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.

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.

Issues like the GZ Mosque provide excellent fodder for the talking heads of the right and the left because it provides them with demons, and they both prefer demons to solutions.

Demons get people worked up and when their blood gets worked up they listen, write, call and participate,  which sounds like “ka-ching” to the media.

Such convenient demons gets to prove to the left how prejudiced and narrow minded the right is and it serves to prove how naïve and unpatriotic the left is.  Such episodes just serves to fossilize convenient stereotypes.

But I would surmise that the great middle, which is becoming less loyal to either party couldn’t give a rat’s ass about the mosque. Nor could they care about whether Obama is a Muslim, where he was born, whether 9/11 was a conspiracy, or whether UFOs exist. This is all just noise for people who want a demon to punch rather  than to face the problems that require thought, decisions, and sacrifice.

That facts are that the real problems we face are difficult.  The depth of these issues are rarely addressed on any major network, because most people have become digital ADDs with an attention span that only lasts in the space from one text message to the next.

I would also guess that what will truly motivate the voters are concerns over unemployment, debt, the economy, the government fiddling with their health care, and the declines in their home equity values and 401k balances.

They are largely moving beyond black and white, male and female, young and old, and red and blue.  They realize that the same government that failed on so many levels is not likely to become better by becoming bigger.

The want common sense and they want their freedom. It may remain to be seen which party delivers this, but it isn’t the party in power now- or at least as we now know it.

from my article in American Thinker
We need more than a change in parties
6/25/10
excerpt

We need to do more than just reduce taxes on business. We need to create some comfort and consistency that they will remain low.  Nobody is likely to make long term commitments when they are concerned that tax and regulatory policies can radically change every two to four years. The extreme actions of the Democrats in control have severely hindered our recovery; but counter measures from the Republicans, even if economically correct, will not restore the confidence that is needed without some political unity to create the conditions to keep the business environment receptive.  This requires a change in more than political parties; this requires a change in political culture.  This is a much more difficult change to make.

In The American Spectator (online version) Boston University Professor Angelo Codevilla writes “America’s Ruling Class- And the Perils of Revolution” (July – August 2010 issue).  I recommend reading the entire article  (about 22 pages printed).

While many advocating government solutions claim a moral motivation,  the end game is power and that power is ultimately achieved through political favoritism. This creates both dependency and corruption as political influence becomes the ticket to wealth rather than production or serving the market economy.  An excerpt from Codevilla’s excellent article:

Our ruling class’s agenda is power for itself. While it stakes its claim through intellectual-moral pretense, it holds power by one of the oldest and most prosaic of means: patronage and promises thereof. Like left-wing parties always and everywhere, it is a “machine,” that is, based on providing tangible rewards to its members. Such parties often provide rank-and-file activists with modest livelihoods and enhance mightily the upper levels’ wealth. Because this is so, whatever else such parties might accomplish, they must feed the machine by transferring money or jobs or privileges — civic as well as economic — to the party’s clients, directly or indirectly. This, incidentally, is close to Aristotle’s view of democracy. Hence our ruling class’s standard approach to any and all matters, its solution to any and all problems, is to increase the power of the government — meaning of those who run it, meaning themselves, to profit those who pay with political support for privileged jobs, contracts, etc. Hence more power for the ruling class has been our ruling class’s solution not just for economic downturns and social ills but also for hurricanes and tornadoes, global cooling and global warming. A priori, one might wonder whether enriching and empowering individuals of a certain kind can make Americans kinder and gentler, much less control the weather. But there can be no doubt that such power and money makes Americans ever more dependent on those who wield it.

By taxing and parceling out more than a third of what Americans produce, through regulations that reach deep into American life, our ruling class is making itself the arbiter of wealth and poverty. While the economic value of anything depends on sellers and buyers agreeing on that value as civil equals in the absence of force, modern government is about nothing if not tampering with civil equality. By endowing some in society with power to force others to sell cheaper than they would, and forcing others yet to buy at higher prices — even to buy in the first place — modern government makes valuable some things that are not, and devalues others that are. Thus if you are not among the favored guests at the table where officials make detailed lists of who is to receive what at whose expense, you are on the menu. Eventually, pretending forcibly that valueless things have value dilutes the currency’s value for all.