Felix Batista, an anti-kidnap specialist who has been credited with ensuring the freedom of hundreds of hostages was abducted as he stepped outside a restaurant to answer a phone call.

The increase in crime in Mexico, especially kidnapping, will have a very chilling effect on the relocation of America manufacturing and other businesses across the border.  American executives and managers are just not willing to take the risks to visit their plants there.

News of capital crimes in tourist areas will not help their tourist industry either. The recent story of dozens of gunmen storming a Holiday Inn in Monterrey and taking six hostages will cause a lot of vacancies throughout the country.

Failure to control the crime in Mexico will have a devastating effect on their economy. As it spills over our borders our citizens will demand increasingly stronger response.

We mortals pride ourselves as rational beings, but we act emotionally. We get attached to previous positions, and will discount or filter evidence rather than change our minds. We read the news for confirmation rather than information.  We are so inundated with information that we rely on emotional instincts to make quick decisions.

Our first instincts are emotional and we tend to then, and only then, rationalize our first decisions. I call this emotional rationalism. Marketers understand this very well.

When you add risk into our thought process we can become even more irrational. Risk is probability plus outrage or fear. Thus the chance of a 911 attack may be small but the outrage of that act may lead us to take extreme measures to prevent such an occurrence from happening again. We spend far more political capital to prevent gun deaths than deaths from swimming pools, which are far more common.

The Age of Reason did not stop wars and hatred; it just changed the institutions that expressed them. Anti-Semitism of the church simply became anti-Semitism in the halls of education and government. Hatred towards those who opposed established faith became even more bitter when it was applied to those who opposed established norms of reason.

Academic credentialism, as distinct from intellectual depth, is not immune to emotional rationalism. Academics will become attached to their theories even when they conflict with the realities of the world they attempt to explain. The world of experience will translate to the world of theory much better than the reverse. Once someone gets a theory in their head it is hard to get them to see the world objectively again.

Thus academics descended on Wall Street with sophisticated models to explain investment behavior. Long Term Capital, a hedge fund from the 1990’s was held in awe because of two PhD Nobel Prize winning economists on its board. Its first few years showed impressive results and helped it attract billions of dollars of capital. But Long Term Capital made bets on Russian bonds and went from a net worth of billions to bankrupt in a matter of a few months. In typical academic fashion the quants explained that the move on Russian bonds was a ‘25 standard deviation event’, so far outside the realm of a rational model that it could not be predicted.

A 25 standard deviation event is a way of saying the odds of this were as remote as getting hit by a meteor while playing the back nine at Augusta National. It is another way of saying that no rational person could be expected to have foreseen this. This is what happens when theory trumps experience. Our world is filled with the outcomes of ‘25 standard deviation events’.

But these same theories brought down a bigger house of cards only ten years later. Debt pools were assembled that were so complicated that when the underlying assets such as a mass of very crappy mortgages collapsed, the credit markets froze because nobody could figure out what any of these pools were worth. The reason these toxic assets are so hard to clean up is because our brightest accounting and financial minds cannot figure out what they are worth.

We still fail to understand the principles of probability and how our emotions filter and distort our reality. As Nassim Taleb notes in his book by the same name we are “fooled by randomness.”

We can discern the various probabilities of a specific outcome of a roll of a pair of dice, because the universe of outcomes is clearly limited and knowable. The same is true of guessing the chance of any combination of cards from one or multiple decks. Cards and dice are a world on known unknowns.

But making bets on the outcomes in the world of global finance is something wholly different. There is no limit to the combinations and outcome of hundreds of national policies, billions of investors, with millions of financial products, subject to the fears and exuberance brought by wars, inflation, and old fashion human greed. This is the world of infinite possibilities, the world of unknown unknowns. This is a world better served by a philosophical understanding of risk embedded in a world of experience than a delusional faith in theoretical models proposed by credentialed academics.

Yet we have still failed to understand this fundamental reason for our recent credit collapse and we are making the very same mistakes, only this time in the government sector. We still swoon for the sound of intelligence over experience.

A car ‘czar’ brags that he has no experience in the automobile business, but “business is business”. Steve Jobs at Apple was replaced by an executive from the soft drink business; Jobs was brought back- you can now Google the story on your iPhone.

In a subject as massive and as filled with unknown unknowns as global climates we are making bets with familiar delusional certainty and even declaring that the “debate is over”. I may not know which end of the test tube the cork goes into, but I would feel a bit better about reordering our entire economy and social structure based on a fifty year climate prediction if we could predict the weather next week.

Many blame the financial collapse on greed and capitalism, but these flaws have been with us forever.  As Thomas Sowell noted, blaming the financial collapse on greed is like blaming a plane crash on gravity; it is true but not a very useful description.

With some months to now reflect and study the causes of the credit collapse, we cannot hide the central role the government played in the disaster. Had Fannie Mae not guaranteed the crappy mortgages they could not have been assembled into vehicles earning AAA ratings and become acceptable to global investors on such a grand scale. We have been fleeced at the gaming table but the casino owners , the dealers, and the pit boss were all government bureaucrats. They just reserved the high roller tables for Wall Street.

As we watch and hope the government will reform the excess of Wall Street, we should be more concerned who will reform the excesses of government. We should ask how they plan to solve a problem by repeating the very same mistakes that caused it.

It is not Obama’s fault that home sales are dropping, though it is his fault that they did not drop sooner.  Why is it bad that the sales of home and home prices are dropping?

Yes, it eats up bank collateral and destroys individual’s home equity values.  But that is exactly what happens when a bubble bursts and it is what should happen.  To move forward from a financial collapse we need to clear away the debris.

Instead of propping up inflated values we need adjust to the fact that home value appreciation near 10% is not normal.  What we got used to was an induced high.  What we are experiencing is financial sobriety.

We are seeing that even our huge national government cannot keep a fake market alive forever.

We should instead create a market where housing has to compete fairly with other investment alternatives without the subsidies, tax breaks, and political meddling.

Housing will not drop to zero. At some point they will reach a point where the industry will recover. For every dollar one person loses on a home another will gain.  For a president so keen on redistribution this should be welcomed.

An elderly couple comments on Indiana's new ID check law.

After a long day of helping my daughter move into her apartment in Bloomington, Indiana, before classes start we went for a late bite at Applebee’s.  Apparently Indiana has a new law that EVERYONE gets carded if you order a drink.

Yes, even a shriveled up, hunched back, liver spotted, slow shuffling, thin haired, mismatched clothes wearing, near deaf, AARP card carrying, yet innately wise old person must present ID to get a beer.  I doubt if the reason was the extreme costumes young people were using to buy a beer.  The reason is that they just did not want to leave any possible error to human judgment.

Because legislators and bureaucrats do not trust human judgment we are inundated with thousands of pages of laws and rules to accomplish the simplest of objectives.  These rules often have foolish outcomes.

This same law states that if my 20 year old daughter sits at the bar area she must present ID even if she is not drinking alcohol, and must also be accompanied by a guardian.  Yet sitting at the table next to me which I can reach out and touch, which is deemed outside of the bar area, would require no ID and no guardian.

Such micro management creates contempt for the law.  The young people who work at this restaurant joke about how ridiculous it is.  Is this how we want our laws to be perceived?

Yet this is a long trend which, like the analogy of the frog in the boiling water, we just get used to.  It is a quiet tyranny of a government that sees no area it should just leave to the citizens to resolve because it has become very separate and contemptuous of its own citizens.  It is laws like this that makes more and more citizens feel like the government no longer enjoys the consent of the governed.

In a similar story, New Jersey governor Chris Christie explains how his state was turned down for a 400 million dollar federal education grant because of simple, easily correctable clerical error on a single page of a 1,000 page application.

Personally I am glad to see angry voters; it makes me hopeful that we have not lost all common sense.

Post posting note:  apparently there is a little more to the Christie story as pointed out by a reader. The Education Commissioner was caught in a lie and was fired. Read the story here.

The problem remains, however, that we have grown accustomed to thousand page applications and 3,000 page laws.

I have to confess that much of the rhetoric from the right on Muslims in America has crossed a line that I find uncomfortable.  Much of this is centered around the controversies of the mosque proposed a few blocks away from ground zero.

One problem is that Muslims are rarely portrayed in the media except in instances of terrorism or other forms of confrontation.  The danger is to assume that Muslims have no moderate base at all.  I would guess that Muslims would find it indignant to have to defend their faith from the acts of extremists, just as Catholics would reject being labeled by the antics of Mel Gibson or the Jews by the words of Meir Kahane ( of the Jewish Defense League).

Rabbi Meir Kahane

On the Zakaria GPS show on CNN today (8/15/2010), Fareed Zakaria interviewed Irshad Manji and Ayaan Hirsi Ali.  Fareed is a Muslim who questioned Ali as to what extent the radicals were a fringe element.  Fareed believes that the vast majority of Muslims are solid American citizens with American values.

Irshad Manji and Ayaan Hirsi Ali

But the interesting exchange was between Manji and Ali. Ali has rejected Islam totally and accepted Christianity.  Manji, who is a very  progressive feminist remains devout to her Muslim faith yet does not hesitate to chastise Muslim moderates for not being more aggressive in  holding the more radical elements more accountable.

The interview has not yet been posted on the Zakaria GPS site, but hopefully it soon will be.

What we should be careful to avoid is painting all Muslims as a monolithic group with a single voice. Just as with Christians and Jews there is diversity within the Muslim ranks. Many Muslims came to this country to escape the more intolerant strains of their religion from abroad.

Fareed is correct that we would be wiser to encourage the more moderate elements than to remain adversarial with the entire religion.  He explains his position in this video where he voices his support for the Mosque.