Glenn A Knight

Glenn A Knight
In my study

Sunday, June 20, 2010

Success Breeds Failure

Robert Samuelson finds a parallel between the BP disaster and the financial crisis: Our very success over a long period of time led to carelessness and complacency, which led to disaster. Every silver lining has its cloud!

One of the problems with human beings having the power to change the earth is that we really aren't very good, by and large, at calculating probabilities and acting appropriately. There seem to be built-in biases toward optimism or pessimism which have very little to do with any objective measure of risk. This is, in large part, why the mass of investors buy at the top of the market and sell at the bottom. They aren't ready to change their behavior until there has been a long trend in one direction, which is actually an indication that the forces driving the trend are nearing exhaustion.

Another problem lies in the phrase "a long period of time." Humans don't do well at evaluating processes with time dimensions outside the human lifetime. One of the underlying drivers in the global warming debate is our inability to deal with time. On the one hand, I think we have too little data, over too short a time period, to be as certain as some people are of the consequences for the climate. Climate operates in cycles of hundreds of thousands of years. On the other hand, some people give far too much weight to a record cold day in their town as indicating that global warming isn't happening. There is a lot of randomness in the weather system.

This is sometimes called, I believe, the local fallacy. That is, people give far too much weight to proximate events, occurrences close to them in time or space, and far too little weight to more distant phenomena.

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