Avoiding ‘Black Swans’

A UK Blackett Review has reviewed some approaches to uncertainty relevent to the question “How can we ensure that we minimise strategic surprises from high impact low probability risks”. I have already reviewed the report in its own terms.  Here I consider the question.

• One person’s surprise may be as a result of another person’s innovation, so we need to consider the up-sides and down-sides together.
• In this context ‘low probability’ is subjective. Things are not surprising unless we didn’t expect them, so the reference to low probability is superfluous.
• Similarly, strategic surprise necessarily relates to things that – if only in anticipation – have high impact.
• Given that we are concerned with areas of innovation and high uncertainty, the term ‘minimise’ is overly ambitious. Reducing would be good. Thinking that we have minimized would be bad.

The question might be simplified to two parts:

1. “How can we ensure that we strategize?
2. “How can we strategize?”

These questions clearly have very important relative considerations, such as:

• What in our culture inhibits strategizing?
• Who can we look to for exemplars?
• How can we convince stakeholders of the implications of not strategizing?
• What else will we need to do?
• Who might we co-opt or collaborate with?

But here I focus on the more widely-applicable aspects. On the first question the key point seems to be that, where the Blackett review points out the limitations of a simplistic view of probability, there are many related misconceptions and misguided ways that blind us to the possibility of or benefits of strategizing. In effect, as in economics, we have got ourselves locked into ‘no-strategy strategies’, where we believe that a short-term adaptive approach, with no broader or long-term view, is the best, and that more strategic approaches are a snare and a delusion. Thus the default answer to the original question seems to be ‘you don’t  – you just live with the consequences’. In some cases this might be right, but I do not think that we should take it for granted. This leads on to the second part.

We at least need ‘eyes open minds open’, to be considering potential surprises, and keeping score. If (for example, as in International Relations) it seems that none of our friends do better than chance, we should consider cultivating some more. But the scoring and rewarding is an important issue. We need to be sure that our mechanisms aren’t recognizing short-term performance at the expense of long-run sustainability. We need informed views about what ‘doing well’ would look like and what are the most challenging issues, and to seek to learn and engage with those who are doing well. We then need to engage in challenging issues ourselves, if only to develop and then maintain our understanding and capability.

If we take the financial sector as an example, there used to be a view that regulation was not needed. There are two more moderate views:

1. That the introduction of rules would distort and destabilise the system.
2. That although the system is not inherently stable, the government is not competent to regulate, and no regulation is better than bad regulation.

 My view is that what is commonly meant by ‘regulation’ is very tactical, whereas the problems are strategic. We do not need a ‘strategy for regulation’: we need strategic regulation. One of the dogmas of capitalism is that it involves ‘free markets’ in which information plays a key role. But in the noughties the markets were clearly not free in this sense. A potential role for a regulator, therefore, would be to perform appropriate ‘horizon scanning’ and to inject appropriate information to ‘nudge’ the system back into sustainability. Some voters would be suspicious of a government that attempts to strategize, but perhaps this form of regulation could be seen as simply better-informed muddling, particularly if there were strong disincentives to take unduly bold action.

But finance does not exist separate from other issues. A UK ‘regulator’ would need to be a virtual beast spanning  the departments, working within the confines of regular general elections, and being careful not to awaken memories of Cromwell.

This may seem terribly ambitious, but maybe we could start with reformed concepts of probability, performance, etc. 

Comments?

See also

JS Mill’s views

Other debates, my bibliography.  

Dave Marsay

Hercock’s Cohesion

Robert G. Hercock Cohesion: The Making of Society 2009.

Having had Robert critique some of my work, I could hardly not comment on this think-piece. It draws on modern complexity theory and a broad view of relevant historical examples and current trends to create a credible narrative. For me, his key conclusions are:

1. “[G]iven a sufficient degree of communication … the cooperative assembly of [a cohesive society] is inevitable.”
2. To be cohesive, a society should be “global politically federated, yet culturally diverse”.

The nature of communication envisaged seems to be indicated by:

 “From smoke signals, and the electric telegraph, through to fibre optics, and the Internet … the manifest boom in all forms of communication is bringing immense capabilities to form new social collectives and positive cultural developments.”

 I ‘get’ that increasing communication will bring immense capabilities to support the cooperative assembly of a cohesive global society, but am not convinced the effective exploitation of the capability in this way is inevitable. In chapter 6 (‘Bridges’) Robert says:

 “The truth is we now need a new shared set of beliefs. … Unfortunately, no one appears to have the faintest idea what such a common set of beliefs should look like, or where it might arise from, or who has responsibility to make it happen, or how, etc. Basically this is the challenge of the 21st century; we stand or fall on this battle for a common cultural nexus.”  

 This is closer to my own thinking.

People have different understandings of terms like ‘federated’. My preference is for subsidiarity: the idea that one has the minimum possible governance, with reliance on the minimum possible shared beliefs and common cultures. In complex situations these minimum levels are not obvious or static, so I would see an effective federations as engaging tentatively at a number of ‘levels’, ‘veering and hauling’ between them, and with strong arrangements for ‘horizon scanning’ and debate with the maximum possible diversity of views. Thus there would be not only cultural diversity but ‘viewpoint diversity within federated debate’. What is needed seems somewhat like Holism and glocalization 

Thinking of the EU, diversity of monetary policy might make the EU as an institution more cohesive while making their economies less cohesive. To put it another way, attempts to enforce cohesion at the monetary level can threaten cohesion at the political level. So it is not clear to me that one can think of a society as simply ‘being cohesive’. Rather it should be cohesive in the sense appropriate to its current situation. Cohesion should be ‘adaptive’. Leadership and vision seem to be required to achieve this: it is not automatic.

In the mid 80s many of those involved in the development of communications technologies thought that they would promote world peace, sometimes citing the kind of works that Robert does. I had and have two reservations. Firstly, the quality of communications matters. Thus [it was thought] one probably needed digital video, mobile phones and the Internet, all integrated in way that was easy to use. [The Apple Macintosh made this credible.] Thus, if there was a clash between Soviet secret police and Jewish protestors [common at the time], the whole world could take an informed view, rather than relying on the media. [This was before the development of video faking capabilities]. Secondly, while this would destabilize autocratic regimes, it was another issue as to what would happen next. It was generally felt that the only possible ‘properly’ stable states were democratic, but views differed on whether such states would necessarily stabilize.

Subsequent experience, such as the Arab spring, support the view that YouTube and Facebook undermine oppressive regimes. But I remain unconvinced that ‘the cooperative assembly of [a cohesive society] is inevitable’ in Africa, the Middle East,Russia or South America’, or that more communications would make it so. It certainly seems that if the process is inevitable, it can be much too slow.

My own thinking in the 80s was informed by the uncertainty and complexity theory Keynes, Whitehead, Turing and Smuts, which predates that which Robert cites, and which informed the development of the United Nations as a part of ‘the cooperative assembly of a cohesive global society’. Robert seems to be arguing that according to modern theory such efforts were not necessary, but even so they may have been beneficial if all they did was speed the process up by a few generations. Moreover, the EU example seems to support my view that these theories are usefully more advanced than their contemporary counter-parts.

The financial crash of 2008 occurred part way through the writing of the book. Like any history, explanations differ, and Robert gives a credible account in terms of modern complexity theory. But logic teaches us to be cautious about such post-hoc explanations. It seems to me that Keynes’ theory explains it adequately, and having been developed before the event should be given more credence.

 Robert seems to regard the global crash of 2008 as a result of a loss of cohesion :

“When economies, states and societies lose their cohesion, people suffer; to be precise a lot of people end up paying the cost. In the recession of 2008/09 … “

But Keynes shows how it is cohesion (‘sticking together’) that causes global crashes. Firstly, in a non-globalized economy a crash in one part can be compensated for by the stability of another part, a bit like China saving the situation, but more so. Secondly, (to quote Patton) ‘if everyone is thinking alike then no-one is thinking’. Once group-think is established ‘expectations’ become ossified, and the market is disconnected from reality.

Robert’s notion of cohesion is “global politically federated, yet culturally diverse”. One can see how in 2008 and currently in the EU (and North Africa and elsewhere) de jure and de-facto regulatory structures change, consistent with Robert’s view. But according to Keynes this is a response to an actual or potential crisis, rather than a causative factor. One can have a chain of  crises in which political change leads to emergent social or economic problems, leading to political change and so-on. Robert seems to suppose that this must settle down into some stable federation. If so then perhaps only the core principles will be stable, and even these might need to be continually reinterpreted and refreshed, much as I have tried to do here.

On a more conceptual note, Robert has the qualifies the conclusion with “The evidence from all of the fields considered in this text suggests …”.  But the conclusion could only be formally sustained by an argument employing induction. Now, if improved communications is really going to change the world so much then it will undermine the basis of any induction. (In Whitehead’s terms, induction only works with an epoch but here the epoch is changed.) The best one could say would be that on current trends a move towards greater cohesion appears inevitable. This is a more fundamental problem than only considering evidence from a limited range of fields. More evidence from more fields could not overcome this problem.

Dave Marsay