Arranging a meeting and chairing the Q&A of it is hard to combine with actually listening to all that gets said. So when it comes to what I personally learned from Sam Bowman’s excellent talk at my home (already plugged here) last Friday, and from the various reactions to it from the rest of us, it’s a case of me picking out verbal cherries, rather than me now being able to describe the entire fruit bowl. Mostly what I want to say is what an excellent restart Sam Bowman gave to Brian’s Fridays 2.0.
Bowman’s starting point was the difference between, in Donald Rumsfeld’s famed phraseology, “known unknowns” and “unknown unknowns”, on the one hand the things you know you don’t know and quite consciously and deliberately choose to remain ignorant of, and on the other hand the things you don’t even know are out there to be known about.
I know that I don’t know how to sort my computer out when it malfunctions worse than trivially, but I have many friends more computer-savvy than I am. So for me, computer expertise is a known unknown. I am neglecting it, but do so “rationally”. I am approximately aware of what I am neglecting, and of the approximate costs attached to such neglect.
But what of unknown unknowns? As Sam Bowman so wisely said, those are harder to describe! If you could think of an example of an unknown unknown, then it wouldn’t be unknown, would it? The point being that unknown unknowns only reveal themselves in the form of surprises, “surprise” being a word that Bowman returned to quite a few times.
The case for a free society is not that we know exactly how it will be wonderful, but rather that it allows an infinity of different bets to be placed on where it is and where it’s headed and where it should be headed. Some of these bets will be right, a few very much so, although as much by luck as by judgement. In a centrally governed society, where one particular viewpoint is given the force of law, that one dominant judgement is almost certain to be wrong.
You can talk about “unknown unknowns” in retrospect, though, once they have finally made themselves known. Sam concentrated in particular on the now widely known, but a few years back not at all widely known, privileged legal position of those three now famous “ratings agencies”, S&P and … er … the other two. (He did of course say, but I wasn’t taking notes.) Also not at all widely understood were the Basel Accords (Sam rather charmingly called them what to my ear sounded more like the “Basil” Accords), which, in effect, positively demanded that banks to buy lots of “investments” of the sort then assumed prudent but subsequently revealed to be the opposite. The financial crash happened as a result of central bankers all scrupulously, in the name of “prudence” (remember her?), doing exactly as they were told to do and as they assumed they ought to do. This was a crash caused not by the neglect of duty, but by the misunderstanding of what duty really demanded. The bankers were not evil and greedy. They were misinformed. As is further illustrated by their own personal investment decisions, which were much the same as the investment decisions they made on behalf of others.
Others present may want to correct and fill out the above description of what Bowman said, Bowman himself in particular. I do not now plan to record my evenings for posterity, and this one wasn’t. I’d welcome comments about the wisdom of that decision. On the one hand, recoding would be a nice service for those who can’t attend. On the other, I want speakers to feel that here is a chance to explore, in a friendly setting, ideas they may not yet be completely on top of. I particularly like asking people to talk about things that they hadn’t perhaps realised were worth talking about, or people who have not themselves done much public speaking and maybe didn’t know they had it in them (in among other more practised and confident speakers). Recording equipment might get in the way of all that. There is, after all, nothing to stop someone else recording them talking about what they said at my place.
The reaction to Bowman’s talk can be summarised as: well, maybe, maybe not. The feeling of the room was that some people had given at least some thought to the possibility of looming financial disaster. Advice had been given to the higher-ups that was based on all kinds of assumptions holding true: provided this or that, then all will be well. The higher-ups tended to hear only the “all will be well” bit, while neglecting the earlier stuff about the assumptions being made. But the people who had given the advice certainly remembered the earlier bits. But what could they do, once those assumptions started to look seriously dodgy? The advisers were not themselves higher-ups.
For me the phrase of the night was “Too big to think about”, see my title above. Like many a memorable phrase, this one is adapted from another common phrase that has been doing the rounds: “Too big to fail”. Too big to fail refers to the dilemma of top decision makers when the proverbial waste matter had already hit the fan. “Too big to think about” refers to the problem of the uneasy lower-downers, the advisers, the quants and the specialists, the ones who did have very bad feelings, beforehand. Too big to think about referred to those for whom the unknown unknowns that eventually clobbered the higher-ups were actually, somewhat, known about beforehand. Various people in the room last Friday “actually heard people say” that if such-and-such does turn out as feared, then we’re all so f***ed there’s nothing that we, and certainly not that I, can do about it. We (I) will have far bigger problems than are covered by my little remit. So, we (I) just have to hope that all will be well, because if it isn’t, that’s … too big to think about!
Which leads inevitably on to the question of how much it was merely pure ignorance that was in play here, and to what extent moral turpitude was involved. How “pure”, that is to say, was the ignorance? There is, after all, a particular sort of immorality that consists of refusing to face unwelcome truths and to think about them in any detail. (Someone mentioned “unopened envelopes” at this point in the discussion.) The consensus of the evening, at any rate from where I stood (which tells you something of how crowded the room was), was that Bowman was making an illuminating extreme point, so to speak, but that the truth was somewhat more muddy and more morally complicated.
What was it about these financial institutions that made them vulnerable to such fingers-crossed, hope-for-the-best, ignore-the-worst, group-think? Mention was made of how a much more widely known-about-in-advance and much criticised set of rules, involving government guarantees of bank deposits, caused banks to be all about crazy risks and not at all about their own prudence, truly understood. That made particular sense to me.
I expected Sam’s talk to be good, and it was. But the quality of the Q&A struck me as being of a particularly high quality last Friday, with quite a few of those present having personal experience of the financial discussions and dilemmas being alluded to. Which is a further reason to maybe not freeze the speakers thoughts electronically. What if, in the light of what he hears from the floor, he ends up thinking slightly differently about his subject than he did when actually speaking?
What I particularly liked about the evening, aside from the quality of the speaker and the quality of the audience that the speaker attracted, was that, instead of assuming total stupidity or total villainy on the part of people from whom we hope and continue to hope for different and better thoughts and decisions, we were all, thanks to Sam Bowman’s eloquent lead, making a serious attempt to get inside the heads of these various decision-makers and their advisers. Arguing works far better if you seriously try to understand where other people are coming from and how they see the world, rather than just making insulting assumptions about their motives and thought processes. Us libertarians (in particular me libertarian) getting better at arguing is (for me) what these evenings are all about.
Sam Bowman is a talented and eloquent chap and, I believe, may do a lot of good in influencing those who rule us in a less destructive direction. There is a window of opportunity as politicians start to realise that expanding the money supply and extending government spending will not deliver economic growth, for some new ideas to seep through. Sam is the sort of person who might just get some seeds of sanity through the prevailing Keynsian miasma of self-delusion.
Damn, I wish we had been able to attend 🙁
I think your recollections are approximately correct. The evening was indeed inspiring, in terms of argumentation and I think at least two blog posts will be coming out of it stuffed with arguments. It remains to be seen if they are better arguments or merely different ones.
Round one, entitled “The Micklethwait Alpha” is already drafted and looks good so far 🙂 Round two was drafted during the Q&A and rehearsed towards the end and needs more work evidently.
Don’t record the evenings, the setting is informal and so the format should match. There are other venues for slightly-more-well-developed ideas that benefit from being videoed, such as the Libertarian Home meetup, if you don’t mind my saying so.
By the way. Something that came up during the Q&A was that some of the relevant reports* about assessing risk in the banks were implemented in PERL. I wonder if that isn’t more important than was recognised. Not many people know PERL anymore; and even fewer like to think about it. That represents a shortage of brains on part of the problem (or part of the solution), lots of reports suffering from bitrot and not being run; and big disincentives to going and looking at these things.
* reports => repeatable computer queries and their outputs.
People believe what they want to believe, if they can.
‘try to understand where other people are coming from and how they see the world…’
I think that is a good starting point – asking someone why they choose to believe what they believe – since we rarely question our motives on a such personal level and self interest is not something people are willing to admit to.
When I use the phrase ‘known unknowns’ it is to signify a question to which the information is unavailable. Is there bacterial life on Mars? Will the last set of changes fix the pressure transient we saw in the data? Are there terrorist groups with enough fissile material to build a bomb? Will a solar storm wreak havoc with Earth this year?
They are all questions for which we may be able to get an answer eventually. We know we do not know the answer. We may not even know how to get the answer. But we know it could bite us. Unknown unknowns are exactly the same except we don’t know the question either…
One angle that could have been mentioned on Friday – but I forgot – is that some of this ignorance of risk in the financial system, say, has been deliberately encouraged. As evidence let me give the case of these “off-balance sheet” structures, in which the credit risks of lenders, in the form of loans and bonds outstanding, were taken off the balance sheets of banks and put into what are called Special Purpose Vehicles. The result was, that when mayhem broke out, some firms had no idea whatsoever on what they were on the hook for in terms of potential bad loans and the like. The ignorance of the situation was in part brought about by the toleration of such things, a feature of the developments in financial engineering in the past decades as well as the activities of rating agencies, mistaken changes in accounting standards; the unwarranted faith in some risk models, and such perverse incentives such as state-backing of banks, “too big to fail”, and of course, bringing up the rear, central banks.
It makes a big difference if you have a system where the incentives are structured to encourage people with specialist knowledge to discover new information and act on it, rather than put it out of their minds almost as an instrument of policy.