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Democracy works by suppressing hubris

Another election, another huge surprise. Teresa May’s historic electoral catastrophe last week was actually foreshadowed by plunging opinion polls this time, so the pollsters are not to blame for once. But the exit poll on Thursday night still came as a vast shock, as the scale of the collapse of Tory hopes became clear. Andrew Rawnsley of the Guardian blamed overconfidence and hubris for the disaster:

She conducted a campaign that combined vanity with incompetence and had learned nothing from the now myriad examples from around the democratic world of what happens when a politician behaves as if they are simply entitled to power.

There is something strangely magnificent in this episode beneath the shrieks and journalistic drama and personalities. Democracy is a messy, awkward, short-sighted system of governance. But it has a better error control loop than autocracy or bureaucratic planning.  Democracy is impatient with failure, as I noted before,  and fixes mistakes relatively quickly.  It may be terrible at long-term thinking and elegance, but it is good at throwing overconfident and arrogant planners out.

That is actually a good thing, and it means people are wrong to see all the turmoil of the last two years only as a departure from some idealized global liberal ideal, as a car crash on the way to utopia. The system is messily rebalancing in response to problems that had been ignored. Overconfident elites get punished, and underserved groups get an (occasional )voice.  The process not ideological. It happened to Progressives in the US last November. It just happened to Conservatives in the UK.   If would be worse if the system got stuck – and that may be the case in continental Europe.

 

 

 

2017-06-13T08:06:49+00:00 June 13, 2017|Europe, Politics|

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.

2017-05-11T17:32:34+00:00 April 24, 2017|Adaptation, Current Events, Europe|

The flaw in international law, and The Chilcot Report

People pay too much attention to their forecasts (which are unreliable) and too little to their assumptions, and that often gets them into serious trouble. I argued in the last post that the assumption driving much EU integration – that international law and international organization is the foundation of the last seventy years of peace in Europe – is not always true.

So what else may have kept the peace in Europe for the last seventy years? What worked, if international law sometimes doesn't work? Think for a moment.

It isn't the same as the question of what you think international law is ideal or moral aspiration or a nice idea, but, again, what actually works. We all know people who are wonderfully nice, but maybe should not be entrusted with arranging your summer trip, or running a company, or handling air traffic control for inbound flights at LaGuardia. You may think it is ideal and moral that everyone should be honest as well. But you probably locked your front door when you left home this morning too. So what actually kept the peace, if not the EU?

Might it have something to do with the US deploying hundreds of thousands of troops in Europe, a chain of air bases from Keflavik in Iceland to Incirlik in Turkey, and the Sixth Fleet in the Mediterranean? Not to mention the threat of thermonuclear escalation if anyone started a war. The US assumed much of the security of Europe, and strongly supported European rebuilding from the Marshall plan onwards, as well as the EU itself as a bulwark against communism. The Red Army might have been entirely unthreatening and peaceful and admired European law, but the citizens of Budapest and Prague who saw Soviet tanks on their streets in 1956 and 1967 might disagree. Yet western European countries could afford to reduce defense spending and focus on welfare and economics. In other words, the EU itself is more a symptom of the US stabilizing the security situation than the cause of security.

Let's say you splutter with outrage at the idea. There are definitely some people in Europe and elsewhere who are very uncomfortable with any positive consequence of Ameican foreign policy, ever. Fine. How would you test that? What kind of implications would you expect to see? The explanations lead very different places and feed different narratives. Seeing the question from different angles and questioning assumptions is usually essential to figuring out the right policy. And the things you feel uncomfortable about are the most likely place for blind spots, because you never look there.

In the same way, the reaction to the publication of the Chilcot report on British participation in the Iraq war was published yesterday. Most of the attention, like this Guardian editorial, is focused on poor prediction of consequences.

Let's agree the war was bad in retrospect. It is also clear that there was not enough effort to question the assumptions underlying intelligence assessments that Saddam Hussein still had weapons of mass destruction, or prepare for the aftermath.

But the press reaction doesn't really come to grips with a recurrent theme in the executive summary of the report. Why did Blair, a European multilateral liberal, stick so close to Bush, a Texan Republican? Was it to preserve the special relationship? Get invited to delightful Crawford, TX? Be a poodle and get dog biscuits?

Most media reactions lean towards thinking it was because Blair was a pathological liar, a vain foolish potential war criminal who ignored advice. They personalize the issue. But Blair was a highly skilled, highly popular leader before the war, not a cartoon villain, and he clearly had doubts about direct UK interests in Iraq. So what was he thinking?

In fact, Chilcot documents how Blair kept trying to push the US to go the multilateral route, to get UN resolutions, to persuade a coalition of allies rather than take unilateral action.

The report references a 2003 speech by Blair several times.

370. In Mr Blair’s view, the decision to stand alongside the US was in the UK’s long‑term national interests. In his speech of 18 March 2003, he argued that the handling of Iraq would:

“… determine the way in which Britain and the world confront the central security threat of the 21st century, the development of the United Nations, the relationship between Europe and the United States, the relations within the European Union and the way in which the United States engages with the rest of the world. So it could hardly be more important. It will determine the pattern of international politics for the next generation.”

In other words, it wasn't really about imminent threats from Iraq or whether it had WMD or supported terrorism for Blair. At best, those were fig leaves or PR concerns. It wasn't even primarily about the effect of disagreement on US-UK relations. It was to get the Americans to follow the norms of international law. It was to stop them acting outside the multilateral framework.

So consider this: international law didn't stop the Iraq war, because the Americans felt they couldn't rely on the UN framework. And Blair, as an internationalist progressive, went along to try to make sure the “pattern of international politics for the next generation” was based on international law and multilateral organizations. He tried to rein back American unilateral use of force by participating as a junior partner, to preserve international norms, albeit not enough for domestic opponents or some other EU governments.

So international law did not lead to peace but was the cause of at least UK participation in the Iraq war. Uncomfortable? Fine. But Blair might have stumbled into huge mistakes because of his assumptions. Forecasts and data and judgements got altered to fit them.

And that happens all the time.

 

2017-05-11T17:32:35+00:00 July 7, 2016|Assumptions, Decisions, Europe, Security|

How to ignore useless abstractions around Brexit

Now some of the initial shock of Brexit is wearing off, it's time to think about reactions. So don't make overconfident predictions, or pronounce on cloudy abstract principles, like so much of the media. Being for or against “globalism” or “openness” or “cosmopolitanism” is a self-deluding waste of time that just distracts you. Instead, look for flaws in your fondest, most cherished assumptions, because that's where you can find blind spots and the basis for action to make things better. It's much less comfortable but more effective.

So what is the biggest assumption about the EU and Brexit? Much of the shock is not really a matter of the result being statistically improbable (it wasn't), or even the medium-term economic implications for the UK. Instead, it seems to be a challenge to deeply-held ideas about international cooperation and global progress. It challenges the ideal of international law and cosmopolitan aspirations.

The great emotional driving force, the hundred-thousand-volt spark behind the EU Project is to make war unthinkable on the continent again. It's symbolized by Helmet Kohl and Francois Mitterand standing arm in arm at Verdun, saying never again. International law must replace international conflict. Instead of meeting on the battlefield, young people should meet in Ibiza nightclubs or Berlin coffee bars. Instead of war and nationalism, prosperity and peace. How could anyone be against that?

The fundamental assumption is that international law and organization prevents war, and that justifies ever closer union. So here's a question. Do you recognize these two faces? They're not pretty celebrities, admittedly.

On the day of their greatest success, both probably thought streets would be named after them in every city, town and village on every continent. You would probably have gone to a high school named after one, or joyously celebrated a national holiday named after the other. They would be remembered as perhaps the two greatest moral benefactors of mankind in history. In fact, both won the Nobel Peace Prize for their efforts.

Not triggering any admiring memories? The first one is Frank Kellogg, American Secretary of State at the time. The other is Aristide Briand, foreign minister and later Prime Minister of France.

They signed the Kellogg-Briand Pact, which abolished war as an instrument of statecraft forever. Think about it. They made war illegal.

Think about it some more. It was agreed to by every major nation on earth.

Who could achieve more than that? Surely it justifies renaming a few major cities in their honor. Instead of Chicago, Kelloggsville, perhaps.

Signatory states promised not to use war to resolve “disputes or conflicts of whatever nature or of whatever origin they may be, which may arise among them.” Besides America and France, it was signed by Germany, Italy, Japan, the Soviet Union, China and the U.K., not to mention other countries from Afghanistan and Australia to Panama, Peru, Portugal and Persia. It passed the US Senate 85-1.

Unless you're a specialist in international law or legal history, you probably haven't heard about any of this. Why not?

Because the pact was signed in 1928. Within 5 years, Hitler had come to power. Within nine years, the Imperial Army of Japan murdered hundreds of thousands of civilians in the Nanking Massacre. Within 11 years, the worst war in human history had started. One signatory perpetrated the holocaust. Others killed hundreds of thousands in a single night in firestorm air raids that destroyed whole cities of civilians such as Hamburg or Tokyo.

So the assumption that international law prevents war in and of itself or creates new inviolable moral norms is catastrophically wrong. At best, international treaties were ineffectual, having little ability to hold back deeper, darker forces driving towards disorder. At worst, the legalistic perspective was actively harmful self-delusion, like the related League of Nations system, that distracted efforts and delayed more effective action.

So you can't just complacently assume international law or international organization works or produced good results as you congratulate yourself on your high moral standards, or even take a trip to Oslo to collect a Nobel Peace Prize. The world may slide towards carnage thanks to your ignorance. Symbolism and aspirations and norms may not work. The fundamental assumption about the EU is sometimes false.

But this shouldn't be a wholesale indictment of belief in international law or good intentions either. Instead, we can ask: what's different? Maybe the Second World War was so much worse that it reinforced the desire for legal norms, and that lasted fifty years. Then again, who needed convincing after the Somme or Verdun? Or maybe legal norms themselves are unreliable and fragile when put under stress, just when you need them most.

Or maybe there's a balance to be struck between law and international cooperation and other forces, that varies in different times and places. The tragedy is universalized principles can also actively undermine balances and blind people to problems.

That's the debate we ought to be having. Instead people talk past each other, shouting from within their fortresses of rigid assumptions.

So instead of mourning or celebrating Brexit this weekend, think about what we can do differently to Kellogg and Briand. Why didn't it work? Why has the EU worked till now? What has changed? What are the key assumptions which can break under pressure? Because that may point to specifics rather than abstract principles. Look for tangible, concrete, situational things, not norms.

 

 

2017-05-11T17:32:40+00:00 July 3, 2016|Assumptions, Europe|

An historic 24 hours. But tomorrow is another day

The Brexit vote in the UK is an epic watershed event, of course, upending 40 years of settled expectations about the shape and direction of the international system. But it’s time to keep calm.

The violence of the market reaction today is partly because of misplaced predictions that the vote would be to remain, as investors had to cover their positions. At one point late yesterday financial markets had it at 80% chance that the UK would still be in the EU today. Expensive private polls conducted by financial institutions also reportedly indicated a remain vote.

As ever, excessive confidence in expert ability to predict political and economic events is foolish, and made people much more vulnerable to damage.

But that also means it’s time to be skeptical about the usefulness of the endless amounts of analysis and prognostications that the media and banks will now publish in the next week or two.  Most of the pundits didn’t understand what was going on before and they don’t understand now.  Yes, there are likely to be negative economic consequences, especially for the UK economy. Yes, the legitimacy of the EU and the international legal framework has been damaged. But people also adapt and find ways to mitigate the impact of change.   It will take time for the full consequences to work themselves out. So it’s time for some patience and moderation.

2016-06-24T16:27:52+00:00 June 24, 2016|Current Events, Europe|

Volkswagen: What were they thinking?

It may turn into one of the most spectacular corporate disasters in history. What were Volkswagen thinking? Even after it became apparent that outsiders had noticed a discrepancy in emissions performance in on-the-road tests, the company still kept stonewalling and continued to sell cars with the shady software routines.

We won't know the murky, pathological details for a while. But understanding how this happens is urgent. If you ignore this kind of insidious problem, billion-dollar losses and criminal prosecutions can occur.

In fact, it's usually not just one or two “bad apples,” unethical criminals who actively choose stupid courses of action, although it often suits politicians and media to believe so. It's a system phenomenon, according to some of the classic studies (often Scandanavian) like Rasmussen and Svedung.

.. court reports from several accidents such as Bhopal, Flixborough, Zeebrügge, and Chernobyl demonstrate that they have not been caused by a coincidence of independent failures and human errors. They were the effects of a systematic migration of organizational behavior toward accident under the influence of pressure toward cost-effectiveness in an aggressive, competitive environment.

It's not likely anyone formally sat down and did an expected utility calculation, weighting financial and other benefits from installing cheat software, versus chances of being found out times consequent losses. So the usual way of thinking formally about decisions doesn't easily apply.

It's much more likely that it didn't occur to anyone in the company to step back and think it through. They didn't see the full dimensions of the problem. They denied there was a problem. They had blind spots.

It can often be hard to even find any point at which decisions were formally made. They just … happen. Rasmussen & co again:

In traditional decision research ‘decisions’ have been perceived as discrete processes that can be separated from the context and studied as an isolated phenomenon. However, in a familiar work environment actors are immersed in the work context for extended periods; they know by heart the normal flow of activities and the action alternatives available. During familiar situations, therefore, knowledge-based, analytical reasoning and planning are replaced by a simple skill- and rule-based choice among familiar action alternatives, that is, on practice and know-how.

Instead, the problem is likely to be a combination of the following:

  • Ignoring trade-offs at the top. Major accidents happen all the time in corporations because often the immediate benefits of cutting corners are tangible, quantifiable and immediate, while the costs are longer-term, diffuse and less directly accountable. They will be someone else's problem. The result is longer-term, more important goals get ignored in practice. Indeed, to define something as a technical problem or set strict metrics often embeds ignoring a set of trade-offs. So people never think about it and don't see problems coming.
  • Trade-offs can also happen because general orders come from the top – make it better, faster, cheaper and also cut costs – and reality has to be confronted lower down the line, without formally acknowledging choices have to be made. Subordinates have to break the formal rules to make it work. Violating policies in some way is a de facto requirement to keep your job, and then it is deemed “human error” when something goes wrong. The top decision-maker perhaps didn't formally order a deviation: but he made it inevitable. The system migrates to the boundaries of acceptable performance as lots of local, contextual decisions and non-decisions accumulate.
  • People make faulty assumptions, usually without realizing it. For example, did anyone think through how easy it to conduct independent on-the-road tests? That was a critical assumption on whether they would be found out.
  • If problems occur, it can become taboo to even mention them, particularly when bosses are implicated. Organizations are extremely good at not discussing things and avoiding clearly obvious contrary information. People lack the courage to speak up. There is no feedback loop.
  • Finally, if things do wrong, leaders have a tendency to escalate, to go for double -or-quits. And lose.

There scarcely seems to be a profession or industry or country without problems like this. The Pope was just in New York apologizing for years of Church neglect of the child abuse problem, for example.

But that does not mean that people are not culpable and accountable and liable for things they should have seen and dealt with. Nor is it confined to ethics or regulation. It is also a matter of seeing opportunity. You should see things. But how? That's what I'm interested in.

It's essential for organizational survival to confront these problems of misperceptions and myopia. They're system problems. And they are everywhere. Who blows up next?

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|

Why reporting the facts on Greece does not produce value

Let’s step back a bit from the immediate Greek vote, which is happening today. How did we get to this?  There is no good outcome, now matter whether the vote is “yes” or “no.” As one opinion piece by a Greek writer in the Guardian puts it, it’s a choice between “catastrophe or absolute catastrophe.” It seems every year brings another financial disaster or crisis of one kind or another, and it’s been like that for a generation.

Why? Think about this: It has not been  a matter of getting the facts wrong. The basic facts of the situation have rarely been in dispute. No-one has deliberately concealed the relevant economic theories, the interests of the parties, or the choices at issue. Even  if some Greek statistics have been distorted or falsified in the past, that self-delusion is largely past.

Just like the run-up to the 2008 financial crisis, most of the problems have been in plain view for years. Instead,  people choose to ignore or discount the facts, and talk past each other when it comes to arguments and narratives. Decision-makers get stuck into ruts and find it difficult to change course.

Most major mistakes do not come about because people don’t have access to facts, or can’t talk to the different parties. Instead, people see things in very different ways despite the facts, and it often takes the most dramatic or final losses to shake their conviction that they are right. By which time it is too late, like today.

That means a standard journalistic account , in a the way a good wire service reporter might file a story laying out the facts, is actually of surprisingly little value at this point, although many investors will be glued to their Bloomberg or Reuters screens today.  There’s always people with a sudden insatiable need for facts about electoral trends by region, or what party lieutenants say, or expert opinion, despite overwhelming recent evidence that political reporting is little or no use in practice. Yes, a scoop like finding out exit poll results an hour early would be a good story. But those journalistic instincts to break news are often a distraction from understanding the underlying game.  A good hard-news story and finding value in a situation are two very different things.

The facts about Apple

Unfortunately, that is a very difficult thing for some people to understand. There is a kind of mindset which is deeply uncomfortable with things that are not hard, uncontested fact. Everything which is not sure or verified by several sources is “opinion” or “speculation” or “vague”.  But in business the most valuable things are often matters of judgment or taste.

Take Apple, for instance. It is rarely at the cutting edge of technology. Its software engineering is often notoriously shoddy, as anyone who downloaded the bug-infested mess known as iOS 8 initially found out. Competitors often sell products with similar capabilities for much less money.  Apple is not known for financial brilliance in the way it invests its over $194 billion of cash reserves. But it is the most valuable company in the world. Why?

Of course, you can reduce it to discounted streams of future income or brand value or current market positioning, but what produces the income or the brand or Steve Job’s notorious “reality distortion field”  in the first place?

It’s largely matters of judgement and taste – a feel for ease of use and style, an ability to look beyond engineering features to put together a combination of things which delight users. And here’s an interesting point – it’s precisely because those intangibles are very hard to replicate that they produce excess value which isn’t immediately competed away.

In the same way, dozens of places around the world have tried to be the next Silicon Valley, spending billions of dollars and hiring very smart engineers. But the particular combination of culture and attitude and interpersonal connections that power the Valley is very hard to replicate in Malaysia or Russia or France. It’s not reducible to easily reported fact. Can you really imagine reading a story in the newspaper tomorrow which reveals a stunning new fact which completely explains the secret of Apple’s success? It’s not that easy.

That’s also why journalism is in such trouble as a business, in contrast to Apple. There’s very little value in information and basic facts, with rare exceptions like a legitimate tradable scoop. Facts are instantaneously replicable,  Even if it is a legitimate news story a scoop has almost no cash value unless you can react within a few milliseconds before algorithms trade. Instead, value is mostly in processes and patterns and culture and combinations which are not easy to replicate.

The real sources of value are not revelations or scoops. It’s about recognition and understanding, and persuasion, and creativity, and synthesis, and a sense for what works.  It’s about alertness and adaptability. None of that is reducible to easily reported fact.

Of course judgment is fallible, and particular kinds of narrowly-defined judgment are better turned over to algorithms. (I’ve discussed that, as well as the pros and cons of big data and linear models at length before.)  But hard-nosed facts tends to lose out where it most counts for business – hard cash.

 

2017-05-11T17:32:41+00:00 July 5, 2015|Europe, Perception|

Greece Alone

I’ve just got back from several weeks in Europe, mostly vacation. We might have been in Athens today, lining up at an ATM.

We had long wanted to go to Greece, and hoped this would be the year to do it. But two months ago we decided that the Greek situation was looking worse and worse. We dropped the dream of the Greek islands and booked flights to Scandanavia instead, which the strong dollar makes much cheaper than usual.  So we’ve been floating around the Stockholm archipelago and Norwegian fjords rather than Santorini. All the same, it’s impossible not to feel sadness and regret about reports of Greek ATMs and gas stations running dry.

Greece is terribly alone. The most important thing in all this, of course, is the fact that the previous “doom loop” between European sovereign debt and European bank exposure isn’t active, at least for now. European bank stocks have taken a hit on worries about their exposure to Greece. But that’s as nothing compared to what would happen if there are renewed fears about other sovereign defaults, or massively expensive bank recapitalizations, which feed off each other.   Instead, ECB quantitative easing purchases seem to be supporting other  government debt markets. And European officials will doubtless double down on support for the next line of vulnerable Club Med countries. It’s also doubtful foreign investors will lose enough money to produce serious system risk from this situation in other markets. That is why markets remain relatively calm.

So long as people are worried about the solvency of Greece and not the solvency of the German or Spanish banking system, the situation is horrible – but contained.

It’s even possible last-minute deals will defer the crunch another few days or weeks, kicking the can down the road one more time. This drama has been running for almost seven years now and one more curtain call won’t make much of a difference.

In fact, I’d worry more about a break in China in the short run. One crisis is bad. Two at the same time is exponentially worse.

The interesting question is whether European officials will learn anything from this. Yes, the Greeks have been irresponsible. But Brussels has been just as bad, filled with self-delusion and wishful thinking and inability to allocate losses in a coherent or sensible way. It’s not so much ignorance of economics that is at fault. The fundamental problem here has not been ignorance of optimum currency area theory or even experience with previous fixed exchange regimes like the gold standard. Instead, it was the hidden assumption that willpower would be enough to conquer all the problems in pursuit of a higher end. Problems were opportunities to consolidate an ever-closer union.

It’s blind spots that interest me above all else – things people just can’t see from their rigid positions. The Eurocrats were blinded by the dazzling vision of the European project, dreaming of how it would nobly end a thousand years of war instead of figuring out what would make it work. I talked to many a few years who considered what is happening now inconceivable.  Will they double down on the vision yet again? Look for speeches on how crises in fact make Europe stronger….. while supermarket shelves are bare in Greece.

2015-06-30T11:50:02+00:00 June 30, 2015|Current Events, Europe|

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.

Piacenza_Bronzeleber

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.

2017-05-11T17:32:41+00:00 May 8, 2015|Adaptation, Current Events, Europe|