It is actually possible not so see something that is really there... We can’t see patterns that our brains have filtered out... But although the risk hunters saw no danger as they stared into the seemingly benign financial jungle, in retrospect, there were certain signs — whose significance was not realized then — that should have sounded the alarm about the crisis that is now upon us...
The signs were there, but they couldn’t interpret them, even when strange and unusual things were happening. Part of the problem with grasping the significance of the anomalies was that the risk hunters were prisoners of their analytic models. What cues they picked up were interpreted in the context of their mental frameworks. They “saw” through the prism of their models. And their models did not account for the existence of the monster that was now closing in on them...
The scenario work I've done with clients for years is rooted in precisely the precept Fernandez begins with: that the mental models or frameworks that people build up over a lifetime, a career and/or a role strongly color what they believe is possible and therefore the kinds of potential problems and opportunities they are willing to consider. I mean literally color. Fernandez' analogies to invisible spectra are apt. It's not that the spectra aren't there. It's just that I'm not equipped to see ultraviolet, infrared or to hear a dog whistle.
I should note that, while the Economist article is about 'seeing' risk, the concept applies equally well to innovation. More on that in future posts. It's where I've been spending most of my time and energy recently.
Mental models are seldom examined. You and I may talk
about our views on particular future events, but it takes a lot of time
and effort (plus a common 'language' for discussing it) to talk in
terms of entire models. And mental models that are not examined and
described -- at any level -- tend to lead to decisions that don't fit
reality. (Think blindfolded child attempting to hit the party pinata
and hitting grandma instead).
Mental models are also fractal. My own colors the decisions I make, but
I also go about my day constrained, to a greater or lesser degree by
the mental models of the groups to which I belong (family, company,
church, country, etc.)
I'm reluctant to conclude that individuals' mental models are always able to change faster than those of groups. (We all know some stubborn stick-in-the-mud; perhaps he's the one staring at us in the mirror). Anecdotally, however, I know of more individuals who have had a 'Damascus-road' 180-degree 'a-ha!', 'boy I've been stupid, haven't I?' moment in some part of their lives than I do larger groups or companies that have done the same. (When that does happen, e.g., Bill Gates' famous 'Internet' memo ten or so years ago, it tends to be just a powerful individual who changed his mind, not evidence of the group turning quickly together.)
Finally, mental models not challenged systematically and fundamentally on a pro-active basis (e.g., with scenarios) tend to change only defensively and slowly (in response to hard, external truths; often at great cost). That's painful. As Fernandez writes:
I wonder to what extent the policy reaction to the current financial crisis is still colored by the limitations of received wisdom — the financial models — and the need to keep the music playing. The interventionary mechanisms of the last few weeks are designed to fix problems as we understand them. If you’re convinced we understand things now. At any rate we are firing into the last known position of the monster. Nothing can withstand that firepower. The crowds are being told not to worry because the monster will soon be dead. True, there are few doubting souls who are worried that the creature may actually be feeding off our weapons, but their fears are dismissed as nonsense. The important thing, we are told, is to keep things going, which was just the advice the traders gave the risk managers.
is remarkable how the advent of the current financial crisis
structurally resembles the intelligence failures leading up to 9/11:
the same misinterpretation of warning signs, the same blindness to
threats now evident in retrospect. The same belief in a rapid
resolution and a belief that the normal would soon be back.
In other words, we all sense that things have changed fundamentally (in financial markets and geopolitics) but we probably won't be able to develop our new mental models (at least collectively, agreeing on which ones are 'real') for many years -- not without a lot of deliberate thought-work, that is. Nor will we be able to perceive ongoing change properly (assessing both direction and magnitude) or develop said models in a way that enables us to act with precision, resolve and clarity. For years. That's a bit scary. It's also humbling (at least it should be).
Here's another thought that I should probably 'unpack' more fully in another post. Mental models are reflected in, but
less often challenged by analytical tools. Oh sure, insights can most definitely be had with them, but I'm talking about much bigger constructs. Sophisticated computer models, for the most part, tend to only amplify the force and reach of our brains.
They do not, as a general rule, make them better able to 'think
different' (ly) and develop new mental models for seeing the world -- for assessing the big risks in truly complex adaptive systems or for finding innovations.
"If Iran continues its nuclear weapons programme, we will attack it," said [Deputy Prime Minister] Shaul Mofaz... "Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme."
One thing notable about this graphic is how little reaction there has been to this news. To my reading (and I've followed this closely the last several years) it marks a significant step up in rhetoric by the top echelons of the Israeli government. The second thing I find remarkable is how the market has trended steadily upwards over the past four months or so.
This is but one of many 'quarterly' prediction markets Intrade has been running on an airstrike on Iran. All of them, obviously (at least so far) have rewarded the skeptics, however most have trended downward as the market close approached. This one isn't doing that.
I'm of two minds on how much stock to put in this market. (Sorry, pun intended).
On the one hand, military missions are, or at least ought to be, closely guarded secrets. And this would be no ordinary military mission. It is truly existential. Sure a few thousand people might be privvy to some kind of knowledge or direct insight into what was going on, but I doubt any of them would risk being shot in order to make a little extra on the side. So, on that basis, this has many of the characteristics of silly/failed markets in things like papal elections and supreme court nominations.
On the other hand, this is not as surprising as a terrorist attack (a dumb thing in which to make highly specific markets IMHO, even though there are many related indicators that might be useful).
Most nations don't want to go to war. (Iran may be an exception, but we're talking here about an attack on them, not by them). Most nations 'do the (diplomatic) dance'. They do relatively rote, predictable things in the lead-up to any conflict. And those things tend to follow patterns that are not random.
They may not be easily predictable, but there is information out there, held by people not constrained by an oath of secrecy, that is meaningful in discerning whether this will go down or not. Sadly, if I were to bet on it (and I don't -- at least not on real money markets) I would have to say that this market is way undervalued.
UPDATE (July 1, 2008): Almost a month after I first made this post, the trend continues (see below). Despite Israeli moves that make such a strike seem more likely (whether for real or for bluff we can't know), the market hasn't had a very high 'beta' (volatility). This despite (or perhaps because of) significantly higher trading volumes in June. A good summary of recent events around this can be found here.
Overt Airstrike on Iran on or before Dec. 31, 2008
Your choice of seating at work may affect much more than your sensory pleasure at knowing when someone is eating tuna fish or onions versus citrus fruit or chocolate. Google has discovered that it's the most important factor in your being in the loop: in particular, whether you win or lose based on your close colleagues' prediction market trading.
(See 'heat map' at right: successful traders are depicted in green; losing traders in red).
'Real' traders take note! (Pick your desk-mates carefully.)
Random thought: this adds a whole new dimension to the elaborate strategies seasoned business travelers use to get primo seating on airplanes. Exit row? No thanks. Just give me the seat next to Warren Buffett.
Check out this extremely cool visualization of how life expectancy relates to national income, region and population--all over time (be sure to press the 'play' button in the lower left). Cleverly (a la Tom Barnett's core and gap concept), the tool is called the "Gap Minder".
Everyone's mind works a little differently, but if there's universal truth in the adage that "a picture is worth a thousand words", then such data-rich portrayals of complex interrelationships have got to be worth millions. In a world increasingly dominated by PowerPoint, we can only hope that they will play a much bigger part in our public and private dialogues about dynamic, complex problem spaces.