What should we be worried about?

Edge Magazine's Annual Question looks pretty interesting, although I've only read a couple of the 151 responses from leading thinkers yet.

We worry because we are built to anticipate the future. Nothing can stop us from worrying, but science can teach us how to worry better, and when to stop worrying.

WHAT SHOULD WE BE WORRIED ABOUT?

Tell us something that worries you (for scientific reasons), but doesn't seem to be on the popular radar yet—and why it should be. Or tell us something that you have stopped worrying about, even if others do, and why it should be taken off the radar.

 

 

Trust and the Internet

How technology is confounding our intuitions about trust, in an NYT book review:

Trust, Mr. Schneier writes, is the glue that binds our societies. Over centuries we have invented various means of ensuring it: moral codes, reputation within a certain community, laws and of course security tools, from embankments, the most primitive kind of defense, to facial-recognition technology.

The liars he worries about most these days are not cyberwarriors or even cybercriminals but private companies and government agencies advancing their own interests, whether for surveillance or commerce. Apple controls the memory on our iPhones. Google keeps tabs on what we search for, and whom we write to, when we use Gmail. We unknowingly pledge allegiance to the companies we do business with.

 

Risk and Rescue

 

Atul Gawande, the brilliant surgeon and writer who wrote The Checklist Manifesto: How to Get Things Right, says in this commencement address that the key thing in taking risk is the ability to recover if things go wrong. That's what distinguishes risk from a gamble: 

So you will take risks, and you will have failures. But it’s what happens afterward that is defining. A failure often does not have to be a failure at all. However, you have to be ready for it—will you admit when things go wrong? Will you take steps to set them right?—because the difference between triumph and defeat, you’ll find, isn’t about willingness to take risks. It’s about mastery of rescue.

 

(h/t Slate)

 

 

Recognition-Primed Decision-Making

I'm now going to look at Gary Klein's book Sources of Power: How People Make Decisions. I mentioned Klein a month or two ago when I was talking about Daniel Kahneman, who writes about biases and mistakes in decision-making.

Kahneman thinks in general you can't trust expert judgment. There is little or no evidence stockpickers or forecasters actually deliver any value. But he describes a long series of exchanges he has had with Klein, who thinks that in many cases expertise does count for something. Sometimes experienced firefighters just know when it is time to run out of a burning building, for example.

After reading Klein's book, I am inclined to side with him. He arguing that perception matters.
His first main point is that real decision-making in the field - "naturalistic decision-making" - is not the same as lab experiments:

Features that help define a naturalistic decision-making setting are time pressure, high stakes, experienced decision makers, inadequate information (information that is missing, ambiguous, or erroneous), ill-defined goals, poorly defined procedures, cue learning, context (e.g., higher-level goals, stress), dynamic conditions, and team coordination (Orasanu and Connolly 1993). ....In contrast, in most laboratory studies, experience is considered a complicating factor. Subjects who know something about the task may have preconceived notions that could get in the way, or their strategies could distort the results. Therefore, subjects are given totally novel tasks to make sure all of them start with the same level of experience: zero.

Lab experiments usually strip out experience. But it is experience which makes the real difference in the effectiveness of decision-making.
Well, OK, but what is it about "experience" which makes a difference, then? It is a matter of perception. Skilled decision-makers do not generate lists of options and the choose between them, as rational choice models have it. They recognize patterns. They just see what has to be done.

Decision makers recognize the situation as typical and familiar-a typical garage fire, or apartment building fire, or factory fire, or search-and-rescue job-and proceed to take action. They understand what types of goals make sense (so the priorities are set), which cues are important (so there is not an overload of information), what to expect next (so they can prepare themselves and notice surprises), and the typical ways of responding in a given situation. By recognizing a situation as typical, they also recognize a course of action likely to succeed.

So Klein says he developed the Recognition-Primed Decision (RPD) model to try to explain the way experts in the field actually thought. Skilled firefighters, pilots, or army commanders did not think through probability trees.

We began to realize that the force of our findings was in their obviousness. Of course the RPD strategy was the strategy used most frequently.

It was a surprise to academics who studied decision-making. But of course it is what we recognize in real life as intuition.

This is one basis for what we call intuition: recognizing things without knowing how we do the recognizing.

Experts in a field see things that others do not. It is not just a matter of knowing more facts.

.. expertise is learning how to perceive. The knowledge and rules are incidental.
The accumulation of experience does not weigh people down; it lightens them up. Experts see the world differently. They see things the rest of us cannot. Often experts do not realize that the rest of us are unable to detect what seems obvious to them.

Like what?

There are many things experts can see that are invisible to everyone else: • Patterns that novices do not notice. • Anomalies-events that did not happen and other violations of expectancies. • The big picture (situation awareness). • The way things work. • Opportunities and improvisations. • Events that either already happened (the past) or are going to happen (the future). • Differences that are too small for novices to detect. • Their own limitations.

Experts have a sense of the way things ought to work.

Experts see inside events and objects. They have mental models of how tasks are supposed to be performed, teams are supposed to coordinate, equipment is supposed to function. This model lets them know what to expect and lets them notice when the expectancies are violated. These two aspects of expertise are based, in part, on the experts' mental models.

In fact, economics-style rational decision-making can be disastrous:

Hyperrationality is a mental disturbance in which the victim attempts to handle all decisions and problems on a purely rational basis, relying on only logical and analytical forms of reasoning. In the initial states, this condition can be mistaken for a healthy development of critical thinking. Only later do we observe an unwillingness to act without a sound, empirically or logically supported basis. The final stages degenerate into paralysis by analysis.

And this is where he disagrees strongly with Kahneman.

Those who favor analytical approaches to decision making believe poor decisions are caused by biases in the way we think. Naturalistic decision-making researchers disagree. We tend to reject the idea of faulty reasoning and try to show that poor decisions are caused by factors such as lack of experience.

But he acknowledges there are limits to the applicability of the RPD model. There are many things in which it is very difficult or impossible to develop genuine intuition or expertise. Klein says

Jim Shanteau (1992) has suggested that we will not build up real expertise when: • The domain is dynamic. • We have to predict human behavior. • We have less chance for feedback. • The task does not have enough repetition to build a sense of typicality. • We have fewer trials.

One reason I liked the book so much is it reminds me of other concrete studies of policy decisions in actual situations, most especially Robert Jervis's Perception and Misperception in International Politics (Center for International Affairs, Harvard University). Indeed, I think perception is the key to risk, rather than the sterile measures of volatility which are the core understanding of risk in financial economics.
The key issue about Klein's argument is scope, however The approach works in some kinds of situation but not others. And that is the most difficult thing for many people to understand, trained as we are in the notion of universal rules.
Firefighters may have genuine expertise. Stockpickers still do not.

Risk-taking and virtue

I've been thinking more about how we see the world if we use the older Aristotelian tradition of the virtues, following on my discussion of After Virtue below.

Why should anyone care? Is this not quite an abstract philosophical question remote from an economy beset by debt, unemployment, and the rancid remains of a vast financial crash?

We should care because it affects the incentives we live by and the kind of rules our lives follow, the kind of behavior we encourage and respect and therefore the kind of economy and society we have.

Something has gone terribly wrong with our incentives. And that is why going back to our fundamental assumptions about what we admire and encourage is a good idea.

Let's take a concrete example. The right and the business community often argues we need to reward risk-taking - for example, starting a business or investing in a risky venture. Or trading CDOs or swaptions.

But it does not have to be purely a matter of monetary incentives to take risks, or monetary compensation for successful outcomes.

Risk-taking is in many ways a version of one of the older virtues - courage. And it lies, like other virtues, between two vices. There is rashness or speculative excess on the one hand. And there is being too conservative, too cautious and unwilling to have any skin in the game on the other.

In McIntyre's scheme, the general virtue, like courage or honesty, is exercised in a specific practice - being an entrepreneur or investor, say - and embedded in institutions which provide external rewards.

The economic issue is getting people to take the right degree of risk. And it is that which the bonus incentives in the banks obscured. (It is more than just a principal-agent problem, in technical economic terms as well.)

So you get ought to get respect and a reward for exercising the virtue, not just - or even primarily - the monetary reward.

It makes risk-taking a matter of character and judgment, not just probability and math. That is also attractive.

Many of the explanations for the financial crisis come down to excessive incentives to take risks. So a different way to look at risk behavior matters, beyond just the expected payoff, value-at-risk or hedging strategy. Risk is not probability ( a theme I will return to later.)

Money and Virtue

One of our problems is virtue is invisible to money. The worst cowardly vicious thief can still be rich. Money is value-neutral. That is one of its advantages in a liberal society. Money can be a means to any end.

And that is why many groups - the great religions, the older professions and academia, the arts and sciences, aristocracy and military castes - have always been suspicious of money. It did not usually prove any worth, even if they still liked to have it.

Indeed, it could often undercut other values. Traditional societies tend to corrode quite quickly in the face of the vigor, energy and flexibility of monetary, commercial societies.

Merchants were looked down upon by the priestly and aristocratic castes of traditional societies. In India, for example, Brahmins and Kshatriyas looked down upon the Vaisya merchant castes, and all looked down upon the laboring Shudra castes.

These days we are very suspicious of distinctions of respect or status, or any incentives which are not monetary. Older ideas like honor or duty have faded away. And maybe often that is a good thing. Nationalism or ethnic identity sometimes rears its head.

But we have few incentives other than money - and perhaps celebrity and political power - to motivate people in broader society. Maybe that is where a lot of the problem lies.

It's another coffee shop question.

What should our incentives be?