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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?


Gullible forecasters and Greece

So how did the predictions from polls and pundits and consultants do on Greece so far? I’ve been arguing that people shouldn’t put so much faith in prediction, but look for potential errors and blind spots. The key is to look for leverage and resilience, not get trapped into vain prophecy when you can be doing something to adapt to the situation instead.

But is that justified by the latest events?

Unsurprisingly, the latest predictions are yet another tale of epic illusion and incompetence, on the evidence which Nate Silver examines here. The polls were bad:

Coming on the heels of the U.K. general election, the Israeli general election, the Scottish referendum and the U.S. midterms, Sunday’s Greek referendum looks like the latest in a series of bad outcomes for pre-election polls across the globe. While the last few polls before the vote showed “Oxi” (“no”) ahead by just 3 to 4 percentage points, it in fact took 61 percent of the vote to 39 percent for “yes,” a margin of more than 22 percentage points. It was a landslide: “Yes” didn’t win a single parliamentary constituency.

The pundits and market conventional wisdom were even worse.

When I use the term “conventional wisdom” in this article, I mostly mean the opinions of political pundits and journalists. In the case of Greece, however, the failure also extended to betting and financial markets. One bookmaker, Paddy Power, was so convinced that “yes” would win that it pre-emptively paid out “yes” bets. Most banks and financial institutions expected a “yes” vote. Betting markets like Betfair continued to show “yes” favored even after the polls had turned back toward “no.”

Markets are full of people who want stupid overconfident predictions, and even more people who will provide them to the gullible. There were plenty of instant experts on Greek politics. Plenty of journalists we’d convinced they knew what would happen. Did you believe them?

The answer? Not to be gullible. Instead of journalism and forecasting, which don’t work, look for ways to be resilient and adaptable. There’s all too many people who will believe the current conventional wisdom.

If you can avoid being naive, that’s 90% of the battle.


2017-05-11T17:32:41+00:00 July 9, 2015|Assumptions, Crisis Management, Current Events, Europe, Forecasting|

Europe: Summer does not last forever

I’ve been in Europe the last few weeks.  Life is good in places like Prague, Vienna, Venice and Turin, although there seem to be signs of fraying of the social fabric in Milan. Sleek new infrastructure abounds which puts the US to shame, like the new-ish Frecciarossa trains in Italy that top 200mph.

But market jitters last week about Portuguese banks and deflation show it is easy to be lulled into complacency by sunshine and happy-talk from Euro elites. Youth unemployment is mostly hidden from view.  The deeper problems of financial system stability remain open and unresolved.

Most of all,  the slow-burning, more serious problem is the undermining of the legitimacy of the European project itself. James Carville famously hung up a sign “It’s the economy, stupid” during the Clinton election campaign in 1992. The sign for Europe in 2014 should read “it’s legitimacy, stupid.”

European insiders often dismiss worries from outsiders with the argument that “the worse it gets, the better it gets.” It takes serious pressure to make the sluggish European decision-making apparatus move forward and confront difficult decisions, they argue. But crises are sources of creativity and progress as well.

The trouble is that most of the current problems cannot be resolved as easily as the doubts last time about the ECB’s willingness to perform a traditional lender-of-last resort role. Draghi’s famous “whatever it takes” assurance in 2012  was a classic central banking 101 assurance under his  control and ability to implement. It was therefore  much easier than the hard choices and trade-offs involved in sorting out the problems in the banking system or the lack of growth. Assurances about stress tests and future reform from finance ministers are much more likely to be disbelieved by the markets.

And sometimes timing and logistics can create their own problems during crises, regardless of prior intentions (just like railway timetables and mobilization schedules in 1914).  It is not just a question of whether a crises can force politicians to compromise. It is whether it is possible to do so by the time markets open on the Monday morning following a weekend shock.

Ofiicials have hoped for a “time correction” – that problems would gradually fade away or resolve themselves over time, a case of drawn-out heartache rather than cardiac arrest. Sure enough, in the near term the ECB might yet be dragged into a  QE program. But Europe is very vulnerable to negative surprises.

One of the classic signs of trouble is what Dianne Vaughan called “normalization of deviance” in her famous study of the Challenger Disaster, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA. People gradually get used to safety problems.  Trade-offs are made under pressure to produce and deliver, and then forgotten, ignored or taken for granted. Step-by-step, year-by-year they reinterpret acceptable risk.  They push the envelope. They feel more confident following many successful launches.

Until a small oversight creates a fireball.  It’s time to rethink what is “normal” in Europe.






2017-05-11T17:32:43+00:00 July 14, 2014|Central Banks, Crisis Management, Current Events, Europe|

Obama and the trouble with credibility

Russia is tightening its grip on Crimea. So Obama’s credibility and American foreign policy in general is being completely undermined, if you listen to the increasing chorus of criticism (like this.)

In this case I don’t agree – or at least, to it is not all Obama’s fault.

The first problem is capability matters as well as intentions. Obama might have made overoptimistic mistakes. But the biggest problem is American voters have tired of foreign intervention, after thousands of casualties and trillions of dollars spent in Iraq and Afghanistan. That history can’t simply be forgotten or washed away rapidly. To put it in economic terms, there is hysteresis in this foreign policy system. It is bent out of shape, rather returning to a previous equilibrium. You can’t put the toothpaste back in the tube.

Some Republicans I speak ferociously condemn the President. But it is very unlikely that Obama could have won a Congressional vote on intervention in Syria. Conservative leader David Cameron suffered a shock defeat in the UK Parliament on the matter, for example.

Any President would face deep skepticism from voters about deploying American forces abroad or similar forceful action at present. You could put Attila the Hun in the White House right now and he would have difficulty taking aggressive, “credible” action. It took Pearl Harbor for FDR himself to persuade America to enter World War 2. And no one remembers FDR as weak or vacillating.

It will take time – maybe decades – or another 9/11 or Pearl Harbor style attack to convince the American public to commit to foreign intervention in large scale again. Obama has to live with that legacy for now.

As I’ve said before, one primary blind spot afflicting decisions is the relative influence of the person and the situation. One of the most common findings in social psychology is people – and this means everyone, Democrat, Republican, American, Russian –  tend to overstress the influence of personal attributes and qualities (“the President is weak”) in other people’s decisions , and pay far too little attention to situational factors. (“Congress will not vote for any strong response.”) Incidentally, we naturally  do the opposite with our own decisions.  It’s not our fault, it was the circumstances.

We’re also seeing the tendency of Western media to turn most issues into a horse race – who is up and who is down (Putin up, Obama down.) to the exclusion of most other angles, because it makes a good domestic story.

Another problem is people tend to use – and think about – “credibility” very loosely. In practice credibility varies with context. Take the doctrine of nuclear deterrence during the Cold War. Some of the chilliest of cold warriors, like Hermann Kahn, in thinking through the likelihood of nuclear war, developed the notion of escalation dominance. As a crisis developed, one side or the other could have the advantage on the ladder of escalation. Soviet forces had overwhelming conventional dominance in Central Europe. No-one pretended otherwise. Hence the importance to  US credibility of the presence of tactical nuclear weapons at the next stage of escalation.

In a similar way, there is no reason to think that US weakness on the borders of Crimea signals US weakness about the borders of Poland or California. The US may have complete credibility on some levels of escalation or different contexts, and none at all on others. That is normal. The advantage may shift at different levels of seriousness in a crisis.

If Obama can be faulted, it is in blurring the kind of  US national interests which would justify a strong response. This is where universalistic notions of human rights or international legal norms cause problems. It may often be in the US interest to pay lip service to international norms, but much less so to expend blood and treasure on someone else’s behalf to defend particular violations. (Bill Clinton did not intervene in Rwanda. Lyndon Johnson did not intervene in Biafra.)

It simply invites situations where words and actions diverge radically, and thus causing people to doubt your words.

Liberals in particular want to defend international legal norms verbally, because that is what makes them norms. But there can be a temptation to overreach.  The American public is more likely to want to focus on tangible immediate interests and the proportionate cost and benefit to the United States itself, rather than universal legal principle. Presidents have a little room to use the “bully pulpit” to try to persuade voters that important interests are at stake. But there are limits to what speeches alone can do.

That points to a need to contain the shrillness of American rhetoric when we are not actually going to do anything much. It may not feel good. But it may preserve the credibility of words for those times when a shooting war is a genuine risk. One of the prime contributions to credibility is to pick your battles, rather than let the battles pick you.

Initial information distorts how you see a (emerging market) crisis

I’ve often talked about how people change their mind in an uneven, misshapen way. One common pattern is to leap to conclusions on the basis of limited and distorted initial information. That then becomes the frame through which subsequent events are interpreted. It is much more difficult for people to change their mind once those initial pieces of information have solidified, even if the first reports turn out to be wrong.

This often plagues intelligence analysis of volatile economic and political developments.  Richard Heuer wrote The Psychology of Intelligence Analysis for the CIA, which is now declassified.

People form impressions on the basis of very little information, but once formed, they do not reject or change them unless they obtain rather solid evidence. Analysts might seek to limit the adverse impact of this tendency by suspending judgment for as long as possible as new information is being received. ..

Moreover, the intelligence analyst is among the first to look at new problems at an early stage when the evidence is very fuzzy indeed. The analyst then follows a problem as additional increments of evidence are received and the picture gradually clarifies–as happened with test subjects in the experiment demonstrating that initial exposure to blurred stimuli interferes with accurate perception even after more and better information becomes available.

The receipt of information in small increments over time also facilitates assimilation of this information into the analyst’s existing views. No one item of information may be sufficient to prompt the analyst to change a previous view. The cumulative message inherent in many pieces of information may be significant but is attenuated when this information is not examined as a whole.

Exactly the same thing applies to financial crises. That’s a particular danger with emerging market crises, where traders and investment managers in developed markets often have little or no familiarity with the underlying economic and political context in a country. There is usually a mad market scramble to learn the basic dynamics of the country in question as soon as it hits the headlines – who leads the main parties, how many months import cover in the reserves, the state of the capital account. (The best first step is almost always the IMF Article IV and staff reports.) Traders jump to becoming instant experts on the banking structure of Cyprus or political maneuvers in Thailand.

When the next EM panic hits, it is essential to be very alert to the quality of the initial information before you lock in a view. There is a temptation to want to appear fully informed and decisive too early, and then spend the remainder of the crisis trying to catch up and fix initial errors.

It also pays to remember country analysts with deep knowledge of local dynamics are frequently the most surprised by developments. (Recall how many Sovietologists predicted the downfall of the USSR.)


People make characteristic mistakes in dealing with crises, but it is possible to recognize many of them in advance.

2017-05-11T17:32:48+00:00 February 2, 2014|Assumptions, Crisis Management, Current Events, Decisions, Financial Crisis, Psychology|

Emerging Markets: Rotation, not Revulsion

A few days of volatility in emerging markets is enough to bring the bears out in force again. But some short-term correction is natural and inevitable. We will see a rotation from EM back to developed markets as the US (slowly) recovers, and short-term portfolio flows often exaggerate that transition.

The issue is whether there is any case to be more fearful: are tremors in EM the first sign of broader global macro problems?

It reminds me of 1997-1998, when I was working on UK EM/IMF policy at the Bank of England during the Asia crisis. Events were much more dramatic then than we have seen in 2014 so far, but there was little impact on the US at the time.

Markets sometimes forget that Fed tapering is good news, net net. Any sustainable recovery in the US is going to mean less addition of liquidity, and ultimately rises in Fed funds.

At some point, the US patient has to come off the emergency central bank-administered intravenous drugs, and get up and walk. There may be withdrawal symptoms in some bubbly EM economies, but that’s part of a return to health.

What could go wrong? This is a good take from the Economist:

… there are two things to watch for signs that the present panic might morph into something much nastier. First the streets—for more social unrest and political gridlock. And then the banks—for any sign that their books are rotten.

The same applies to the eurozone, incidentally.

Short-term volatility could ignite or highlight deeper structural problem. After a liquidity binge local EM financial systems are likely riddled with problems. That obviously applies to China, which has deferred some of its problems with a vast credit boom.

Everyone knows China’s growth model has to transition from a low- to middle-income economy, with less growth coming from simply adding more cheap peasant labor to basic manufacturing. The key question is whether the transition will be gradual, or abrupt. For now, I’d count on gradual.

The base case is continued US and wider global recovery. The current EM volatility is not enough to upset that.  But signs of deeper financial system problems in China or Europe, or serious problems with political legitimacy would be much more important than short-run exchange rate or local stock market volatility.

2017-05-11T17:32:48+00:00 January 27, 2014|Crisis Management, Current Events, Financial Crisis|

The thousand different ways organizations deny problems and resist change

I’ve been talking about how organizational culture can conceal problems. Culture is also one major reason why organizations fail to notice and  resist change. People’s assumptions give them some equilibrium and stability, and that stability gives people and organizations an identity.

There have to be at least three factors for an organization to generate enough motivation to change (continuing with the classic analysis by Edgar Schein). They are:

.. 1) enough disconfirming data to cause serious discomfort and disequilbrium; 2) the connection of the disconfirming data to important goals and ideals concerning anxiety and/or guilt; and 3) enough psychological safety, in the sense of seeing a possibility of solving the problem without loss of identity or integrity, thereby allowing members of the organization to admit the disconfirming data rather than defensively denying it.

The trouble is organizations are capable of ignoring data that contradict their preferred view for a very long time.

It is not an uncommon situation, therefore, that disconfirming data have existed for a long time but because of a lack of psychological safety, the organization has avoided anxiety or guilt by repressing it or by denying the relevance, validity or even existence of the data. The essence of psychological safety, then, is that we can imagine a needed change without feeling a loss of integrity or identity. .. The identity that the organization has built up and that has been the source if its success must now be preserved, even if that means ultimate failure to adapt successfully to a changing environment.

It often needs a long period of increasing suppressed anxiety before an organization is ready to pay attention. Without that, even the most visionary leaders may fail to reach people.

The importance of visionary leadership can be understood in this context, in that the vision sometimes serves the function of providing the psychological safety that permits the organization to move forward. Without a period of prior disconfirmation it is not clear that a visionary leader would be given much attention.

Most prophets tend to be cast out, and sometimes stoned out.

Some people might find this talk of “psychological safety” and “visionary leadership” unsatisfyingly subjective. But we know that most organizations do not survive very long, and their lifespan has been plunging. That falling survival span is a matter of hard, objective fact. It is also the personal experience of just about everyone that organizations are capable of denying the most obvious problems for a very long time.

The question is what they can do about it so they survive just a little longer. For one thing, they have to be aware of their blind spots. If they are not, all the detailed forecasts and sales projections and new product lines in the world may fail them.

Muddling through to success, and complacency

I've been talking about how, despite the crazy mess of the government shutdown, the US political system manages to be adaptable and successful over time. This is highly important to markets when the stakes are default, trillion-dollar economic disruptions or systemic breakdown.

The trouble is democracies also get complacent, says this article in the Guardian by David Runciman, a Cambridge academic who has just written a book on the subject of democratic adaptability.

Democracies make more mistakes, Runciman says, but they correct them quicker, too. Toqueville first noticed this in Democracy in America in the 1830s.

The messiness, chaos and frustration of the process means the media and intellectual elites always tend to look on dictatorships with a wry kind of envy, however. At least the Chinese government can get things done in a rational way, they think. People said the same about Ludendorff in the First World War, Mussolini in the 1930s, and the Soviet Union in the 1960s.

The irony of dictator envy is that it goes against the historical evidence. Over the last 100 years, democracies have shown that they are better than dictatorships at dealing with the most serious crises that any political system has to face. Democracies win wars. They survive economic disasters. They adapt to meet environmental challenges. Precisely because they are able to act decisively without having to square public opinion first, dictators are the ones who end up making the catastrophic mistakes. When dictators get things wrong, they can take the whole state over the cliff with them. When democratic leaders get things wrong, we kick them out before they can do terminal damage.

Yet that is little consolation in the middle of a crisis. The reason we keep succumbing to dictator envy is that it requires steady nerves to take the long view when things are going wrong. The qualities that give democracies the advantage in the long run – their restlessness and impatience with failure – are the same qualities that make it hard for them to take the long view. They look with envy on political systems that can seize the moment. Democracies are very bad at seizing the moment. Their survival technique is muddling through. The curse of democracy is that we are condemned to want the thing we can't have.

But, Runciman says, this can also make democracies too complacent, too. We blithely walked into the 2008 crisis, for example, and have done very little to tackle the underlying causes since.

How to steer a course between unwarranted complacency and unhelpful impatience is the democratic predicament. It is so difficult because countering complacency sounds impatient and countering impatience sounds complacent. This is the confidence trap, and there is no easy way out. ..The pattern of democratic life is to drift into impending disaster and then to stumble out of it.

This is a well-taken point. If you play chicken, there is a risk that one side will miscalculate and you crash in a fiery wreck. And some mistakes cannot be quickly fixed.

That reinforced the importance of looking at misperception, however. Recognizing miscalculation, miscommunication, misunderstanding have to be central for market people trying to make sense of it all. Small miscalculations can have epic consequences.


2017-05-11T17:32:50+00:00 November 10, 2013|Adaptation, Crisis Management, Financial Crisis, Perception, Risk Management|

First stirrings of fear in markets

The market reaction to the government shutdown and debt limit has been relatively limited so far. But there are stirrings of fear as people start to contemplate what even a “technical default” would mean. The mood is beginning to deteriorate.

No-one thinks that the US will outright refuse to pay its debt so that it becomes worthless. But a gap of two or three days before meeting a payment now looks like an outside possibility, even if it is still not probable. People are beginning to discuss just what it would mean in practice.

And the market does not like the thought. It could wreck the delicate “plumbing” of the financial system. Small details like cross-default clauses, collateral rules, pension fund credit rating limits, payment system capacities, reference rates for derivative contracts could all be thrown into uncertainty or breakdown by even a brief US default. It would be extremely dangerous.

The trouble is players don't back down in a chicken game until there is real fear – which is why much of the liberal press has been dismayed there has been little impact from the government shutdown so far. But technical details of payment system breakdowns may not be enough to make Congress fearful.

As I said earlier this week, this infrastructural “nuts and bolts” is crucial.

It puts the Fed in a difficult position. There is potentially enormous systemic risk which could conceivably cause markets to freeze solid. If necessary, they ought to find a way to lend the government enough to cover a temporary gap in payments. They already own $2.069 trillion in treasury securities because of QE, after all, so covering a $30-50bn repayment is small change.

They can't buy treasuries direct from the government, under the Federal Reserve Act. But I don't think they are prohibited from other forms of lending, especially if lawyers get creative. The Fed was noticeably resourceful about inventing new programs at short notice during the crisis. They could perhaps call it temporary excess float in Fedwire, or suchlike, a mere facilitation of the payment system. They could organize a special purpose vehicle to provide the funds to meet government debt payments, like Maiden Lane.

Of course, direct funding of government by the central bank is one of the greatest no-nos in central banking, in normal circumstances. That way lies Weimar. They can't even hint that they could do this until it became unavoidable, as politicians would be let off the hook to do a deal. It would raise constitutional issues – the power of Congress (Article 1) versus the public debt shall not be questioned (14th Amendment) that would reach the Supreme Court later.

But even a technical default could take us into potential meltdown territory.

There's not enough fear yet to resolve this. That is something we should get a little fearful about.


2017-05-11T17:32:51+00:00 October 9, 2013|Central Banks, Crisis Management, Market Behavior, Monetary Policy|

How a default could happen

“A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall,” says this Bloomberg story. But the market doesn’t believe it is going to happen. We are down half a percent so far today on the S&P. But that still leaves us just a sliver beneath the historic all-time high in equities.  The 10-year Treasury bond is at 2.608%, down 30bp from two weeks ago. That too, of course, is still remarkably low by the standards of the last three decades.

I agree with the market sense that there is a vanishingly small chance of a default. In this game of chicken, both sides would prefer to turn the wheel and swerve rather than crash the cars.

But one good principle in making decisions is to consider the opposite. One variation of that is a technique called the pre-mortem. Let us assume you are told by an absolutely certain message from the future that in fact the US defaults on October 19, 2013.

How did it happen?

The point is to set aside all the dozens of reasons there are to ignore disconfirming evidence that points the other way. In any given catastrophe, there is always evidence that was ignored at the time. The mind is very good at picking up information that is consistent with what you think and expect, and very bad at noticing the opposite. If you assume the catastrophe has happened, you turn this tendency the other way around.

So here goes.

The most likely reason the default happens is both sides tried to swerve at the last possible moment – but the steering wheel doesn’t turn in time. Logistical obstacles are the biggest potential source of a default.

I firmly believe that if Obama and Congress are confronted with a real, actual, imminent default they will do almost anything to avoid it. Obama would sign an executive order and fight out whether he had the power to do so in the Supreme Court later. Congress would pass a temporary vote. Perhaps Treasury could even set up a temporary daylight loan from the Fed.

The problem is all these things take time – not very much time, but if there is a last minute legal obstacle ( a clause in the Antideficiency act, say) or it takes time to set up payment instructions in the Treasury computer – deadlines could be missed.

And the risk is Congress is used to flexible deadlines. Time works in a very different way from financial markets. Most deadlines on the Hill (apart from elections) can be waived or ignored or made subject to exceptions. But a scheduled bond payment is a fixed deadline. It will not wait for Congressional deals or Presidential deliberation. It either happens or it does not. Two systems of perception of time could crunch into each other.

There are other potential causes of last minute accidents. Sometimes opponents calculate they can benefit from a full-on crash in situations, and a few tea party members may think this way. Or they may believe they may lose proportionately less in a catastrophe (hence the theories of fighting a “limited” nuclear war in the 1970s.)

But believers in default are very few here. The unknowns and potential ripple effects of a US default would be enough to scare most in Congress to want to avoid it, and certainly all those in positions of power or responsibility.

The other reasons chicken games sometimes go very wrong are:

  • pre-binding  commitments. One of the drivers unscrews the steering wheel altogether and throws it out the window. He can’t back down, even if he wanted to. But these don’t exist in this situation. Commitments for and against a “clean CR” can be revised, at the cost of looking like a loser.
  • miscommunication and miscalculation. This is less likely given that all the players know each other and act within the same political system. It is not like Kennedy facing Khruschev in the Cuban missile crisis, for example, across different political cultures and systems, different languages, different power bases, different conceptions of great power interests.

The upshot is the most significant risk is unintended infrastructural or logistical details, that slow down a resolution enough to cause a default. Like the Larry Summers weekend banking crisis scenario, the players might simply run out of time because of unforeseen delays or miscalculation of how close to a bond market deadline they could go.

So it pays to watch Treasury and OMB statements about the nuts and bolts of the situation, more than Boehner or Reid. If you dance too close to the edge of the precipice, you can slip even if you don’t intend to. That said, I still think the chance is extremely small.

2013-11-22T12:41:14+00:00 October 7, 2013|Confirmation bias, Crisis Management, Current Events, Fiscal Policy, Politics|