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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.

Good people and bad situations

I talked in the last post about how people have characteristic ways of seeing the cause of problems.  As a rule, the human mind seems to leap towards looking for a particular person to blame, and does not pay much attention to the underlying situation.   We have evolved to think first in terms of people’s intentions and inclinations and abilities. Personalities loom large in our mental landscape.

That’s often justified.  Most people have seen plenty of individual incompetence and foolishness  and mulish ignorance in their careers. . Open almost any newspaper and you’ll find evidence of astonishingly bad behavior and judgment  by people who ought to know better, as well as examples of genuine personal talent and grit.

But it also leaves serious blind spots. We often don’t take context and situation seriously enough from the outside.  We vastly overestimate how consistent people’s behavior and abilities are in different situations.

For example, the media are tempted to hail brilliant CEOs and policymakers, because personal genius or foolishness makes a better story. But the best CEOs know the underlying situation and context matters.

When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.

— Warren Buffett




Raise the champagne (but not until you learn the lessons of 2013)

We’re all one year older as we reach the end of 2013, but are we one year wiser?  The end of the year is a time to look back and see if there are any ways to do things better next year.

For the hedge fund industry, there just has to be new approaches to sustain long-term survival.  The industry had a very bad year in 2013, at least measured in terms of investment returns.  The average “smart money” hedge fund made 8.2% and charged 200bp for that positive performance. But if you put your money in the dumbest, cheapest global equity index fund, you made almost 21%, and got charged less than a tenth of the fees for it.

So it is essential to learn from the experience of a rough year for the industry. Clearly, it’s difficult to improve or turn things round without trying to learn from outcomes and mistakes.

The problem  is it is also often extremely difficult to learn from experience, for a range of different reasons. There are multiple serious blind spots in individual and organizational learning.

One bedrock theme for me is insight about macro policy, like the Fed, or market behavior and opportunities for outperformance, are basically about sensitivity to evidence. People’s assimilation and “stretchiness” in response to evidence and events is actually more important than the objective underlying evidence itself. So paying very close attention to how and when and why people learn from experience is essential.

The most obvious issue is people often just prefer to move on to the next thing. They are reluctant to review outcomes or try to learn from them at all.  Raise the champagne anyway. 2013 is already history.  At least next year might be better. (It ought to be a little bit better ,  just because of regression to the mean.)

Markets have remarkably short memories. Policymakers have remarkably selective ones.

The Person and the Situation

But here’s one deeper problem. Who or what do you blame for bad outcomes?  If something goes wrong (like horrendous investment returns or policy errors),  do you blame the person or the situation?  There are some frequent deep distortions here, so much so that social psychologists call it the “fundamental attribution error.” (see the classic analysis by Nisbett and Ross in Human Inference: Strategies and Shortcomings in Social Judgement).

People pay too much attention to the constraints and headwinds in their situation when it comes to explaining their  own success or failure.

So if a fund manager has a bad year, it’s because of the situation. Blame the Fed and Congress and the tough challenges in the markets. You can expect to read variations on that in a lot of fund manager reports to their clients on 2013. This also means you don’t have to think much about potential mistakes or errors you might have made.  If you don’t recognize mistakes, you can’t correct them.

But if you had a good year, it’s all because of your own talent and skill and effort. This also means you don’t have to think much about the drivers of the situation or the prior likelihood of success.

In sharp contrast, people also believe that other people’s success or failure is almost entirely due to their personal qualities or dispositions,  and not their situation. We pay too little attention to situational factors in other people’s decisions.   You will read plenty of variations on that in comments on Bernanke’s tenure at the Fed when he steps down in  few weeks. It will be all about Bernanke’s skills and judgments, with less attention to the situation in which he found himself. Hedge fund clients will be much less sympathetic to claims that poor performance was because of a tough general situation.

It pays to be aware of when and why people are invoking the person or the situation as explanations for outcomes. And it is critical to observe  signs of how they learn and adapt.