Subba’s Serendipitous moments

June 21, 2009

Will Singapore learn the lessons from the financial crisis?

Just finished reading Daniel Gross’s book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation. It is available as an e-book too. It is a book that I recommend to all executives and civil servants who are responsible for developing policy and strategy because it is important to place emphasis on perception tools as much as we do for analytical tools. There are similarities between the actors in the dumb money operation and in the Singapore civil service.

Dan writes:

“The Dumb Money creed rested on four pillars: perpetually low interest rates, perpetually rising asset prices (especially for housing), borrowers of all types remaining perpetually current, and perpetually strong markets for debt. The high priests of this cult were the nation’s central bankers.

In 2007 and 2008, each of the pillars of Dumb Money began to crumble. The rules of physics still applied to finance. Interest rates, it turned out, could rise. Asset prices could, indeed, fall. Borrowers, having seen no income growth in a decade, fell behind on their debts. All of which helped cause the markets for securitizing debt and derivatives to break down”

The people who blew up the system weren’t anarchists. They were members of the club: central bankers and private-equity honchos, hedge-fund geniuses and Ph.D. economists, CEOs and investment bankers. And the (overwhelmingly legal) con they perpetuated on themselves, their colleagues, their shareholders and creditors, and, ultimately, on us taxpayers makes Madoff’s sins look like child’s play.”

Looking back, the investors who believed the stories told by Madoff and Stanford—that they could deliver steady, positive, market-beating returns in any type of climate, despite the manifest failure of virtually every other money manager to do so—were obviously foolish. But our best financial minds also spun tales and theories with great assurance, making seemingly irrational and unprecedented activity seem completely sensible. And we bought them.”

So, Why do the best and brightest get it so wrong? One easy way to explain it is here.

The arrogance of power. Combine that with great wealth, quick progress, a group think syndrome, limited thinking style and big responsibility at a relatively immature age and you have a potent mix. It invariably leads to hubris. Hubris was typically responsible for the downfall of heroes in Greek tragedy.

In addition, people in positions of great power and/or wealth will often interact primarily with people like them, both at work and in their social life, most of whom share a similar world view. They start believing that they are the only ones who understand what is going on and what needs to be done. Everyone who disagrees with them is just plain wrong or worse downright stupid. When problems occur, they tend to circle the wagons and become even more isolated.

Now Singapore’s civil servants are intelligent people, but they have become ensconced in their ivory towers. There is too much group think and there is rarely a marketplace where ideas compete. Most Ministers and civil servants come from the same elitist institutions and often have a tendency to very much function like a club. I do not know how much debate happens during the cabinet meetings, but after observing Parliament proceedings closely I have rarely seen a good debate or alternate viewpoints being pursued.

More importantly, having seen civil servants and executives in Ministries and statutory boards interact, the “group think” syndrome just continues to strengthen because they don’t want to be left out of the club. Worse, any alternate view is interpreted as a challenge to the authority, not just to a point of view. Has kowtowing the superior become the SOP (standard operating procedure) or is it a “survive and grow” strategy or worse the natural default behavior? With so many Minsters and civil servants coming from the military side, I would not be surprised if compliance fetches a better premium than creativity.

The Singapore media has never had a track record of triggering new ideas or debating current ideas. It has always served to propagate official thinking and giving it a spin.

Now, can the top honcho always get it correct? And what’s the risk of his reading the situation wrong or coming up with the sub-optimal solution? I shudder to think.

If the financial crisis has one thing to teach the Singapore government and civil service, it is that systemic failures of massive proportions are possible. And the best and the brightest (in Singapore they are judged when they are 18 years old based predominantly by their school leaving scores) with their group think cannot be the fountainhead of wisdom.

Wisdom and government dominance have been strange bedfellows. And incompatible too.

February 25, 2009

It’s the perception, stupid!

Most decision making processes pay a disproportionate emphasis on the aspect of analysis after one has made an assessment of the situation.

In fact the more important the decision, the more sophisticated the analytical tools.

That by itself is not wrong. However what is wrong is that spectacular errors in decision making can occur not because the analytical tools are inadequate, but our perception tools are! In fact, I blogged about decision frames borne out of perception here

The recent crisis amply  illustrates why:

  1. Even the highly respected Alan Greenspan admitted that he made a mistake by assuming that self-interest would enable banks to protect their own share holders.
  2. Few people are even aware of the perception biases. Looking at and perceiving the world is an active iterative process of creating meaning. This process is dynamic and often it shapes the subsequent steps in the decision making chain including the choice of analytical tools.
  3. Like perception bias, we also suffer from some form of selection bias. There’s a strong predisposition to see data that confirm our biases and ignore data that contradicts them. We also seem to emphasize recent events than historical events when anticipating the future outcomes.
  4. We also seek refuge in the majority. Just because a majority hold a particular view is no proxy that they have to be right. Often a majority is caused by a social contagion and they tend to avoid facing the “Black Swan” moment. And as the crisis has shown, the majority need not be correct.
  5. We need to understand human motivation for sure. Rewards and penalties are one axis to monitor human behavior, but there’s another equally important axis that has been given less importance. The better we understand how fear and greed are represented at an individual level and how they respond to specific externalities, we would be able to avoid crisis. It more important for Type A personalities than Type B personalities.

So are there any ways to improve perception tools?

  1. First, there has to be humble admission that we have limitations and flaws in the way we think about a given situation.
  2. There has to be a more open and backwardly integrated communication of how we arrived at a particular assessment or how we ‘manufactured’ meaning as we saw the situation. Such a communication helps us to uncover the biases.
  3. Every feedback mechanism should be “de-politicized” so as to uncover inconvenient facts.
  4. I am actively looking for more perception tools, since I have long been convinced that better perception is superior to better analysis.

One of the approaches that I have adopted to improving my own perspective is to “sleep on it” for a while.

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