Greg signed-off with the following quote:

‘As compared with the other animals man lives not merely in a broader  reality; he lives, so to speak, in a new dimension of reality. There  is an unmistakable difference between organic reactions and human  responses. In the first case a direct and immediate answer is given to  an outward stimulus; in the second the answer is delayed. It is  interrupted and retarded by a slow and complicated process of thought.  Yet there is no remedy against this reversal of the natural order. Man  cannot escape from his own achievement. He cannot but adopt the  conditions of his own life. No longer in a merely physical universe,  man lives in a symbolic universe. Language, myth, art, and religion  are parts of this universe. They are the varied threads which weave  the symbolic net, the tangled web of human experience.’ (pp. 24-25)

Cassirer, Ernst (1944). *An essay on man: An introduction to a  philosophy of human culture*. New Haven/London: Yale University Press.

Crucifixion, P. Picasso, 1930 (The tangled web of human experience)

Doc, it hurts when I do this!

There’s an old joke that goes like this:

A guy goes to the doctor and says, “Doctor, doctor, it hurts when I bend my arm like this. What should I do?”

The doctor answers, “Stop bending your arm like that.”

On this blog site, I have repeatedly argued against cyclical models as predictive. Now comes a new and fascinating book entitled “This Time is Different: Eight Centuries of Financial Folly“, by economists Carmen M. Reinhart and Kenneth Rogoff. The authors use newly acquired historical data to argue that the recent economic crisis is wholly unexceptional. It is merely one more financial market driven boom-bust incident in a chain of incidents going back more than 500 years.

Their “panorama” looks at repeated patterns in which the financial machinations of business people, investors, and governments, seeking advantage, lead to riskier and riskier leveraging of debt and exchange rates until, with fateful inevitability, the house of cards collapses into a chaos of debt defaults, currency instabilities, and other perturbations of what had come to be regarded as predictable markets. In their original paper, which you can read online HERE, they offer the following chart as evidence of the cyclical nature of these events.

Nations in Default on Debt - 1800 -2006

Let’s stop for a moment and think about what we are seeing in this chart. We see periods with some semblance of order (the valleys) during which risk taking becomes increasingly reckless and stupid over time. In other words, these are the periods during which the game is afoot. The players are moving capital willy-nilly. Leveraged risk-taking based on easy credit, is increasing at an increasing rate. On paper, GDP, if you want to call it that, is skyrocketing. But greed, tunnel vision, and “this time is different” thinking, blind the players to the risks they are taking. As certain as the sunrise, each game period is followed by a sudden collapse (a peak) in which the risks come home to roost and the rules of the game are abandoned in panic  (nations default on their debts and taxpayers bail-out “too big to fail” companies). All illusions of order and predictability are eroded away in uncertainty and chaos.

Thus, the “Cycle of Stupidity” can be summarized as:

1. People devise a regulated and predictable economic system designed to enable the creation of, and fair and equitable exchange of, goods and services.
2. People, in order to gain inequitable advantage, game the system by subverting the rules and regulations of the system and exploiting its weaknesses.
3. The subversion of the system comes to be regarded as the system itself.
4. The system becomes so undermined that it collapses into chaos.
5. All Hell breaks loose (Blood in the streets, so to speak.)
6. Return to step 1.

In an interview on the PBS New Hour, Kenneth Rogoff says,

“There’s no doubt about it. I mean, the recurring theme is arrogance and ignorance: ignorance that this has happened before in other places, in other countries; and arrogance thinking we’re special, this time is different. We have financial globalization. We’re running our economy better. “They’re lending us a lot of money because they love us and we’re doing a good job.”

From a cyclical standpoint, the only thing that is repeated is stupidity, followed thereafter by chaos and panic. In every instance, the losses realized, are unique to their time and place. In human terms, some storied few may weather the storm, but on the whole come unemployment, wars, famines, impoverishment, sadness, and misery, all in ever greater allotments.

Rogoff and Reinhart are doctors who are telling us, not that the observed patterns are themselves, predictive. What is predictive is our own stupidity. Like the old joke at the beginning of this entry, if doing something hurts you, the solution is to stop doing it.¹

=====footnote——–

GDP Up!

October 29th, CNN-Money lead article: “Economy finally back in gear: Government says GDP grew 3.5% in third quarter, ending a year-long string of declines and coming in better than forecasts“.

Readers of this blog already know that I regard the stock market as a misleading leading indicator. Is GDP a better predictor?

Two lynchpins to understanding the work of Dr. W. E. Deming are the nature of “measurement” and “optimization” of a system. The efficacy of measurement depends on what we choose to measure and why. The concept of optimization counsels us to remain steadfastly committed toward our aims, based in our values, and cautions us against reliance on any single measure.

What does GDP really mean and is maximizing GDP a desirable thing?

GDP is widely used as a summary statistic said to be indicative of the overall well-being of a nation’s economy.

First off, here’s what GDP looks like to most economists:

It is translated into english as:

GDP = private consumption + gross investment + government spending + (exports - imports)

So what does it mean?

In a very general sense, it purports to be a measure of economic activity. It does not care what kind of economic activity. It does not care a wit about the aims and ends of that activity. It is, supposedly, just the heat being generated by the wheels of industry. Burn baby burn!

Are we there yet?

Think of it this way.

You are in your car and driving down the road. You press your foot down on the accelerator. Your speed increases and your fuel consumption increases. Your favorite band is blasting away on the CD player and you are grinning from ear to ear as you zip by other cars LOL (laughing out loud).

WAIT A MINUTE! Where are you going? What’s just up ahead, over that hill or around that curve? Is it a place of joy and happiness or is there a cliff?

A high GDP can be rightly regarded as an imperfect measure of the speed at which our economy is racing to heaven or hell, but the number does not and cannot, distinguish between the two destinations!

Nobel prize-winning economist Joseph Stiglitz explains this quite well in the following video clip. Use it as a departure point to a better understanding of Deming’s theory of measurement and optimization.
Share/Save]]> http://www.3sigma.com/heaven-or-hell-by-what-measure/feed/ 3 http://www.3sigma.com/heaven-or-hell-by-what-measure/ http://feedproxy.google.com/~r/ThreeSigmaSystems/~3/F8jTTsUdAEY/ http://www.3sigma.com/stocks-tumble-on-consumer-weakness-nytimes-com/#comments Sat, 31 Oct 2009 00:37:10 +0000 marc http://www.3sigma.com/?p=3088 “Stocks Tumble on Consumer Weakness” reads the headline in today’s New York Times. I wonder why they didn’t soar on today’s other news:” Estee Lauder Profit More Than Doubles on Strong Sales 3:20 PM ET. NYSE Euronext Beats Estimates 1:52 PM ET, Duke Energy Profit Falls, but Sales Stabilize 6:30 PM ET, Washington Post Co. Quarterly Profit Up 69% 4:40 PM ET, Timberland Sale Helps Weyerhaeuser Results 6:30 PM ET. Call me paranoid if you like, but I can’t help wondering if the real story is that the Wall Street sharks saw all of the suckers jumping into last week’s  “Dow Breaks 10,000″ market and decided it was feeding time — again.

In the October 29, 2009 New York Times, financial commentator Floyd Norris offers up a solution to excessive executive compensation and the bubbles that plague our free enterprise system. In his article, ”To Rein In Pay, Rein In Wall St”, he suggests that Wall Street profits need to be dampened through regulatory intervention that increases transparency, limits risk, and breaks up “to big to fail” institutions, to make them more competitive. His analysis of Wall Street money churning is excellent, but  is his tangled web of regulations a auseful approach?

WILLIAM OF OCKHAM (1280 - 1349)

The wisdom called Occam’s Razor asserts the principle that, all things being equal, the simplest theory or solution to a problem should be favored. If we really do believe that market demand is driven by consumers seeking the “best” return for their dollar, and that competing for the customer’s dollar will drive companies to compete with one another to create product and service that customers desire, then we should abide by that theory. We should remove the obstacles and let the market fundamentals work.

How can we do this?

King's X?

The solution is as simple as Occam’s Razor itself. There need be one and only one rule in conducting transactions. TELL NO LIES!

All we need to do is require that every purveyor disclose, to the best of their ability, all of the details about the product or service they deliver in exchange for the customer’s dollar. If we make deception by inclusion or omission a crime, the consumer will be able to rationally compare and choose between products and services. Let the best supplier win!

For example, require that automakers disclose vehicle specs, safety data, environmental impact, failure records over time, customer satisfaction data over time, AND actual cost of production, marketing, distribution, and sales. If the customer has a question that is not on the disclosure list, then require the seller to answer honestly or find the answer or confess ignorance.

If an automaker feels that this data places him at a competitive disadvantage, then let him change the product so that the data will be more advantageous.

Complete honesty and transparency underly the fundamental thesis of free market fundamentals. Competition for consumer dollars only works if the customer has the information needed to choose. Only with complete and transparent information can the customer compare products and serivces in order to decide just how much extra to pay based on the value he or she assigns. In the automaker example, the price the customer is willing to pay under these conditions will contain the profit to be realized and distributed among the automotive supply chain players.

When it comes to financial investemnt, sellers should be required to fully disclose the statistical data that quantifies the risk of an investment. This is no different than disclosing the data that is readily available for various games of chance played at gambling casinos around the world. If a Wall Street investment wizard feels an investment risk is to complex to quantify, he or she must simply say, ”I   H A V E   N O   I D E A”.

Adam Smith and the "Invisible Hand"

In other words, let free market work!

Does this sound naive? Won’t people fudge the truth anyway, you say?

Sometimes sellers will lie. They will make false claims or claim a truth for which there is no evidence. But when they do this, the truth will come out at some point down the line. Their crimes of irresponsibility will be detected and punishment and compensation will be extracted. They can either do better, or pay the price for their deception and ignorance.

———————-

If you conclude that “tell no lies”  cannot work, then there is a fundamental problem with Adman Smith’s theory of the market’s “invisible hand” that is guided by rational self-interest.

Would of, could of, should of…..

If I had jumped into the stock market and bet on the DOW last March, my investing friends say that I would have made a tidy sum.

As I understand it, even though unemployment continues to increase and housing prices continue to decline, in the few short months since the world economy nearly collapsed, the stock market, a leading indicator, is now promising a recovery. Apparently the DOW has been rapidly buoyed up by the stock prices of companies that specialize in financial trading. (Hey aren’t those the guys that got us into this mess in the first place?).

I suppose it makes sense. Those companies are the ones that have been given access to vast sums of taxpayer dollars at 0% interest and an implicit government guarantee that the taxpayers will bail them out again if they blow one of those too-complex-to-understand bets. With a sweetheart deal like that, who wouldn’t play some long-shots with lots of upside?

So now I am wondering if I should ante up a chunk of money to get into the game. Hey, I’m only human. My broker says yes, but the fine print still says the past is no predictor of future performance. But hey, people who are in the market are getting get richer as I write this!

Even though past performance does not predict future performance, I found this cool historical composite chart on the Internet and it got me to thinking.

The black line is the DOW circa 1928. 381 was the high and 128 was the Great Crash, which was followed a few short months later by a nice little “happy days are here again” rebound. The rest is, as they say, history. The red line is the DOW circa 2008. 14000 was the high and 7000 was our very own “great crash”. I guess 10000 is Happy Days all over again. Or is it?

Anyone want to help me out with an informed prediction?.

Happy days are here again, right?

As is clear in his notorious 14-points, Dr. W. E. Deming was adamantly opposed to the use of motivational incentives by management. He saw goals, targets, performance evaluations, and pay-for-performance schemes as destroyers of the system of people. He said the correct function of management is to “remove obstacles to joy and pride in workmanship”. I have suggested that the very ideas suggested by motivational theory might be best abandoned. My suggestion is one of those ideas that I think of as bordering on the edge of chaos. It challenges conventional thinking and pushes our thinking envelope.

In this post I use an engineering analogy to explain how the idea of motivation may lead us in the wrong direction.

Note: For the sake of continuity, I have created a new category called “Motivation” that gathers my blog posts on the subject so that readers can look back at previous entries on the subject.

I am a great fan of John McPhee, who writes a good deal about the contradictions produced by the hubris of technologists who push buttons, pull levers, drive bulldozers, and otherwise bully our environment by “motivating” it to fit our needs and desires. The following analogy was inspired by the essays included in his book, “The Control of Nature“, which I commend to your attention.

Analogical argument in favor of repurposing organizational management

Imagine that there two engineers who have been tasked to come up with a plan for getting water to a location called B from its current location called A.

Remove obstacles to the flow

Engineer 1 is an ambitious fellow. He draws up a plan to move the water in a straight line by motivating it up and over mountains using pumps and siphons. He argues in favor of his plan by saying that by “motivating” the water he can direct it along the shortest and most reliable path to point B.

Engineer 2 is an older and wiser fellow. He proposes a much longer path that follows a gravity line from A to B. His plan does not require pumps or siphons. He argues that, by understanding the behavior of water, he can gently channel it to point B. He has no need to “motivate” the water. He only needs to understand how it behaves and REMOVE OBSTACLES to the flow.

The designs of both engineers will likely achieve the target outcome (RFP specs) in the short run but, keeping in mind that neither will be perfect,  which theory — to motivate the water or to let water’s inherent behavior do the work — will set in motion the fewest contradictions (problems) in the longer run?

Of course, people are not water. People flow uphill!