Are “data driven campaigns killing the Democratic Party?”

“Data driven campaigns are killing the Democratic Party,” argues this article on Politico.  It argues Democrats need to return to story-telling, and not put so much trust in analytics and modeling.

It is absolutely true that far too many people naively trust models and big data. But I don’t think Democrat defeats are the fault of the models. Instead, it’s a matter of recognizing what such models are good for. Analytics are much better at optimizing within a particular set of rules, of squeezing out inefficiencies and inconsistencies. They can maximize a given set of variables.

But models are much less good at telling you what isn’t in the model, or recognizing new features in the environment.  So they can optimize, but they can’t help you much at adaptation, recognizing new opportunities or threats.   It’s not to say that computers can’t do this, but it’s a much more difficult problem than running statistical tests on a set of data.

Storytelling may be a more effective means of communication than a scatterplot, to be sure. But figuring out how you need to change your story or recognize something you were not seeing is a very different matter. What if the Democratic Party needs to adapt or change the mix somehow? Just changing the communication technique doesn’t help with that. You also need to think about the message.

2017-02-21T10:18:53+00:00 February 10, 2017|Communication|

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.

2017-05-11T17:32:35+00:00 September 10, 2016|Adaptation, Central Banks, Communication, Decisions, Economics, Forecasting, Time inconsistency|

What happens when you have principles

How do we make sense of a week that rocked American public life to the core?

It’s been another appalling, disastrous few days for the GOP establishment in particular. It now appears Ted Cruz is the only contender with even the faintest hope of catching Trump in delegate counts. But Cruz is even more unacceptable to the party leaders than Trump, because is so hostile to current institutions and power structures.  Rubio has performed poorly in the latest round of states and is still in danger of losing Florida. As a result, the Republican party is in “meltdown”, “chaos”, “collapsing.” The Bush wing of the party has been utterly routed. How could this happen?

If you look at explanations by insiders, like Romney’s speech, you just can’t help noticing the overwhelming shock and disbelief that someone who doesn’t espouse conservative principles is doing so well out in the country among supposedly conservative voters.

And there lies a major blindspot. As I’ve often argued, it’s  assumptions and ways of thinking that get people into trouble fastest, rather than particular facts. They never even notice facts that don’t fit their view of the world.

One of the most important patterns is just this: whether people primarily think in terms of abstract principles. This often tends to go with extra education and jobs which require justification of actions or abstract thinking about rules, such as journalism or law or some kinds of politics. And academia is in many ways all about abstract principles.

So notice that the GOP establishment usually tend to define their position in terms of principles or abstract ideals such as limited government, strict adherence to the constitution, free trade, and usually a tendency to foreign intervention in the service of principles like democracy.

Set aside for a moment what you think of individual policies, whether they are right or wrong, and look at the pattern of thinking here, what people consider correct or appropriate or relevant. Some people find this impossible to do, in isolation from a sense of moral outrage or indignation.

That, however, is a sign it is not just a matter of politics. It’s a matter of ethics as well,  which is why so many people come to feel so strongly about it. It’s how you define the good, and the right, and the true, and for many the cause or purpose in life. No wonder people get intense about the issues.

Morality on the established view is a matter of universal principles and objective impartiality.

It’s a pattern that dates back centuries. Kant, for example, summed up morality as “Always act on the maxim that you can, at the same time, will that it be a universal law.” In other words, anything you do should be justifiable in all times and places and contexts. (You notice that this itself is a principle?)

So consider: this necessarily means that your own self-interest or inclinations cannot be in any way a basis for morality. Instead, you are moral insofar as you are impartial or unbiased between groups, and set up things so that they function according to impersonal rules. You tend to see individuals as rational autonomous agents, instead of people from a particular nation or culture, or time, or place, or background.

This view has a lot to be said for it. It is the reason, for example, we don’t see CEOs of large corporations exclusively hiring their cousins or brothers-in-law for top jobs. It is the basis for bureaucracy, in Weber’s sense; large organizations can’t run without following abstract rules and policies and procedures. Modern life depends in large part on restricting clans or extended families or parochial interests. So this way of thinking comes naturally to managers of large corporations or civil service administrators. The finest thing you can be is objective and impartial and unbiased.

WEIRD principles

Are you nodding your head? It is a view which is often felt to be so common as to be unquestionable. But it is actually comparatively rare. In the world as a whole, probably only 5% or less of people think this way.   Even in most developed countries, less than 20-30% of people think of morality or decisions in this way. As Jonathan Haidt put it in The Righteous Mind, such people (like you) are WEIRD, standing for  Western, educated, industrialized, rich, and democratic. Researchers..

 reviewed dozens of studies showing that WEIRD people are statistical outliers; they are the least typical, least representative people you could study if you want to make generalizations about human nature. Even within the West, Americans are more extreme outliers than Europeans, and within the United States, the educated upper middle class (like my Penn sample) is the most unusual of all.

Instead, most people typically believe morality is a matter of religious revelation, or custom, or tradition handed down through the centuries. Or a matter of honor and reputation. Or most of all, rules that bind together a particular group or community and promote its survival.  Group solidarity – loyalty, self-sacrifice, respect for community elders, observing group norms – count for far more than universal principles. The essence of morality is something like loyalty, pulling your weight for the group.

An Inevitable Flashpoint

Where is this difference between ways of thinking most likely to show up and turn into major clashes and mutual incomprehension? Well, take a look at the issues where Trump established himself and rocketed to the top of the field, immigration and torture of terrorists.

If you think in terms of principles, restrictions on immigration, or building a wall, are almost a perfect example of lack of impartiality, of violation of universal principles, of the need to treat everyone in an equal, non-discriminatory, unbiased way.  The essence of morality is to be impartial in these cases, and not favor the interests of a particular group like  current inhabitants. (You can see Merkel’s policy on refugees in the same light. )

But if you think of morality in terms of care and loyalty and support for your own community or group, or at least a morality that  is embedded in a particular set of  customs or traditions, it is the perfect example of near-traitorous disloyalty and lack of ethics, of foolish adherence to vacuous abstraction, or a mere cover for the self-interest and malicious intentions of billionaires, or big business.

Again, before you rush to be shocked at one view or the other, stay calm, step back and recognize that they exist, and they help explain not just the lack of communication but the sense of anger and  emotional energy right now. Immigration is almost bound to be a flash point between views.

And torture? It’s obviously a violation of universal principle, one of the worst that can be imagined. How could anyone support infliction of pain as a universal idea? But in the other view, it’s more a matter of reciprocity. It may be undesirable, but in a specific context exceptions can be made if it is for the defense of the group and merely responds to unfair actions by the other side, such as acts of terrorism. Treating people in a universal, unbiased way, on principle, simply isn’t important. (Cue gasps from the universal side.)

So the two sides are talking past each other, and simply don’t understand each other. Unfortunately, it’s likely that as a matter of voter arithmetic that universal rectitude may often come a distant second to voter self-interest. But the way of thinking among the elites define this as the very essence of lack of morality.

Incidentally, as the GOP prepares to tear itself apart over the definition of ” conservative”, the establishment view is more or less than the same as classic 19th-century liberalism.

And on the Democratic side? The Democratic party is mostly a coalition of groups who do act in terms of group solidarity – ethnic loyalty, or labor interests, or the interests of sexual orientation groups, plus rich, educated progressives who also define their view in terms of principles, with slightly  different emphasis: equality, welfare, government action to pursue rational principles, a different kind of liberalism.

There is a third kind of fundamental view as well, although it more often gets forgotten or ignored, and can reconcile or ameliorate some of these clashes. That is to see morality or decisions as a matter of balances, a golden mean.  But that’s a story for another time.

How people think counts.

2017-05-11T17:32:40+00:00 March 6, 2016|Assumptions, Communication, Politics|

Debates are ludicrous

What a stupid waste. So much air time and column inches on the Republican primary debate, but so little insight. Fox News got record ratings, sure, but because it promised to be a celebrity takedown of Donald Trump. Maybe TV news should try to get Beyoncé or Kim Kardashian to run for the Democratic nomination to help TV ratings at this rate, if it is all just about entertainment value and who looks good on tv.

For all the endless commentary, political journalists are notoriously only obsessed with the horse race aspect, who is up or down as of today, eight months before the main primaries.

The whole debate thing is a bit ludicrous. It doesn’t really test anything much you want in a nominee or President. As if Putin or OPEC are going to care about a witty comeback or a glib sound bite.

What we should do instead is give each candidate a description of the same situation – reports of a missile attack on a Navy ship, for example – with conflicting intelligence, partial information, state dept briefs, staff analysis, stacks of reports only some of which are useful, and give them an hour to make a decision and explain why. Let the candidates ask three questions for additional data or clarifications. Lock them in a room by themselves and make them decide , which is what you want to see presidents do.

The military play war games all the time , and companies have similar tests. It could be done in a fair way.

It’s not the only thing you want in a President, of course. The ability to make a brilliant speech or organize a massive government bureaucracy matter too. But the ability to make decisions under pressure in a crisis is the must-have, the essential factor, the deal-breaker. And if they are uneasy or lack confidence about being asked to make difficult decisions with incomplete information potentially exposed to scrutiny and criticism, they shouldn’t be in the running for a job which is all about precisely that.

An actual test like this wouldn’t happen, of course, because it would be way too risky and revealing. But this current charade of journalists asking “tough” questions and candidates avoiding gaffes is stupid. Politicians are expert at brushing off “tough questions”.

Debates are a network -TV era idea and institution, good for the 1960s and 1970s. There’s no reason why they should always be as central, any more than we should still send out election results by pigeon or steamship like the 1830s. There should be a tougher, better ,smarter way to test candidates in the internet era, mostly by getting them to DO something, not just pass off cliches to journalists. Choices under pressure will show more about ability and character than any podium soundbite.

After all, it’s only the leadership of the free world, the future of the nation, and the life or death of thousands -perhaps millions – of people that depend on this.


2017-05-11T17:32:41+00:00 August 8, 2015|Communication, Politics|

From Cat Fights to Successful Science

Here’s another way to look at the process of how people change their minds, because it’s so essential to figuring out decisions.  People are often amazingly insensitive to hard facts – even in hard science

We’ve known for a long time that the simple story about scientific advance, i.e  rigorous observation of objective facts, careful and rigorous weighing of evidence,  rarely fits how science has functioned in practice, let alone business or finance or markets. They don’t even do the ideal approach  in physics, let alone monetary policy.

So how do scientists change their minds? And where does the huge success of science come from, and what can the rest of us learn from that? Thomas Kuhn famously argued in the The Structure of Scientific Revolutions in 1962 that science moves in discontinuous jumps, which he called paradigm shifts. (I mentioned Kuhn before  here).  Scientists don’t alter their beliefs much for decades at a time, if ever. Contrary evidence is usually dismissed as a “puzzle” or “anomaly” until some new encompassing paradigm turns a field on its head.

But Kuhn was dismayed at the reception and exaggeration of his arguments in some quarters.  In the climate of the 1960s some seized upon it as overthrowing the authority of science altogether. Later, the “strong program” of sociologists of science argued that there was essentially no truth  or deeper legitimacy to science at all. It just was a veneer for power and self-interest.

Kuhn wanted nothing to do with this. He hated it. But he had to admit the microsociological studies shows more than ever that the actual process of laboratory life was not pure ethereal weighing of evidence either. (Think of the parallel with Kahneman & Tversky or Nisbett & Ross in the same time frame.)

Avoiding Cat Fights

So in a lecture in 1992 towards the end of his career, The Trouble with Historical Philosophy of Science,  Kuhn laid out a different justification for science. Facts often clearly weren’t enough to settle disputes, he said.

Observations, that is, including those designed as tests, always left room for disagreement about whether some particular law or theory should be accepted. That space for disagreement was often exploited: discrepancies that to an outsider looked trivial were frequently matters of deep import to those on whom the research impinged.


And disagreement had a way of getting personal, even within the scientific community. Fraud was rare,

But failure to acknowledge contrary findings, the substitution of personal innuendo for argument , and other techniques of the sort were not. Controversy about scientific matters sometimes looked  much like a cat fight.

You might say the same of most issues in polities or business, but science is supposed to be more effective. So how did people ever reconcile differences to reach some consensus on science? How did science actually work?

Changes in Belief

It was not by seeking Truth for all Time, correct Belief in capital letters, Kuhn concluded. There was no pure, neutral, rational Archimidean platform.  Instead, it was about understanding changes in belief.

From the philosophical point of view, the difference between these two formulations – the rationality of belief and the rationality of incremental change in belief- is vast.

So what, you might ask? Kuhn doesn’t say this, but remember that the whole basis of economics and the standard expected utility method of making decisions is based on the rationality of belief,  not understanding changes in belief.

You see now? It’s the second one I’m interested in, and, as Kuhn suggests, the difference that makes is vast. You don’t really understand decisions by looking for normative universal theory, but by looking at how people change their minds in practice.

This might also remind you of Lindblom’s criticism of the way people think about decisions, including in institutions like the Fed. (I looked at it here.) Decisions are too complex to carry out in a wholesale rational-comprehensive way, Lindblom said. So in practice people have little or no choice but to proceed by successive limited comparisons, branching out from existing positions, or “muddling through.”

You can also see in both cases they are getting at a dynamic or evolutionary approach, rather than a simple static rational-actor approach. Back to Kuhn’s 1992 article:

Scientific development is like Darwininian evolution, a process driven from behind rather than pulled toward some fixed goal which grows ever closer.

Speciation of knowledge

Knowledge evolves, rather than being a pristine static timeless edifice, and that has major implications. For Kuhn, one of them is the  constant proliferation of disciplines. Distinct specialties and practices constantly grow, he says. As late as the 1950s there was only one serious physics journal in America, which all physicists read. Now that journal has split into four, and there are hundreds of others, separated into dozens of sub disciplines.

That means that disciplines and specialities become incommensurable. They speciate, he says,  unable to breed or communicate any longer. It wasn’t just incommensurable paradigms. It was constant differentiation.

What replaces the one big mind-independent world about which scientists were once said to discover the truth is the variety of niches within which the practitioners of these specialities practice their trade.

It’s not crude relativism, although Kuhn is still accused of it. Practices do rub up against hard reality, just as lemmings who believe jumping off cliffs is not dangerous tend to find gravity is, well,  not just an arbitrary opinion or Foucaultian discourse of power.

But , if you think about it, it means communication and understanding assumptions and ways of thinking becomes much more difficult between specialties and practices in this view as well.  And the difficulty of actually communicating simple things across specialities is a whole other story.  Much of what we see in business and markets is  like lemurs trying to explain the very rational lemur point of view to lions. It only works well  in Disney fairlytales.

2017-05-11T17:32:41+00:00 May 19, 2015|Communication, Decisions|

Living on (Swiss) Vesuvius

You’ve probably seen those films about Pompeii that begin with bustling sunlit scenes of normal life, and end with ash clouds and panic and burning and suffocation.  The victims had become used to rumbling and smoke from the volcano for decades, and paid no attention to the mountain. Then an epic disaster overtook them and burnt them alive.

Yet people still live on the slopes of volcanoes. They ignore small risks of terrible outcomes , in a consistent pattern called disaster myopia. The slopes are often fertile and attractive. Vesuvius is now surrounded by far more people today than it ever was in Roman times.

In fact, recent discoveries  suggest the site of city of Naples itself has been buried under ten feet of ash in the past, in more ancient eruptions far worse than the infamous Roman disaster.  The trouble is that evacuating the Naples area would be logistically almost impossible. So Italian authorities largely ignore the possibility.

Disaster myopia also applies to economics and banking and finance, as researchers like  Guttentag and Herring have pointed out since the 1980s. People find it very difficult to handle small risks of serious problems, so often ignore them altogether.

That brings us to the events of this week, specifically the massive losses caused by the decision of the Swiss National Bank to abandon their peg against the euro. Only one out of 50 economists surveyed by Bloomberg was expecting a change in the peg – and the one who did expected a tiny move.  The Swiss  currency leapt 41% after the announcement and ended the day 19% higher.  If you measured risk the way so many in the markets do, using standard deviation and value at risk, that should not have happened in the lifetime of the universe. As Matt Levine of Bloomberg View points out,

An 180-standard-deviation daily move should happen once every … hmmm let’s see, Wikipedia gives up after seven standard deviations, but a 7-standard-deviation move should happen about once every 390 billion days, or about once in a billion years.  So this should be much less frequent.

Complacency produced the financial equivalent of Pompeii. Losses run into billions of dollars, including major banks, hedge funds, retail fx brokerages, and probably thousands of retail clients who were foolishly trading FX on margin have been wiped out.

That said, it’s one thing to ignore volcanoes which can be expected to erupt every four or five hundred years, or longer. Even if you live on a volcano, you have a very good chance of never seeing an eruption in your lifetime, and in most places you have a good chance of escaping if you do.  Events in complex systems like the economy and financial markets are much less predictable. We have, as Keynes pointed out about uncertainty in the 1930s, little or no idea of the odds of many important events.

Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of pivate wealth-owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatsoever. We simply do not know.(QJE, February 1937)

The result, he says, is people fall back on conventional judgment and copy what others are doing. Or, as we see, they use forecasts and “information” sources in much the same way the Romans used sheep entrails to try to foretell the future, despite all the evidence that forecasters almost always miss critical turning points and mostly just produce foolish overconfidence in their clients.

In complex systems formal prediction is usually a futile hope.  It is stupid to make decisions on the basis of forecasts that are largely based on extrapolation of historical data and leave conventional assumptions unchallenged. Here’s some things you can do instead:

  • figure out what can go wrong with a decision, or position, or point of view. That means examining your assumptions, looking for boundary conditions, and thinking about what-if scenarios. And then develop markers, to monitor events. You’ll never be able to anticipate every eventuality, but you can have enough signals to make sure you are alert, and agile, and suspicious of complacency.
  • think about how you and the other side think about the situation. Step back and take a detached view of the game that is being played, and do some “second-level thinking“. I’ve worked in a central bank and have had years of working out how they make decisions from a market perspective.  There are ways to do better than the market, largely by avoiding errors most of the market typically makes. I wasn’t following Switzerland so can’t claim I had any special insight here. That said, you can get a much better understanding of how events like this take place by thinking about people’s actual reaction function, not what you think they “ought” to do.  Markets and central banks regularly misunderstand each other because they misread communication, misunderstand motivations and have structural incentives to say one thing and do another. Ignoring what people say and concentrating on how they actually think and do is the only way to have a chance of avoiding problems.
  • think about where your edge or advantage lies. If you don’t have one, don’t play the game in the first place. What possible advantage could a retail investor have playing FX markets at a leverage of 20 or more? It’s a classic case of trying to pick up pennies just in front of a steamroller. Understanding where your edge actually lies is the first step to   using it.
  • manage your exposure where you can’t make easy predictions, so that it reflects underlying uncertainty.  (This is a point Nicholas Taleb vociferously argues.)
  • don’t be naive. Anyone who thinks that the latest soothsayer or prophet is going to help them is naive. Only suckers pay for seers.  Financial market companies have wasted billions on futile attempts to forecast the future when they should pay more disciplined attention to the roots of their own views and assumptions.  You have to think about the underlying validity of opinions and forecasts, which is usually extremely low.
  • have a plan B. If you think about what can go wrong, you can have a plan to deal with it or turn it to your advantage. Instead of making extrapolations from the past, you need to think about how to react to various scenarios in the future.

I’ll come back to some of these in more detail. The most important thing is to develop markers that alert you to problems with your own assumptions. You have to look at mindsets and thinking patterns, not spurious “predictions” and forecasts.





2017-05-11T17:32:42+00:00 January 20, 2015|Assumptions, Central Banks, Communication, Current Events, Europe, Risk Management|

The joke in central bank communications

One of the greatest minds in twentieth-centry strategy was Thomas Schelling, who won the Nobel Prize for Economics in 2005 for his work on game theory back in the 1950s.  Schelling was, however, extremely skeptical about treating strategy as “a branch of mathematics.” According to Lawrence Freedman, Schelling claimed he learned more about strategy from reading ancient Greek history and looking at salesmanship than studying game theory.

So, as often happens, one of the brilliant and creative founders of an abstract approach warned (slightly dimmer) followers against misusing or over applying it.

“One cannot, without empirical evidence,” Schelling observed, “deduce whatever understandings can be perceived in a non-zero-sum game of maneuver any more than one can prove, by purely formal deduction, that a particular joke is bound to be funny .”

Mainstream economics, however, went in a different direction. Now think of what this means for all the economic papers on policy rules and credibility/communication in monetary policy that I referred to in the last post. Most of the problem of central bank communication come from trying to prove by deduction much the same thing as a joke is funny.

2017-05-11T17:32:43+00:00 August 31, 2014|Central Banks, Communication, Economics, Monetary Policy, Quants and Models|

Deeper differences on Ukraine

This is an important observation from Timothy Garton Ash the other day on Ukraine:

Russia’s strongman garners tacit support, and even some quiet plaudits, from some of the world’s most important emerging powers, starting with China and India.

What explains that?

What the west faces here is the uncoiling of two giant springs. One, which has been extensively commented upon, is the coiled spring of Mother Russia’s resentment at the way her empire has shrunk over the past 25 years – all the way back from the heart of Germany to the heart of Kievan Rus.

The other is the coiled spring of resentment at centuries of western colonial domination. This takes very different forms in different Brics countries and members of the G20. They certainly don’t all have China’s monolithic, relentless narrative of national humiliation since Britain’s opium wars. But one way or another, they do share a strong and prickly concern for their own sovereignty, a resistance to North Americans and Europeans telling them what is good for them, and a certain instinctive glee, or schadenfreude, at seeing Uncle Sam (not to mention little John Bull) being poked in the eye by that pugnacious Russian. Viva Putinismo!

This is a quite different matter than accusations Obama or the EU have lost credibility. Western elites often fail to grasp other powers take a very different view of events, regardless of our own current actions, and may work to counteract some of our preferred legal and political values. Oh sure, you might say, we know that, it’s obvious in principle …….except the evidence shows we frequently forget it.

For example, consider Merkel’s assertion that Putin has “lost his grip on reality.” It’s not that we misunderstand his view or perceptions or motivations, you see, he’s clearly just gone nuts. Loo-la. With tanks. Or has he? It’s particularly hard for many EU elites to understand, whose entire project for three generations has been to dilute or pool sovereignty.

There’s two lessons: 1) people actually find it extremely hard to see events from different viewpoints, all the more so when they have prior commitments, or confront evidence their own policy hasn’t worked, or when important values and taboos are at stake. There are countless examples of foreign policy crises worsened by miscommunication and wrong assumptions. It happens to the most brilliant statesmen and accomplished leaders. You have to take this into account in crises. Indeed, it’s no different from central bank officials trying to understand bond traders, and vice versa.

To take just a few pieces of evidence, fifty years of work in social psychology since Leon Festinger has shown people have remarkable ability to ignore information which is dissonant with their current view. Phillip Tetlock’s more recent work also shows the most prominent experts are most often hedgehog thinkers who know “one thing” and one perspective -and that the track record of most country experts and intelligence agencies (and markets) on foreign crises is woeful.

It’s not that alternative views are necessarily justified, or right, or moral: but ignoring their existence rarely helps. The most difficult thing to get right in crises is usually not the facts on the ground so much as the prior facts in your head.

2) The international system is just that: a system, with both balancing and amplifying feedback loops. But the human mind has a natural tendency to want to see things in a straightforward, linear way. I’ll come back to issues of system dynamics soon, as another major alternative to the simplistic ideas about decision-making that regularly lead people towards failure.


Political problems on the way for the Fed

One thing to note about the Yellen speech yesterday: it really annoyed a lot of Republicans.  The Fed chair talked about the problems faced by local Chicago residents: Dorine Poole, Vicki Lira and Jermaine Brownlee. Explaining things in terms of personal stories of named individuals might seem like a good communication idea. She was trying to explain that the Fed’s goal is to help Main St, not just bail out big Wall Street institutions. So putting it in terms of personal experience might seem like a good way to do that.

But Republicans tend to be enraged when people use vivid particular stories to argue for general government intervention, because activists and campaigning journalists have used the rhetorical tactic so often against them.

Does it matter if the GOP is annoyed? It does if they take the Senate in November, as seems likely, and initial primary talk is being dominated by Rand Paul who is very hostile to the Fed.  A Fed keeping rates low to help the unemployed might very quickly be seen as a Fed keeping rates low to help the Democrats.

The Fed does not respond to overt political pressure. But it is aware of political context, and the potential for distortion or backlash of the Fed message would be highest in 2015, when a new Republican Senate and the appeal-to-the-base phase of primary season would most likely coincide with the window for the first rate rise.

2017-05-11T17:32:45+00:00 April 1, 2014|Central Banks, Communication, Federal Reserve, Monetary Policy, Rhetoric Watch|

Primary sources versus primary evidence

People often make disastrous mistakes by relying on primary witness testimony. But if primary sources are often deeply unreliable, as we've seen, why do we take the trouble to put witnesses in the box in a court room?

I spent a few weeks on a jury in New York City a year ago. The judge warned us not to speculate, or rely on gossip or hearsay, and judge only on the evidence we heard.

However, the judge also always specficially instructs a jury that a major part of their task is to judge the credibility of the witnesses. They have to weigh the evidence they hear, not meekly accept any testimony without question. A jury is supposed to use their common sense experience to decide whether witnesses appear evasive or hesitant or confused.

This is not analysis, in theoretical terms. It is not abstract. It is a matter of common sense and experience. Primary testimony without judgment of credibiliy is useless.

A jury is also expected to be alert for inconsistencies between witnesses. Indeed, the most important aspect of primary sources is not what any one says in isolation, but where anomalies or inconsistencies point to problems in the evidence.

Added to that, the most persuasive and important evidence in most trials is not testimony from particular witnesses or sources. It is hard objective evidence, less subject to distortion. That means sound recordings, video camera evidence, medical reports, or DNA evidence. It means e-mails, internal documents, receipts, tickets or fingerprints. It means records of interviews, transcribed at the time, calendars and measurements of skid marks or damage.

Primary sources are important. But only if you have a layer of judgment to figure out the value of what they say.



2017-05-11T17:32:48+00:00 January 21, 2014|Communication, Confirmation bias, Decisions, Mindfulness, Perception, Situation Awareness|