Archive for the 'Books' Category

The Illusion of Control

Influenced by 9/11, fewer people decided to fly in the fourth quarter of 2001. Airline passengers fell by 18% compared to the same 2000 period…

In the same period, however, 128,525 people died in US car accidents. That’s an estimated 5% more than expected, based on past driving patterns. The statisticians have concluded that as many as 5,000 deaths would probably have been avoided if people had carried on taking the plane as usual. In addition, up to 45,000 people would have been spared serious injuries and up to 325,000 less serious ones.

Why did so many people take their car instead of the plane after 9/11? The simple explanation is that, behind the wheel of your own automobile, it’s natural to feel in control. Try telling drivers that they have no influence over the skills of other road users, the weather, the condition of the road, mechanical problems, or any other common causes of accidents — and they will agree. But they feel in control of their destiny when they drive.

The above example comes from the book Dance With Chance by Makridakis, Hogarth, and Gaba. It illustrates how some people’s desire for control can wind up hurting themselves and others, as this control is often just an illusion. In my profession, there are many people who will not hand off investment authority to a competent money manager with a good track record, despite the great likelihood of earning a better return. The reason it is so difficult for these people is that they suffer from the illusion of control. And just like the individuals who chose to drive instead of fly after 9/11, those individuals who choose to manage their own investments as amateurs stand to lose a great deal.

Complexity Cloaks Catastrophe

Thanks to Simoleon Sense for pointing out that the book A Demon of Our Own Design is available on the web. The following quote is from page 5:

These [financial market] breakdowns come about not in spite of our efforts at improving market design, but because of them. The structural risk in the financial markets is a direct result of our attempts to improve the state of the financial markets; its origins are in what we would generally chalk up as progress. The steps that we have taken to make the markets more attuned to our investment desires—the ability to trade quickly, the integration of the financial markets into a global whole, ubiquitous and timely market in-formation, the array of options and other derivative instruments—have exaggerated the pace of activity and the complexity of financial instruments that makes crises inevitable. Complexity cloaks catastrophe.

I think one can look at our history of efforts to prevent market breakdowns and easily see a Greek tragedy. No matter how much we want to change the future or avoid our destiny, our efforts are the direct cause of that which we do not want to happen.

Twenty-First Century Central Bankers

Twenty-first century central bankers go on and on about their “credibility.” Hearing that word, we are inclined to substitute “incredibility,” for, to us, the notion that the stewards of paper money can pick the right interest rate out of the air and successfully impose it on the economies they pretend to manage is literally unbelievable.

Page 312 of Mr. Market Miscalculates by James Grant.

The Difference Between the Stupid and the Intelligent

“Nell,” the Constable continued, indicating through his tone of voice that the lesson was concluding, “the difference between ignorant and educated people is that the latter know more facts. But that has nothing to do with whether they are stupid or intelligent. The difference between stupid and intelligent people—and this is true whether or not they are well-educated—is that intelligent people can handle subtlety. They are not baffled by ambiguous or even contradictory situations—in fact, they expect them and are apt to become suspicious when things seem overly straightforward.

Page 283 of The Diamond Age by Neal Stephenson

An Ineffective Regulatory System

We have too many ineffective regulators: the OCC, Fed, OTC, FHFA, SEC, FDIC, and more. Watching the regulatory system is like watching bad doubles tennis players. No one hits the ball thinking the other guy will get it. Investment banks are not suffering from too much regulation. The global capital markets are suffering from too little competent regulation where it counts most.

Page 205 of Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street by Janet Tavakoli.

A Conditioned Belief in a New Era

Pecora judged the Wall Street of his day to be a moral sinkhole, and in the defalcation of Richard Whitney, chairman of the New York Stock Exchange, and in the short selling of Albert Wiggin, he seemed to prove the point. However, he assigned too much to the lightly regulated financial system and too little to the boom. It wasn’t the lack of rules and regulations that raised the depravity index in American finance. It was the conditioned belief in a new era.

“The Miscreants We Deserve,” February 15, 2002, page 210 of Mr. Market Miscalculates by James Grant

A Long Leap From Roe

From page 521 of Cra$hmaker: in discussing whether its alright to kill Dominic Ancona, who is making trouble with his media appearances calling for abolishment of the Fed and re-establishment of a currency backed by hard assets, the CIA officer Masterson brings up Roe v. Wade as justification.

“What do you mean, so?” You can’t go around wantonly killing people, Frazier,” Butcher complained, dropping to what he assumed was the irreducible minimum of agreement.

“Ancona’s not a person,” the intelligence operative replied coldly.

“Come on, Bat,” Butcher retorted. “He’s a human being!”

“That’s not the same thing,” Masterson intoned even more icily, slowly shaking his head from side to side in disbelief at Butcher’s naivete.

“Who says there’s a difference?” Butcher challenged him.

“The Supreme Court—Harry Blackmun—Roe versus Wade,” Masterson responded with the confidence of a grand master announcing a checkmate.

Just as Masterson had anticipated, invocation of Roe intimidated Butcher into silence. Why not? All of American society genuflected in awe, or cursed in frustration, at the mention of that momentous decision. Nevertheless, any three-hundred-dollar-an-hour Establishment attorney could have explained to the Treasury Secretary how Masterson was extrapolating the sound premise that an unborn child was not a legal “person” to the so-far-unprecedented conclusion that other biologically human beings could also be denied personhood. Not that legal logic was unable to travel from Blackmun’s starting point to Masterson’s terminus. Only that, for practical political reasons, the Establishment was not yet ready to expand Roe’s holding so far.

Nonetheless, being slightly ahead of his time did not make Masterson wrong—and he knew it. “Roe versus Wade stripped mere biological human beings of all rights,” he explained triumphantly to  Butcher, “because if an individual can be killed for someone else’s convenience, he can’t assert any rights. To have rights, an individual has to be more than scientifically a human being. His factual human nature isn’t good enough any longer. He has to have a special political status, too. He has to be a person—whatever that means, or can be made to mean. So, in Roe, Harry Blackmun overruled the Declaration of Independence: All human beings aren’t naturally equal; and none have unalienable rights!” Masterson exulted. He had always despised natural law.

“What’s the difference between a human being and a person?” Stillwell asked, a mixture of perplexity and anxiety creeping onto his countenance, as if his subconscious mind had some peculiarly personal and troubling need to know.

“Basically, the faculty of choice and reason,” Masterson responded immediately, having thought through that question beforehand. “If an individual can’t choose or can’t think, he may still be biologically human, but he’s no legal person, and therefore has no rights. At the opposite ends of the spectrum of life are self-evident non-persons: unborn children, brainless geriatric patients. Within the spectrum are individuals in a persistent vegetative state: you, for instance, Reginald,” Masterson laughed cynically. Butcher was not amused.

“An even more sophisticated approach,” Masterson continued, “is to gauge personhood by the mental quality of an individual’s life. A human being proves, or disproves, that he exercises good choices and right reason by the nature of what he chooses and how he thinks. It’s not the mere faculty of choice and ability to think that makes someone a person, but his actually making correct choices and thinking proper thoughts.”

“That’s a long leap from Roe,” Butcher suggested.

“Not at all,” Masterson sneered. “Roe held that all human beings aren’t entitled to a right to life; only persons, as the courts—an enforcement arm of the government—define them. Then society decided that even some persons are better off dead, and have a right to suicide or voluntary euthanasia. Then society decided that some people can choose death for others who can’t decide for themselves. Now, society’s in the process of deciding to prescribe death for individuals who ought to die, but who stubbornly, stupidly, and antisocially cling to lives not worth living. Well, ought to die covers a wide area, doesn’t it? Those who ought to die can be injured or diseased in body—but also in mind, in personality, in patterns of thought, in persistent attitudes. If the government can empower a mother to kill her child, a sick man to kill himself, a doctor to kill a patient who can’t speak for himself—and even one who can—if society can rid itself of some worthless superannuated senile Negress who’s eating up too much in costly medical care, why can’t the body politic eliminate troublemakers like Ancona who are even more expensive to keep in line? Why squander scarce resources refuting his lunatic ideas again and again, when one cartridge can shut his trap permanently? The New World Order has no place for too many of the very young, or for any of the very old, the very sick, the very stupid—and especially the incorrigibly rebellious. Too many lives not worth living are the problem. Death’s the answer. Today we have to finesse the public’s squeamishness with euphemisms such as women’s choice and death with dignity. In a few years …”

“That’s all nonsense,” Butcher interjected, his voice betraying his unease, as he tried to attack Masterson’s premise. “The government isn’t empowering women to kill children through abortion—it’s only protecting their choice and their privacy.”

“Choice?! Privacy?!” Masterson guffawed. “What other homicide does the government treat as noncriminal simply because the killers choose to perpetrate them in private? And why do judges deny the father any choice in the matter of the mother’s killing of his own child? What other jointly created property does the government license one of the creators to destroy over the other’s objection? Sorry, Reginald. No theory of the right to life or the right to property—at least as those rights were misunderstood before Harry Blackmun pulled the blinders off the law—ever conceived that one individual could have a natural, unilateral right to kill another, wholly innocent individual on demand. So abortion must be an outright grant of power from the government. And where does the government obtain its authority to grant such a right? From its power to decide who among its biologically human subjects should be sacrificed for society’s greater good—as embodied most instantly in its power to drive its citizens to their deaths in a war.

“Well, we’re in a war now, a war to preserve the environment and our quality of life. We can’t win that war if too many people of the wrong kinds keep being produced. So, the government allows—promotes—abortion to cut the population. And it delegates the authority to kill to the parties whose self-interest works in favor of that policy: mothers for whom pregnancy’s a personal inconvenience, and abortionists for whom terminating pregnancy’s a lucrative business. But if government can delegate the authority to kill, why can’t it assert that authority directly? Why can’t the government order abortions? And, even more to my point, why can’t there be retrospective abortions?”

“How can an abortion be retrospective?” Butcher demanded, his unease with the whole subject becoming ever more apparent.

“Sometimes I wonder whether you have the grey matter to be a policy maker, Reginald,” Masterson groaned. “It’s so obvious: Imagine someone who—because of the poor way his life’s turned out-would’ve been better off being aborted. And society would’ve been better off, too. Why should society suffer for his mother’s negligence? Shouldn’t we simply rid ourselves of individuals whose lives—as measured by their actions or thoughts—prove they shouldn’t have been allowed to live in the first place? That’s retrospective abortion. And it’s even more sensible than aborting unborn children, because prospective abortion winks at the deaths of the occasional gestating Beethoven or Einstein—whereas, with retrospective abortion you know for sure you’re simply disposing of a piece of garbage, not a potential genius.”

Butcher’s eyes betrayed his fear of the self-taught disciple of Nietzsche haranguing him. He could easily imagine Masterson as a Black Crow—a nazi Einzatzgruppe trooper—gunning down Jews, Gypsies, assorted Slavs. Good God!

A Fetish of the Twentieth Century

Page 498 of Cra$hmaker:

“Democracy has been the fetish of the twentieth century, perhaps politically the most stupid period in world history,” Svetlana reminded Lara, just as seriously. “Democracy set the stage for the great bloodlettings of bolshevism and naziism, and in every welfare state today is preparing the ground for a financial catastrophe that will shake the West to its roots. Oh, now the intelligentsiia chatter about the end of history and claim that liberal democracy and transnational capitalism have proven themselves superior to all other systems. What better evidence that the end of an era is upon us? Such fools! How long will liberal democracy last in America when the claimants for Social Security can receive checks only if workers are taxed out of economic existence? When all income taxes are absorbed to pay interest on the national debt? When …? Enough. You know what is coming—and how soon.”

An Elegant Chain of Reasoning

Page 433 of Cra$hmaker; Dominic Ancona and his campaign managers and regional operatives are discussing whether average Americans are able to figure out what’s best for them. One of the regional directors is skeptical and cynical, saying, “Most people base their political decisions on emotions and what they think are needs—all generated or manipulated by campaign advertising and managed news. Self-government’s usually an exercise in self-deception.”

However, Gregory Boston, one of Ancona’s managers, explains with absolute certainty how the campaign will presume average Americans can and will figure out what’s best for them. Dos Santos, another of Ancona’s leaders, explains the simple reasoning behind their message:

“Everyone wants economic security. Economic security depends on economic growth. And that depends on production, production on investment, and investment on savings. But government doesn’t produce, invest, or save—it only redistributes and wastes. So, to maximize economic welfare, America must minimize redistribution. Minimizing redistribution requires protecting private property and personal liberty. Liberty and property depend on restricting not just the government’s size, but also its ambit. And circumscribing that demands strict enforcement of the Constitution. So, specifically, we’ll focus on separating bank and state, repealing taxes that burden production, and otherwise freeing the market from Washington’s heavy hand. When everything comes into focus, people will see us as an all-American movement, because in the long run everyone except a tiny minority of elitists and their lackeys will benefit from the reforms we’re proposing.”

After this, Boston pulls out some t-shirts to give a graphic example of the tone of their campaign message: white t-shirts depicting black ants and green grasshoppers. “Ants versus grasshoppers—building for the future versus squandering the present.”

“An Amoral Market Economy Guarantees No One Freedom”

From page 333 of Cra$hmaker, this passage is delivered by Evgenii Stolypin in the State Duma and the Federation Council of the Federal Assembly, the parliament of the Russian Federation. The Deputies were hotly debating charges that the on-going discussions between the Chairman of the Central Bank (of Russia) and an American Adivisory Committee  over a possible Russian gold standard violated the Central Bank’s constitutional duty to protect the stability of the rouble.

“Russia cannot save herself by aping Western democratic capitalism,” Stolypin warned the Deputies. “An amoral market economy guarantees no one freedom. To the contrary: it promotes the corruption of government. In the West, markets cater to consumerism. Unfortunately, many people cannot earn from voluntary transactions with others as much as they would like to spend. To obtain more income, they ask the state to steal for them from their fellow citizens. As more and more people use the state to supplement their incomes, the market provides the most efficient forms of lobbying, political action, propaganda, and other techniques for promoting redistribution of wealth—which becomes simply another product offered for sale. The society then cannibalizes itself through every variety of political looting.

“Where has democratic capitalism taken the United States?” Stolypin asked. “To the highest, most subtle and effective form of fascism—in which powerful interest groups conspire with politicians and the media to fool the people into lending legitimacy to a system designed to rob them at every turn. Friendly fascism that says Have a nice day! while it deftly picks the people’s pockets.”