severe actions to escape demise.

Instead, the researchers say, managers try to “weather the storm” by tightening budgets, cutting wages, introducing new metrics or redoubling efforts on what has worked before. They typically waste time, and defer choices. In the meantime, the firm filters out contrary evidence, and often gets even more entrenched in its ways. This is normal corporate life.

… well-meaning colleagues and subordinates normally distort or silence warnings or dissents. .. Moreover, research shows that people (including top managers) tend to ignore warnings of trouble and interpret nearly all messages as confirming the rightness of their beliefs. They blame dissents in ignorance or bad intentions – the dissenting subordinates or outsiders lack a top managers perspective, or they’re just promoting their self-interests, or they’re the kind of people wo would bellyache about almost anything. Quite often, dissenters and bearers of ill tidings are forced to leave organizations or they quit in disgust, thus ending the dissonance.

And then one morning it turns out it’s too late, and there is no more time.

The only solution that reliably works, Nystrom and Starbuck say, is to fire the whole top management team if there are signs of a crisis. All of them.

But top managers show an understandable lack of enthusiasm for the idea that organizations have to replace their top managers en masse in order to escape from serious crises. This reluctance partially explains why so few organizations survive crises.

The only real hope is to adapt before you have to. But the much more likely outcome is senior decision-makers end up eliminated, and destroy their companies and their company towns and employees and stakeholders along the way.

Just think about what might fix this. It isn’t more information or big data , as it will probably be ignored or discounted. It isn’t forecasts or technical reports or new budgets or additional sales effort. It isn’t better or more rigorous theory, or forcing the troops to work harder.

It’s a matter of focusing on and looking for signs about how people change their minds. It’s about figuring out what might count as contrary evidence in advance, and sticking to it. If you’re a senior decision-maker, this might be the only thing that saves you, before some outside investor or opponent decides the only hope is to wipe the slate clean, including you. If you figure out you need it in time. Will you?


Looking for leverage instead of predictions

I’ve been throwing stones at prediction in the last few posts. Here’s another angle.  I’ve talked about the distinction between hedgehogs and foxes before. These differences in mindset go very deep and surface in all kinds of ways. Another way to put it is between a kind of academic analytic approach to decisions, and a practitioner’s or leader’s approach.

As Richard Rumelt puts it in his book Good Strategy Bad Strategy: The Difference and Why It Matters; –

Whereas a social scientist seeks a diagnosis that best predicts outcomes, good strategy tends to be based on the diagnosis providing leverage over outcomes.

Strategy is about doing something, he says,  not passively predicting or forecasting things. That means if you can’t take action, or shape the situation, you are very vulnerable. And the first thing to do is usually have a plan B.

True enough, a failed prediction may show up a wrong assumption or mistake. But by that point its usually too late. Practitioners have to survive another day, not develop parsimonious explanation and general theory that is true for all time.

That means you have to think about and test your assumptions before a big failure.  But most people find it extremely hard to see their assumptions, let alone test them and adjust their view.

In theory people should learn from their mistakes and failed predictions. In practice they most often don’t. It’s an anomaly. Or an exception. Or they knew all along anyway (i.e. hindsight bias).  The reality is people resist changing their minds, predictions or no predictions. They get too entrenched in a view. That’s the fundamental problem that needs solving.

By | May 12, 2015|Adaptation, Assumptions, Decisions, Foxes and Hedgehogs|Comments Off on Looking for leverage instead of predictions

Shock British election results and the sheep liver mentality

Today we had one of the biggest political surprises in recent memory. Instead of the expected hung UK parliament and endless coalition negotiations, David Cameron won an outright Conservative majority. Yesterday,  Labour leader Ed Milliband thought he had a good chance of moving into 10 Downing St in coming weeks. Instead, he has already moved into dark political oblivion, already resigning as party leader in disgrace.

The pollsters were wrong. But none of the pundits predicted anything like this, either. The politicians themselves were stunned. I wasn’t paying much attention, but I didn’t predict it either. What’s going on?

There’s a deeper pattern. I have been arguing for a long time that right at the top of the list of challenge decision makers face is one stark fact: experts and pundits and data-merchants are horrifically bad at prediction. That argument includes yesterdays’ post – forecasters can’t forecast. It applies to many of the biggest central bank decisions in the last two years.  In fact, the research shows the same applies to almost all the really big decisions since the second world war.

Why? Markets and political events are complex. And complex systems are inherently unpredictable, beyond short-term trend following.  Worse, it’s usually at the big turning points and big market-moving surprises that forecasters do worst. They produce overconfidence rather than accuracy.


It’s only human to want to forecast the future. The Romans tried to do it by examining sheep livers, and paid trained “haruspices” . They picked that up the Etruscans, who picked it up  from the Babylonians.


Diagram of sheep’s liver found with Etruscan inscriptions (wikipedia)

We might not use sheep livers any more, but large parts of the investment and business and policy communities still have the sheep liver mentality.

The way to stay alive and thrive is not to predict better, or have a better theory or even better data. It’s to adapt and evolve faster, despite all the pressures within organizations to do the opposite. It’s essential to test assumptions and develop resilience, instead of developing “rigorous” self-defeating models that don’t work.  And that requires a different way of thinking.

The real lesson here: Drop the sheep liver. It doesn’t work, even if you’d like it to.

By | May 8, 2015|Adaptation, Current Events, Europe|Comments Off on Shock British election results and the sheep liver mentality

Entrenched thinking and Greece

Investment adviser Ned Davis has a wonderful phrase which sums up how markets often work: you can be be right, or you can make money. (He wrote a book about it.) Everyone makes mistakes all the time, he says. Most of Wall Street is in the business of making predictions, but

Perhaps the biggest myth in financial markets is that experts have expertise and forecasters can forecast. The reality is that flipping a coin would produce a better record. [..] So if we all make mistakes, what separates the winners from the losers? The answer is simple – the winners make small mistakes, while the losers make big mistakes.

Investment survival is everything,  he says, and most of that comes from a willingness to recognize mistakes and adapt quickly.  Many investors make a blazing impact through one successful, “right” big prediction which turns out to be a lucky bet, but then almost inevitably flame out. Big heroic predictions tend to lead to overconfidence and meltdown.

Instead, what is needed for survival is in essence a kind of agility, and being overcommitted to one particular view as “right” or “correct” defeats that.  Davis advocates quantitative timing models and indicators, which I don’t believe in, but his effective point remains: you usually don’t do better by having better forecasts or information, but in how you change your mind in response to evidence.

As I’ve argued many times on this blog, people mostly don’t change their minds. People fall in love with a view.  Or they change with a lag, or in simple-minded imitation of what others are doing. That’s the main problem confronting decision-makers in financial markets and business, especially at senior levels.

That kind of rigidity has bedeviled discussion of events in Europe in recent years, because so much of it gets caught up with emotional commitments to (or sometimes against) the larger European integration project. For most euro enthusiasts, it’s not ultimately about exchange rates or economics. It’s the issue of deeper legitimacy of a project rooted in memories of the destruction of two world wars. The trouble is that can lead to very entrenched and moralized views on the issue.

But there tends to be a natural rhythm to most economic policy: successes cause side-effects which cause new problems. Media cycles exaggerate and then ignore problems. Market attention focuses on an issue and then wanes. Periods of apparent success set the grounds for subsequent failures, and vice versa. So the effective thing to do is avoid large mistakes about the ultimate success of decades-long projects and big commitments for or against, and look at how people are thinking and adapting to current evidence about specific problems. It’s about the right amount of flexibility now and responsiveness to the rhythms, not commitments about who the superpowers of the 22nd century will be.

In that sense, the latest round of “grexit” talk has been usefully more technical and local in focus, centering on the potential failure of Greece rather than the potential failure of the wider euro project. That has reduced the rigidity of the discussion so far, as the EU institutions and the Greek government play their game of chicken. But suspicions of “Anglo-Saxon speculators” are now surfacing again, as in these comments by Juncker. It’s a sign of rigidity.

What causes a game of chicken like this to go wrong and produce a crash or meltdown? Of course, people overestimate or misread their chances. (The Greeks may have done so far, but events are forcing them to reconsider. ) People believe their own propaganda.  It often happens decision-makers get so entrenched in a view they don’t realize the situation is moving against them. Looking at people’s stretchiness, or sensitivity to contrary evidence, is the key. And what they say is often a poor guide to how their underlying view is changing.

The other reason for crashes in games of chicken is that there are timing or side-effects which mean the situation gets out of control even if the participants realize to their horror too late that they need to change course.    This is often a matter of technical issues – things like cross-default clauses or the minutiae of how settlement systems work. I always think of it in terms of the mobilization railway timetables in the run-up to the First World War. Or, more recently, the bullet-to-the-heart impact of Lehman’s failure, which was far worse than the Fed or Treasury expected.

For the time being, the seemingly endless dragging out of the Greek drama is boring. But if the current scene is about Greek overconfidence and increasing desperation,  the next scene will probably be problems caused by EU overconfidence and hubris that they can control the situation. The notion of hubris, after all, is a Greek invention.


By | May 6, 2015|Adaptation, Current Events, Europe, Market Behavior|Comments Off on Entrenched thinking and Greece

Resisting new evidence, and fish

Much of the way we think in business and economics and markets is centered around what people ought to do, on the basis of some version of rational choice. So there is endless commentary on whether the Fed ought to raise interest rates sooner rather than later, for example, or whether the US ought to take more decisive action in the Middle East, or what strategy Apple or General Electric should adopt.

You probably read twenty or fifty arguments like this in the media or broker research just yesterday alone.

In practice, the more relevant and useful thing is to observe how people and organizations are amazingly prone to resist evidence altogether.  They don’t adapt. They never even get to the point of realizing there is a critical choice to be made.

Or they pretend they don’t have to choose. Or they prefer to wait until one option is “proven” beyond all reasonable, and unreasonable, and half-baked crazy doubt.

Perhaps the most famous thing written on leadership in the last fifty years is Warren Bennis’ book On Becoming a Leader. He says:

Organizations often go to absurd, even immoral lengths to ignore bad news – the auto industry’s silence on dangerous car and truck models is an egregious example. But authentic leaders embrace those who speak valuable truths however hard they are to hear. Nothing will sink a leader faster than surrounding him- or her-self with yes-men and women. (p xxii)

Yet it happens all the time. People simply can’t bring themselves to see contrary evidence in many situations, even when the survival of their career or company, or even country depends on it. They wake up when it is too late.

Decisions are likely to end up as catastrophes not so much because you choose the wrong option, as you refuse to see that there is a problem, or a choice to be made at all.

This is not usually because of “bias” in the classic sense, such as anchoring or representation or probability estimates. It is a matter of assumptions and “comfort” and selective use of information. It is a refusal to change your mind.

That is why it is usually more important to look at adaptive capacity than specific choices. According to Bennis,

.. the one competence I now realize is absolutely essential for leaders – the key competence – is adaptive capacity. Adaptive capacity is what allows leaders to respond quickly and intelligently to relentless change.

Much of that comes down to understanding the context. But it is very hard to do that from one fixed position.

Unfortunately, looking at our own context is as difficult for us as it is for fish to look at water. (p7)



By | April 16, 2015|Adaptation, Decisions|Comments Off on Resisting new evidence, and fish

The most important executive skill? “Thinking about your own thinking”

If only there was one key thing that a leader or trader could do to develop winning strategies, when markets get more challenging all the time.

There is. According to  UCLA’s Richard Rumelt, one of the most prominent thinkers on management strategy, in  Good Strategy Bad Strategy: The Difference and Why It Matters:

Being strategic is being less myopic – less shortsighted – than others. You must perceive & take account what others do not, be they colleagues or rivals. Being “strategic” largely means being less myopic than your undeliberate self.

It does not mean exhaustive information gathering and formal analysis. It does not mean two-hundred page binders of beautiful charts and tables (or elaborate central bank forecast reports)  It does not mean elaborate forecasts or expected-utility-based  “decision science”, let alone big data, although many businesses fervently believe in them.

We are all aware of the basic formal approach to making a decision. List the alternative, figure out the cost or value associated with each, and choose the best. But in [numerous examples he cites]  you cannot perform this kind of clean “decision ” analysis. Thus, the most experienced executives are actually the quickest to sense that a real strategic situation is impervious to so-called decision analysis. They know that dealing with a strategic situation is, in the end, all about making good judgments.

So what’s the answer?

This personal skill is more important than any so-called strategic concept , tool, matrix, or analytical framework. It is the ability to think about your own thinking, to make judgments about your own judgments.(p267).

It’s all about awareness, not microeconomic rationality or “paralysis by analysis.” I’ve talked to hundreds of the most senior policymakers and traders over the years. If there’s one thing I notice about the best of them, it’s they tend to be open and curious and engaged.  They want to think about issues from different angles.  It’s more about ability to test and learn than bias.

There’s been too much emphasis on “bias” in decisions. The solution is not some abstract ideal of formal analytical perfection that may take six months to arrive at. Instead, the thing to look at most is how people think and change their minds. It’s adaptiveness that counts – but as everyone knows, organizations find it extremely hard to adapt, and most people fiercely resist changing their minds.

The same conclusion recurs in different language whenever people look closely at successful decisions. (Compare Philip Tetlock’s distinction between “know one big thing” hedgehogs and “know many things” foxes. )

By | November 28, 2014|Adaptation, Decisions, Organizational Culture and Learning|Comments Off on The most important executive skill? “Thinking about your own thinking”