Self-Licking Ice Cream Cone: the real financial invention

"Word of the Day today is LIQUIDITY. LIQUIDITY is when you look at your Retirement Account and wet your pants."
- Allen Warren

The folks at etrade sent me a note that starts out:

Not surprisingly, the long and painful bear market has pushed a lot of money to the sidelines. At the end of 2008, cash in money markets and bank accounts had reached nearly $9 trillion or 74% of the value of all publicly traded stocks in the U.S.!

That was the highest such ratio since 1990 — and it would only take a portion of that money moving back into the market to have a powerful effect on stock prices

One of the things that I find so fascinating about social reality is how it differs from physical reality. It does not matter whether you suddenly think that a bowling ball is as soft as a marsh mellow - if you drop it on your foot you will feel intense pain. By contrast, if you suddenly think that that stocks are a bad investment, you'll get evidence of just this thing.

There are real and legitimate reasons for markets going up and down. Having said that, there is a great deal of "me too" money that chases after the trends of these dynamics, the money that makes the bubbles and the bubbles pop.

Right now, there is about $9 trillion waiting for stocks to become safe again as an investment. When will stocks again be a safe investment? When that $9 trillion stops waiting.

What do you think is true about financial markets? The real answer is, Whatever you think is true about (or in regards to) financial markets. Of course, as arbitrary as this seems, it can't just be manipulated at will. It's worth remembering that the publishing industry phenomena the year before the financial crash was The Secret.

How could anyone not find cultures, societies, and markets fascinating?

Underwear, Peasants, and Paradigms

Underwear saved the lives of peasants in the 1700's.

Innovations in the early day of the industrial revolution made underwear and changes of clothes affordable. Prior to that, clothing that lie next to the skin fostered bacteria and infection and early death. Some time later, fashion became, er, fashionable and people began to buy clothes simply to stay current rather than because their clothes were hopelessly soiled, worn or outgrown.

It is considerably harder to change minds than clothing. Thomas Kuhn's often cited and occasionally read book The Structure of Scientific Revolutions popularized the notion of paradigm. He argued that a particular worldview, or paradigm, does two things. One, it makes sense of the world by ordering data and experiences into comprehensible patterns. Two, it filters out what doesn't fit into the pattern, what doesn't support the paradigm. (At any given instance, our senses are exposed to millions of bits of data; our consciousness can process only about 40 bits per second.) Thus, the paradigm we need to make sense of reality also filters out reality. One of the first jobs of a paradigm is to defend itself from attack.

Kuhn points to various examples of paradigm filters throughout history. Scientists expecting planetary orbits to be perfectly circular threw out data that deviated from that, seeing it as an error or anomaly. Their failure to clearly see the data meant that they missed the elliptical nature of orbits which meant that they missed the opportunity to develop a theory of gravity. The way that they made sense of the world kept them from sensing the world.

Radically new theories generally get accepted only by later generations. The Copernican Revolution actually took a century to be accepted. The germ theory was discarded by Pasteur's contemporaries and only accepted by the next generation, provoking the quip, "Science proceeds by the death of scientists."

A great deal of the progress of the 20th century came from solving problems of information. From semiotics and algorithms to the transmission and storage of information, we've made amazing progress in information technology. Yet new information does not automatically create a new paradigm.

There is a difference between information that streams in to be sorted and filtered to support our existing paradigms and the acquisition of knowledge, understanding, or wisdom that might transform our paradigms. We've mastered the first and have, as near as I can tell, not even bothered to define the latter as a challenge worth pursuing.

I'm sure that the medieval masses didn't think any more about changing underwear than today's masses think about changing paradigms. Yet fluency with paradigms might do as much for our quality of life as information technology did for the last century or textile manufacturing did for the 18th century.

If history teaches us nothing else, it is that paradigms are like underwear; no matter how comfortable they first seem, they eventually need changing. Maybe it's time to make paradigm shifts fashionable.

The Bay Area and the Reinvention of Self

I'm on business travel this week, here in Silicon Valley with a client. I grew up close to the Bay Area and lived in Santa Cruz for awhile. I met my wife (a Canadian on vacation at the time) in Los Gatos and our first date consisted of me trying to find the waterfront in San Francisco (to this day I remain directionally challenged).

In my mind, there is a relationship between the beginnings of the free speech movement at Berkeley and the hippies in Haight Ashbury during the 1960s and the Esalen Institute and EST seminars through the 1970s and 1980s and the tech boom here in Silicon Valley in the 1990s.

I don't know if there is another place on the planet where people are so full of possibility - whether it be the possibility of reinventing themselves by a change in thinking ("excuse me while I slip into a more comfortable paradigm") or body ("I'm feeling bored, Barbara. I think I'll ran an ultramarathon this weekend out to Yosemite."), or starting a business with which they expect to change the world and become rich.

Of course, what else would one expect from a state that was largely defined by a Doctor Marsh in LA who was not actually a doctor and a Captain Sutter in Sacramento who was not actually a Captain? Americans who reach the end of the continent have no where left to go but where their imaginations will take them. California is the land of invention - technological, social, and personal.

Bill Gates, George Bush & The Predictability of the Unpredictable

I don't think that it's a coincidence that the world's richest man is a software programmer.

Software programming reveals the predictability of the unpredictable. Even smart people who write code very quickly find themselves dealing with unexpected, unpredictable results. These are called bugs. Bugs can be trivial, causing text to overlap in places it shouldn't. Bugs can be catastrophic, locking up the system or causing a program to crash. Bugs are inevitable because lines of code interact in ways that our brains are simply too small to predict.

Microsoft has had a history of failures, but those failures are rarely the final story. It's not hard to think that Gates approached the business setbacks like debugging software - problems that were not to be taken personally but needed to be understood and solved. What context did the business fail to take into account? What unexpected interaction with customer needs or competitor actions or technology ecosystem rendered the old plans obsolete? What new plan would be appropriate? Gates seems to have taken the lessons of debugging to heart, applying them even in the formulation and execution of business policy. The approach has seemed to work.

By contrast, George has been meeting this week with ... Donald Rumsfeld and Dick Cheney to formulate a plan for Iraq, a session almost guaranteed to be an exercise in defending earlier decisions rather than discarding them as failed. His administration's earlier announcement about unveiling a plan in December has been pushed back to January. Already George has indicated that he's resistant to the solutions offered by the Baker - Hamilton report. His refusal to listen to that commission or anyone else on the topic of talking with Iran and Syria suggests that military action is inevitable, action that will suck him deeper down the rabbit hole.

It's not obvious that George has written a line of code in his life. As George has encountered problems with his Iraq policy, he's failed to get the message that his thinking, his policy, has bugs in it. Instead, he's blamed the computer (the global community), the operating system (the political dynamics of the Middle East), and the user (the Iraqi's). Never once has it occurred to him to take those as givens and adapt his policy to those realities. Never once has it occurred to him that many of the bugs have resulted from unpredictable (or even ignored in advance) interactions between pieces of his own policy. For George, programming (or policy) bugs are personal.

Bill Gates has become the richest man in history. George Bush has become the worst American president in history. The difference could be as simple as their different levels of willingness to acknowledge bugs and go about the difficult business of debugging policy and thinking in order to better understand reality before taking further steps to change that reality.

If there is one bit of certainty in the midst of all this uncertainty it must be this: we can't change reality until we change ourselves and we cannot continue to change reality unless we're willing to continue to change. And this is perhaps the defining failure that has made the rest of George's failures inevitable.

The Paradox of Organizations

Organizations will always be problematic. Organizations have to institutionalize a particular approach. This can be seen in rituals, process, and a particular solution set. Yet organizations have to be flexible, open to change, willing to abandon what no longer works as they strive to survive.

Create predictable processes and worldview? Or be open to re-arranging around unpredictable learning? Without the first, there really is no contiguous organization. Without the latter, the organization is eventually made obsolete by a changing environment, by changing people.

Happy Tangencies and Recovering From Iraq

Look at A on the left. At a low resolution, it looks like one fuzzy line. At a higher resolution, it looks like two lines that mostly overlap.

Now, look at B. In B, you can see that the two lines that sort of overlapped in fact were just tangents to one another. If you trace the line long enough, it eventually diverges from the circle for a simple enough reason: the line is straight and it can only overlap with the circle for a certain period of time.

I'd argue that all philosophies start as happy tangencies - a line that seems to overlap with the circle, a philosophy that seems to overlap with reality. But eventually such philosophies show their true nature - products of minds much smaller than the world they're trying to explain, philosophies, hypotheses, and beliefs are all eventually shown to be limited and eventually diverge from reality. This shows up in a variety of circumstances. For instance, the problems at WalMart are in part due to their institutionalizing the solution to a past situation - one that is becoming less relevant.

Reactionaries are worse. They don't just cling to a particular world view. They try to recreate the conditions that seemed to make that worldview correct - stop the world and take it back to the point at which the tangent was happily coincident.

Ultimately, this has to do with a sense of awareness about how much we can actually know the extent to which we need to be open to changes. William James put it this way:

“But the faith that truth exists, and that our minds can find it, may be held in two ways. We may talk of the empiricist way and of the absolutist way of believing in truth. The absolutists in this matter say that we not only can attain to knowing truth but we can know when we have attained to knowing it; while the empiricists think that although we may attain it, we cannot infallibly know when. To know is one thing, and to know for certain that we know is another.” [Louis Menand, Pragmatism: A Reader (New York: Vintage, 1997) 77.]

Some have asked whether there is any hope for Iraq. There is, in the meta-sense. If George would only understand that personal conviction has little to do with actual knowledge and were to express that ... If he were to express a mea culpa that included his denunciation of certitude in the face of complexity, arrogance as an approach, of failing to test the null hypothesis ... That could be one way that this debacle could actually translate into something positive for this country.

Fourteen Categories of People

There are a variety of reasons that my politics tend left. One is my sincere confusion about the absolutes that seem so absolutely clear to so many on the right.

For instance, the conservative may think that some are worthy of some kind of public assistance - perhaps orphans and widows - and others should fend for themselves. That is not so clear to me. It seems to me that there is, instead, a spectrum and the lines one draws, the categories that are useful, depends on the situation.

I don't consider myself needy but there was a stage in life when I greatly benefited from public assistance. My parents provided for me. I have no obvious physical handicaps (you have to watch me engage in sports before my lack of celerity, coordination, and skill become glaringly apparent). To a certain brand of conservative, I would likely be an example of someone who needed no public assistance. And yet I could have never afforded to pay for college myself - not private college that is. I was only able to get university degrees because my education was subsidized by the government. Could I have made a living without university degrees? Yes, but I doubt that I would have done as well.

To neatly categorize people as those who need help and those who do not is to set arbitrary categories that ignore the subtleties and grays of reality. As I listen to some conservatives offer their stark truths I think of the delightful (and fictional) Chinese encyclopedia, the Celestial Emporium of Benevolent Knowledge that Jorge Luis Borges pretends to quote, as follows:

"For your consideration, friends, the fourteen kinds of animals: those that belong to the Emperor, embalmed ones, those that are trained, suckling pigs, mermaids, fabulous ones, stray dogs, those included in the present classification, those that tremble as if they were mad, innumerable ones, those drawn with a very fine camelhair brush, others, those that have just broken a flower vase, those that from a long way off look like flies."

I realize that much of liberal policy can seem wishy-washy, to come in shades of gray rather than black and white. I suppose that if the world seemed to me more clearly black and white, I would more readily embrace a philosophical stance that was less nuanced, less full of caveats. But I do know that there are about as many categories of things as there are people to categorize them. Some people look embalmed, some are trained, some are pigs, and some tremble when they are mad. Along this spectrum of people one has to draw the line differently for different reasons.

If we are serious about freedom, we have to allow each individual this most personal of freedoms – the freedom to categorize the world as he or she sees fit. It is this element of freedom of religion that still so few understand. In such a world, to have one group stand up and pretend to talk for everyone is not just scary – it seems as though their description of reality is as odd as Borges’ fourteen categories of animals.

Two Paradigms Walk Into a Bar

Two paradigms walk into a bar. The one paradigm says,
“I’m right and can quote myself to prove it.”
The other paradigm sits stunned, looking at his drink. He finally looks up, dazed. “You are a reliable source?”

Paradigm 1 says, “As I was saying just yesterday.”
Bartender: “You’re quoting yourself?”
Paradigm 1: “Sure. Who else can I trust?”

Bartender: “But you aren’t always consistent.”
Paradigm 1: “It seems to me that I am.”
The bartender turns to the second paradigm. “How about you? Do you trust your memory?”
Paradigm 2: “Sure. I mean, what I remember always seems to jibe with everything I can remember.”
Bartender: “Don’t you ever forget?”
Paradigm 2: “Not that I remember.”
Bartender: “What if I could point out to you times when you forgot?”
Paradigm 2: “You have apparently forgotten that I don’t trust anyone else's memory.”

The bartender asks, “You really don’t refer to any other sources?”
“I don’t trust any sources other than me,” say paradigm 1 and 2 simultaneously.
They look at each other, surprised.
“At last,” says the bartender. “Something you two agree on.” He smiles. “You finally have some basis for agreement.”
“I’m not so sure,” say the paradigms, once again in unison.
After staring incredulously, the bartender finally admits, “You may be right.”

Keepers of the Worldview

A theory is comprised of a set of testable hypotheses. By contrast, an ideology is not subject to tests. For some reason, the world of science and technology has been largely defined by theory but the world of business and politics has not. In the place of theories that are continually challenged we have, instead, defenders of worldviews.

Today, the keepers of the worldviews in the world of politics are, oddly enough, media personalities. I rarely watch TV news but did this election week, sitting in a hotel in the DC area on election night and the next two evenings. I was flabbergasted by how seriously the political reporters take themselves - Lou Dobbs, Keith Olbermann, Joe Scarborough, Chris Matthews (who confuses hard-hitting questions with rudely interrupting), and Bill O'Reilly obviously are so impressed with their view of the world and the importance of articulating that for us mere mortals who would otherwise be unable to make sense of the world.

But in this world of complexity where there is enough data to support just about any reasonable worldview, it is vital to have keepers of the worldview who defend it from the facts, events, and people who would erode its authority. Or at least that is what the elites seem to believe.

The truth is there is an enormous amount of power and wealth to be had in pushing a worldview that is accepted. All of these personalities are paid huge salaries and have real influence over policy. Sadly, what they are doing is often little based on theory and more often seems based on ideology. Just imagine public policy making as dramatic and as impressive advances as science and technology has over the last century. Just imagine the adoption of the scientific method in the world of politics. Perhaps it's time the FCC stopped fining indecency and began fining fact-free assertions.

Rethinking Government

Our founding fathers were Enlightenment thinkers, heavily influenced by the philosopher John Locke who was, in turn, heavily influenced by Rene Descartes. Descartes might have been the first to define analytic thought, advising one to break seemingly intractable problems into smaller pieces that could be more readily understood before aggregating those insights into a whole. Descartes believed that if parts of a problem could be understood, the whole problem could be understood. Adam Smith believed that if each individual did what was best for him or her economically, the whole community would be taken care of. Our founding fathers believed that if each representative did what was best for his district that the whole country would be taken care of. Descartes' analysis was the foundational worldview onto which rested the construction of capitalism and democracy.

As it turns out, the analytic approach is not always best. Since Descartes, we've had a variety of thinkers who have shown us that understanding of the pieces is not always an effective means to understand the whole. You can know all about the gases hydrogen and oxygen and not predict that in combination they'd form a fluid with radically different properties. Systems thinking, or synthesis, points to how emergent phenomenon can define a thing far more than analysis of its parts would reveal. Keynes invented macroeconomics, basically pointing out that in a Depression what might make perfect sense to each individual would actually be awful for the overall economy. When sales are low, businesses are not going to invest. When they don't invest they can't hire. When they don't hire, households lose income. When households lose income, they can't buy. When households don't buy, sales are low and businesses are not going to invest. What makes sense for each part of the economy makes no sense for the overall economy.

Descartes first changed thinking about thinking. Adam Smith changed thinking about economics, and our founding fathers changed thinking about government, both basing their perspective on Descartes' analytic thought.

Systems thinkers have again changed our thinking about thinking. John Maynard Keynes has changed our thinking about economics. As yet, we've had no parallel change in government based on systems thinking. Perhaps its time to think about how we'd do that. Perhaps the task should begin with thinking about how we'd design Congress to encourage its members to care more about the country than their own district.

Why The New Congress is Guaranteed to Disappoint

The Democrats have taken back the House and Senate. For that I'm glad. Nonetheless, the 110th session of congress is certain to disappoint and the fault lies not in human nature but in the design of government by our founding fathers.

It is common to decry our form of democracy as great but its execution poor because of the greed and corruption of politicians. This kind of apologia sounds rather like defenders of communist ideals who say that communism would have worked if only people weren't so selfish. Adam Smith's capitalism worked in large part because it did not depend on the butcher or baker transcending his self interest but, rather, used that. What is needed is a new design of government that does not depend on the transcendence of human nature.

One of the reasons that our 110th Congress is guaranteed to disappoint is that it is based on the assumption that if each representative does what is best for his or her district, they will automatically do what is best for the whole country. Each congressman does all he can to lower taxes and increase government spending in his district. To the extent that he is successful, he simply drives up the national debt. This may be among the simplest explanations of why public opinion of one's congressperson is invariably higher than the opinion of Congress.

The problem with Congress is not a problem of poor representatives. It is a problem of poor government design.

Attention Tuning

All around you is a sea of information. Some you can perceive and some you cannot. We're wired to hear things from one spectrum of the wavelengths around us, to see things from other spectrums yet need to rely on cell phones, radios, TVs, wireless cards and the like to perceive others. And even if you have an FM radio, say, you still have to tune it to actually hear any particular station. Until you tune the radio, you have only static. It is not that the stream of coherence and information doesn't already exist - it's just that you cannot perceive it until you tune in to that exact frequency.

Some of life is like colors - as long as your eyes are open you will see whatever colors are presented. Some of life is like radio or TV - until you tune to a specific frequency you will miss it altogether.

Traditional education is like eyes open. You show up in the modern world and a series of people fill your consciousness with a stream of information that you can use. A sense of mission is like radio or TV - until you focus on a particular potential you will miss opportunities and the spectrum of possibilities for realizing that potential.

Get a sense of your own potential, get excited about what it could mean, and your problem won't be in failing to see possibilities but, rather, in narrowing your focus. Having a sense of your own potential is not a guarantee of a great life - but it is a guarantee that you won't walk blindly past great opportunities.

Murdering Moderates

155 Iraqi professors of both sects, mostly moderates, have been assassinated since the 2003 invasion, the Hindu has reported. When things get extreme, extremists thrive.

At one point I had this fantasy that the Iraqi war was a plot by moderates on both sides - a way to lure violent extremists from both sides into a battlefield. The eventual result? Only moderates who stayed away from violent solutions would be left standing.

But of course, violence doesn't work that way. And it is particularly disturbing for Iraq that even moderates are being targeted because moderates are always the glue that holds societies together.

A similar thing will happen Tuesday in this country. The murders will be political, of course, but it will be moderates who will be victims. Anyone who fails to feel some measure of delight at the prospect of Republicans losing their grip on Congress has simply failed to pay attention to this 109th Congress. Nonetheless, it is quite sad that their reign of error will be truncated by the political death of moderates.

Politics is about compromise - finding a peaceful solution to clashes of worldviews and values. Only fools think that there are violent shortcuts to political compromise or think that soon everyone will "get it" and the idiots on the other side will admit the error of their ways, repenting of being naive (pick one: conservatives or liberals or environmentalists or pro-lifers or ...) and joining with us in the forward march of progress. As the influence of moderates over the process wanes, the political process becomes more defined by acrimonious name-calling than progress.

Iraqis may think that they are murdering moderates but the real victim is a sense of inclusion in the political process by the average person and a resultant sense of optimism about the future of the country. As we vote moderates out of office, the result is similar – the average person feels more alienated and less optimistic about the direction of the country.

Not in His Right Mind

First, two quotes of note, both spoken in regards to the Iraq invasion and occupation.
"Anyone who is not conflicted in their judgment is not thinking seriously."
- Representative Jim Leach, Republican from Iowa.
"I don't know how you operate unless you continually challenge your own assumptions."
- Brent Scowcroft, former national security adviser to both Ford and George H.W. Bush

Brain research indicates that the right brain and left brain have different roles in the complex process of formulating and defending world views. The right brain is the revolutionary, continually challenging the current worldview as new data streams in. Obviously, a person cannot reformulate worldviews as rapidly as he receives new data - the process is too time-consuming and potentially too disruptive. Plus, a worldview that didn't last longer than it took data to stream in would be useless. By contrast, the left-brain defends the existing worldview from new data. At its most extreme, a stroke victim unable to move her arm may insist that she is, indeed, pointing with it. When the brain has been hijacked by the left brain, it is unable to change the worldview no matter how poorly matched that is to reality.

The simple truth is, our minds are much smaller than the world and inevitably our worldviews are limited. Given a lack of omniscience, worldviews need to be regularly tweaked and occasionally shifted. The only option to allowing on-going changes to one’s worldview is to ignore or distort reality.

So what is one to make of Bush's insistence on staying the course in Iraq, even as events have repeatedly unfolded as contrary to his original theories? It is quite simple and fairly intuitive. Bush is not in his right mind.

A Confusion Between Rights and Being Right

Governments in France, the UK, and the US are corrupting a precious legacy of Western Civilization. France's lower house of parliament recently passed a bill making denial of the Armenian genocide a crime. The British recently charged an activist for passing out anti-homosexual leaflets at a gay and lesbian festival, enforcing a law that allows the crown to prosecute anyone causing a person "alarm or distress" on "at least two occasions." Bush has decided that habeas corpus is a gift that he is free to take from anyone he deems unworthy of it.




This confusion between what seems to be right - squelch the speech of activists who harass those with whom they disagree or indefinitely hold suspects without the need to go public with potentially dangerous information - and rights - freedom of speech and the right to trial - can very easily lead down a slippery slope towards benevolent dictatorships. Communities need to reverse their trend of worrying about what is right for the individual and instead focus on protecting individual rights.