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Global Crisis Blog

Can We Trust the Intuition of Experts?

By Shlomo Maital

Nov. 10/2009

 

    An article in the latest American Psychologist, by Daniel Kahneman and Gary Klein, addresses the key issue:  When can we trust the intuitive judgment of experts? [1]

    Kahneman is identified with the HB (heuristic bias) approach.  His work, some of it done with the late Amos Tversky, shows how flawed our judgment is and how non-rational our decisions often are.[2]  Kahneman won the Nobel Prize in Economics for his research.

    Klein is identified with the NDM (naturalistic decision making) approach, which chronicles often-amazing successes of intuitive judgment.  The article is an interesting dialogue between the two approaches, ending in “a failure to disagree”, i.e. broad agreement.

     Here is what the two scholars agree upon:

  • · An environment of high validity is a necessary condition for the development of skilled intuitions. Other necessary conditions include adequate opportunities for learning the environment (prolonged practice and feedback that is both rapid and unequivocal).If an environment provides valid cues and good feedback, skill and expert intuition will eventually develop in individuals of sufficient talent.

  Although true skill cannot develop in irregular or unpredictable environments, individuals will sometimes make judgments and decisions that are successful by chance. These “lucky” individuals will be susceptible to an illusion of skill and to overconfidence.   The financial industry is a rich source of examples.

    Let me translate.   If the ‘environment’ of decision-making is stable and predictable (i.e. that of a chess game),  experts develop startlingly accurate intuitive judgment.  Chess grandmasters, for instance, can choose the best move quickly in complex situations when amateurs fail to even consider that move.  But if the environment is unstable and unpredictable,  expert intuition is flawed.  True, such judgment will be right part of the time.  But this is solely through chance.   Those who ‘hit it’ by chance become overconfident, take excessive risk — and destroy their own businesses and the capital of others. 

      If “the financial industry is a rich source of examples” of flawed intuition,  then those enormous bonuses the industry is again paying itself are not justified.  Nor can we put our faith in investment advisors with superior rates of return over the past year.  Probably, an accident.   We can, however, better understand Warren Buffett’s surprisingly accurate intuition.  It is based on investing from the outset ONLY in stable environments, i.e. basic products like food, drink, machine tools or railroads, and holding on to the equities for decades.  

      Kahneman and Tversky once investigated the phenomenon of the ‘hot hand’ in basketball (streaks of baskets, without misses, by star players) and showed statistically that there was no such thing — it was simply random.  (Toss enough coins, and you will eventually get a dozen straight ‘heads’).   Why, then, do we still believe in ‘hot hands’ among financial advisors?   And why have they returned to paying themselves obscene bonuses? And why do we the people agree to it?   

       And finally, why in the world would anyone believe, in a world of overconfidence in flawed intuition in the financial services industry,  that the 2007-9 global crisis will not recur? 

   

 

 


[1] “Conditions for Intuitive Expertise: A Failure to Disagree”,  American Psychologist, Sept. 2009.

[2] See S. Maital, “Daniel Kahneman: on redefining rationality”, J. of Socioeconomics, 2004.

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      berlin wall dominos              Global Crisis Blog

Fall of the Wall:  20 Years Later

By Shlomo Maital

 

  As I write this, I am watching German Chancellor Angela Merkel on CNN, in a sea of Germans, speaking informally about the extraordinary events two decades ago — events she personally witnessed and took part in, when she, then a young scientist crossed from East to West.   Merkel chose not to create a formal diplomatic event with stuffy speeches, but simply stood elbow-to-elbow with thousands of Germans, some of whom had crossed with her on Nov. 9, 1989,  after symbolically crossing from East to West again, as she did in 1989.   Merkel thanked Mikhail Gorbachev, who was with her, for his policies that made the Fall of the Wall possible and eventually, on Dec. 25, 1991, led to the dissolution of the Soviet Union.  When Poland’s Solidarity movement won the June 4, 1989, election,  the Russian ambassador to Poland called the Kremlin in panic and asked,  what shall I do?   what shall we do?   Gorbachev had a simple answer.  Do nothing.  Let the election stand.   It was in part Gorbachev’s non-intervention policy that enabled the Wall to fall. 

     The Berlin Wall was erected in June 1961, after some 3.5 million Germans fled East Germany to the West.   The Wall had concrete walls, barbed wire, guard towers and a death strip that had anti-vehicle trenches, spikes and other types of defense.  Between 1961 and 1989 some 5,000 people tried to escape over the Wall;  an estimated 150 people died.

     Those most surprised at the fall of the Wall were the Germans themselves.  Most of them who witnessed the dramatic events of Nov. 9, 1989, said they never believed the monolithic German Democratic Republic would crumble so rapidly.  

     Today we know that British Prime Minister Margaret Thatcher and French Prime Minister Francois Mitterand were both worried and displeased by the fall of the Wall,  understanding that it would bring German reunification and create Europe’s largest and most powerful economy.    Indeed, unification came quickly.  On Oct. 30, 1990,   the new reunited Germany was announced.  West  Germany was in such a rush to implement the unification, that it offered to buy East German marks at a price of one such mark for a West German mark — at a time when the buying power was about eight to one.   The resulting flood of marks into the system caused inflation, led the Bundesbank to raise interest rates —  and ultimately, caused Britain to leave the European Monetary System, as the British wanted to free themselves from the straitjacket of high European interest rates and float the pound.  (On Sept. 16, 1992, George Soros’ massive sales of pounds caused Britain to leave the European Exchange Rate Mechanism).    So ironically, the fall of the Wall may have ultimately been responsible for keeping Britain out of the euro system.

     These events, from 1989 through 1992 and beyond, show how appropriate is the initiative taken by German students  to visually demonstrate the impact of the fall of the Wall.  The students created 1,000 styrofoam dominos, each three meters high, and placed them along the path of those who fled from East to West.   As one domino toppled another, we saw clearly how the Fall of the Wall led to a chain of remarkable events that forever changed history.  

    Congratulations to those innovative German students!

 

 

Innovation Blog

Poetry & Innovation: Mommy, Daddy, Tell Me a Story!

By Shlomo Maital

Nov. 4/2009

  Do you want to build a powerful business innovation? I ask my students.

  If you do — tell me a story.  Build a powerful narrative that has real people in it, a plot, conflict, a story line, and above all, a happy end.   These are all elements of  every great children’s book, stories we all grew up on,   Good Night, Moon,    Where the Wild Things Are,  and so on.  Children make meaning out of the world through stories.  So do we adults, it seems.   War and Peace, Anna Karenina — great novels are all great stories.   

     So — I ask my students to write a great narrative, rather than a dull-as-dust business plan with a huge spreadsheet.  Tell me a story.  Tell me how you will build a prototype, sell to one customer, scale up — and change the world.   And make sure there is a vivid photographic happy end.

    Who is the main client for such a story?  Investors?  VC’s?  No.  The main is client  is YOU yourself!    Does your story excite you, does it reflect your deepest passions? If so, you have a business idea with potential to succeed. If not — you’re wasting your time.  If you cannot energize yourself, you will not energize others that you will need on your team, in order to succeed. 

    Great stories create meaning.  They are memorable.  They inspire.  No-one ever joined a business venture because of an inspiring spreadsheet.  They do join because of a powerful change-the-world visionary narrative.

    To tell the absolute truth — many of my students do not ‘get it’.  They have been polluted by follow-the-rules here-is-how-to-do-it MBA course formulas for writing conventional business plans.  Do it this way, students learn in their MBA studies.  Is it not ironic that we teach entrepreneurship and innovation, by instructing our students to avoid innovation (in business plans) like the plague?

    I find badly-needed moral support in last week’s New York Times column by Thomas Friedman, titled “More Poetry Please”.   Here is what Friedman says:

      “President Obama has not tied all his programs into a single narrative that shows the links [among all his ideas and initiatives].  …such a narrative would…evoke the kind of popular excitement that got him elected.   Without it, the President’s eloquence is lost in a thicket of technocratic details.  OBAMA NEEDS TO ENERGIZE THE PROSE  of his Presidency by recapturing the poetry of his campaign!”

     [Yesterday’s (Tuesday) elections in the US prove the point.  The Democrats lost two key races for Governor (New Jersey and Virginia), despite Obama’s intervention there.]

     Precisely!  Every innovator, including Mr. “Yes, we can”,  must energize the prose of his or her idea (the feet-on-the-ground business details)  with head-in-the-clouds narrative poetry, to excite himself or herself and to energize the team, the investors, and even the clients.

    But innovators, beware!  Building such a narrative is extraordinarily difficult.   Entrepreneurs are not supposed to be poets!   Many innovators are engineers;  engineers are trained to understand the Second Law of Thermodynamics, not the First Law of Rhetoric and Narrative. 

     Here is a suggestion.  Do you have a business idea?   Tell it to a six-year-old.  Make it into a story.  If you can hold their interest, and elicit questions,  maybe you have a good business idea.  If you cannot,  if you cannot respond to “Mommy, Daddy, tell me a story”,  with a good one —  go back to the drawing board.  

     

 

 

Innovation Blog

How to Say “I Love You”  Without Saying “I Love You”!

By Shlomo Maital

Nov. 4/2009

      A BBC World Service program on the songs of Irving Berlin and  George and Ira Gershwin, American Jewish songwriters and musicians who lived in the 1930’s,  reveals a key innovation principle:

     Often, thinking IN the box [i.e. within difficult binding constraints or limitations] spurs enormous creativity.

     In the 1930’s composer George Gershwin (Rhapsody in Blue, An American in Paris] and his brother Ira, who wrote the words (lyrics), wrote wonderful love songs.  They did so, however, without using the words “I love you”, because those words were overused and tired.

     How do you say I love You without saying I Love You?  Wow, here are two great examples:  Gershwin’s Let’s Call the Whole Thing Off, and Irving Berlin’s  How Deep is the Ocean?

Let’s Call the Whole Thing Off

This song was written for the 1937 movie musical Shall We Dance?  By Ira and George Gershwin.  It was sung by Fred Astaire and Ginger Rogers, who did an innovative dance while singing it,  on …. roller skates!   It is pure magic!   Compare these lyrics with today’s rap!

Things have come to a pretty pass
Our romance is growing flat,
For you like this and the other
While I go for this and that,
Goodness knows what the end will be
Oh I don’t know where I’m at
It looks as if we two will never be one
Something must be done:
You say either and I say either,
You say neither and I say neither
Either, either
Neither, neither
Let’s call the whole thing off.

You like potato and I like potahto
You like tomato and I like tomahto
Potato, potahto,
Tomato, tomahto.
Let’s call the whole thing of
But oh, if we call the whole thing off
Then we must part
and oh, if we ever part, then that might break my heart

So if you like pyjamas
and I like pyjahmas,
I’ll wear pyjamas
and give up pyjahmas
for we know we need each other so
we better call the whole thing off
let’s call the whole thing off.

You say laughter and I say larfter
You say after and I say arfter
Laughter, larfter
after arfter
Let’s call the whole thing off,
You like vanilla and I say vanella
you saspiralla, and I saspirella
vanilla vanella
chocolate strawberry
let’s call the whole thing of
but oh if we call the whole thing off
then we must part
and oh, if we ever part,
then that might break my heart

So if you go for oysters
and I go for ersters
I’ll order oysters
and cancel the ersters
for we know we need each other
we better call the calling off off,
let’s call the whole thing off.

I say father, and you say pater,
I saw mother and you say mater
Pater, mater
Uncle, auntie
let’s call the whole thing off.

I like bananas and you like banahnahs
I say Havana and I get Havahnah
Bananas, banahnahs
Havana, Havahnah
Go your way, I’ll go mine

So if I go for scallops
and you go for lobsters,
So all right no contest
we’ll order lobseter
For we know we need each other
we better call the calling off off,
let’s call the whole thing off.

 

How Deep is the Ocean?

  Irving Berlin’s 1936 song, to which he wrote both words and music, conveys the deepest feelings of love , using I love you only twice, but as a question….

 

How can I tell you what is in my heart?
How can I measure each and every part?
How can I tell you how much I love you?
How can I measure just how much I do?

How much do I love you?
I’ll tell you no lie
How deep is the ocean?
How high is the sky?

How many times a day do I think of you?
How many roses are sprinkled with dew?

How far would I travel
To be where you are?
How far is the journey
From here to a star?

And if I ever lost you
How much would I cry?
How deep is the ocean?
How high is the sky?

 

 

 Global Crisis Blog

Three Global Scenarios: Take Your Pick, Share Your Wisdom

By Shlomo Maital

Nov. 3/2009

      In The Economist’s Oct. 1 issue,  a special report on The World Economy has an excellent and insightful lead article.   The question addressed: 

     *** Will the world economy recoup its huge losses from the 2007-9 global crisis, catch up to the pre-crisis trajectory, and return to the original baseline growth (a large but one-time loss)?  This is Scenario 1. (See Chart).    (Prof. Milton Friedman believes this has been the case in every American recession, for instance).

     ***   Will the world incur a permanent loss in output, returning to the original global growth rate but NOT recouping fully the losses in wealth and output. This is Scenario 2.

    ***   Will the world incur a permanent and growing loss in output, with global output growth emerging SLOWER than pre-crisis and never regaining its original rate.  This is Scenario 3.

      It makes a huge difference for every single manager, business, family, government — everyone! — which of these scenarios will actually occur.  If forewarned is forearmed, we all need to be forewarned. But as usual, our economists disagree and are of little help.

   If you have insights into which of these scenarios you believe is most likely, and why, please share them with us and submit a comment.

 Picture1

 

Global Crisis Blog

Act Two: Which Country Will Be Smart Enough to Find a Happy End?

By Shlomo Maital

Oct. 31/2009

 

     As the world breathes a sigh of relief — the global crisis has not become a decade-long Depression, and GDP growth is restored in the U.S. —   there is room for gloom, or at least great caution.  We are not out of the woods yet.  Bad things still lie ahead. (What other message would you expect from an economist?).

     The reason is simple.  Both America and China, and to some degree other nations,  spent their way out of recession, through massive fiscal stimulus packages and huge deficits, plus enormous credit expansions.  America’s package exceeded $1.2 trillion.  China’s was over $586 b.  But as the Wall Street Journal’s widely-read column “Heard on the Street” notes,  “It is going to be a challenge for Beijing to rely on stimulus spending to keep growth going.”  And,  WSJ might have added, for America, Israel, and every country.

       America and China restored growth, or maintained it, respectively, by deficit spending.  For America, this has created a huge debt overhang, because the money was largely borrowed.  The deficits must be restrained, at some point.  Otherwise, the debt burden will soar impossibly and inflation may result.  But, what will replace government demand?  Exports?  We are seeing a wave of protectionism.  Investment?  No sign of that, only higher profitability will drive investment, and margins are down.  Consumer spending?  No way– with unemployment still high, and no signs that employment will revive any time soon,  why would consumers spend, rather than save? 

     There is no replacement for government demand. But governments cannot continue to give the economy artificial respiration, or CPR,  forever. 

     The near-term prognosis is for very very weak growth, in America and Europe,  and in China, a difficult transition from export-led growth to consumer-led domestic demand growth.

     Which country will be smart enough to write Act Two for its fiscal stimulus plans, and end the Act with a happy ending?  America? China?

      We are not yet out of the woods.

Blog entries written by Prof. Shlomo Maital

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