Hypnotized in high places - Northwest Flight 188

( picture of vulcan cockpit from u07ch on flickr -- Click for larger view.)

So, yesteday, it seems that a Northwest flight #188 overflew its destination city as the FAA attempted desperately to reach it. According to the NY Daily News,

Crew members aboard Northwest Airlines Flight 188 told the Federal Aviation Administration they were distracted during an intense discussion over airline policy and lost track of their location in the bizarre Wednesday night error.

I wrote a comment to ABC News, after reading the other 200 or so comments, as follows (spacing put back in for clarity and ease of reading).

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There are always multiple levels of contributing factors, from personal to procedural to crew interaction to cockpit design to job design to corporate policy to FAA policy.

For safety, versus lawsuits, it's worth looking at each level of that nested hierarchy of contexts to seek ways to reduce the odds of this type of thing recurring. If we do that, we don't need to know for sure what happened -- only what might have happened that we are now aware of is a gap in our current system that is relatively easy to fix without side effects.

I think the context of the discussion could be expanded in two ways, both of which involve asking "What other events is this event like?" in a much larger framework.For example, I note an uncanny resemblance between this situation and the behavior of CEO's and government regulators as the nation financial situation flew up to the red line, and past it, while thousands of people screamed and called for attention below, and those above seemed to be ... asleep? ... arguing?... out to lunch?

This is not just situational unawareness, it is unawareness or a shared-delusional-mesmerized state that cannot be broken into by repeated efforts from outside and below, in the corporate and governmental boardrooms.

I'm not saying that just to b####, although b####ing can be fun -- I'm saying that human beings, even those with superb qualifications in isolation, can manage, collectively, to get themselves set up so that those "above" are completely and thoroughly "cut off" from input and flying blind or simply not flying at all anymore.

Again, not as legal blame for this accident, but as a route to understanding "what goes wrong with human interactions", this event could spur us to look at that much larger question, asking seriously, "No, seriously, how could THIS KIND OF THING ever actually happen?"

The truth is, socially, it happens A LOT.

There is something structurally seriously wrong with our mental model of how a hierarchical command structure ACTUALLY functions versus how we IMAGINE it to function.The lives destroyed and lost on a corporate and national level from THIS KIND of error are far more than the lives lost in this latest incident (zero).

Wade_AA

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(picture by aeneastudio on Flickr)

Other observations I've made about structural blindness and delusional-mesmerism in high places:

Why we have so much trouble seeing

Why are so many flights delayed? The circle of blame


Model induced blindness and FEMA

It's a year since Katrina made it obvious that people watching CNN knew more about what was going on top government officials.

We have to ask how that is even possible. It defies our intuition, although not our experience, which is interesting.

While the "blame-game" remains in high-gear, Systems Thinking leads us to discount the obvious "bad people" and look for deeper root-causes in the social structure. FEMA Director Brown has been replaced, but the systems problems are harder to see and may still be there....

The power of delusion

It is an astonishing fact of life, which the Times article reveals, that the desire for life to be simpler is so powerful that it can cause 10,000 "trained" scientists, with PhD's, to take 30 years to finally collectively observe what others outside their mutual-blindness-field already knew.

As I've said, textbooks such as "Feedback Control of Dynamic Systems" are in their 5th editions in Control System Engineering, but biologists, and much of public health's biomedical research community, discount that literature to the point of invisibility and effectively treat it with contempt. To them, this literature does not exist. When seen, it "comes as news to them", and is promptly forgotten, because it conflicts with the shared myth of their culture, and cultural myths always win out over boring contrary evidence.

The Way Things Are (The "Yarn Harlot" tells it like it is, beverage alert!)

There are some truths. Things that just are the way they are, and no amount of desperate human optimism will change them. Allow me to demonstrate.
The guys showed up with the new stove. I went out front to meet them....

OK, Seriously... WHY didn't we see it coming?

High-reliability human systems have been studied extensively, from Chernobyl to The Bay of Pigs to Challenger to aircraft cockpit teams to hospital surgical teams to the US Army Leadership Field Manual. The answer always comes down to the same thing -- dissenting views need to be heard, and dissenters need what Harvard Professor Amy Edmondson calls "Psychological Safety" or they will wilt and become ineffective. This is how humans always behave and unless steps are taken it always breaks along this fault line.

The right question then should be, who is going to take charge of seeing that those steps are taken and that level of social literacy achieved?

I can't emphasize enough how much more important this is than more math and science, in the absence of this. As T.S. Eliot said, we repeatedly get burned "dreaming of systems so perfect that no one will need to be good, but the man that is will shadow the man that pretends to be."

Much of my weblog is about what we really need to do to avoid such errors in judgment.

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Various related posts:

My 40 page multilevel structural analysis of
the Crash of Comair 5191 crash in Lexington KY. August 2006
with extensive links to source materials

related webpost with links to Comair 5191 cockpit voice recorder transcripts.


Information on the investigation of the crash of Continental flight 3407 in Buffalo, NY Feb 13, 2009, from the Buffalo News.

On Thursday, Feb. 12, 2009 at 10:20 p.m., Continental flight 3407, en route from Newark, N.J., spun from the sky and crashed into a home as it made its approach to Buffalo Niagara International Airport. All 49 people on board the plane were killed, as was one man in the house in Clarence Center. It was the worst aviation accident in Western New York history.

...A moment later, the co-pilot, Rebecca Lynn Shaw, complained of her own inexperience.

"I've never seen icing conditions," she said. "I've never de-iced. I've never seen any. I've never experienced any of that. I don't want to have to experience that and make those kinds of calls. You know I'd 've freaked out. I'd have like seen this much ice and thought oh my gosh we were going to crash."

Moments later, the crew lowered the plane's flaps and landing gear, and the plane quickly encountered trouble.

Things we have to believe to see

Why men don't ask for directions

Pisa/OECD - Why our education stresses the wrong way of seeing

Failure is perhaps our most taboo subject (link to John Gall Systemantics)

Active strength through emergent synthesis

US - Economy of arrogance (and blindness)

Virtue drives the bottom line - secrets of high-reliability systems

High-Relability Organizations and asking for help

Secrets of High-Reliability Organizations (in depth, academic paper)

High-Reliability.org web site

Threat and Error Management - aviation and hospital safety

Failure is perhaps our most taboo subject (link to John Gall Systemantics)

The importance of social relationships.

Houston - we have another problem (on complexity and limits of one person's mind)

Institute of Medicine - Crossing the Quality Chasm and microsystems (small group teamwork)

Here's a few quotations from MIT Professor John Sterman's textbook "Business Dynamics".

Many advocate the development of systems thinking - the ability to see the world as a complex system, in which we understand that "you can't just do one thing" and that "everything is connected to everything else." (p4)

Such learning is difficult and rare because a variety of structural impediments thwart the feedback processes required for learning to be successful. (p5)

Quoting Lewis Thomas (1974):

When you are confronted by any complex social system, such as an urban center or a hamster, with things about it that you're dissatisfied with and anxious to fix, you cannot just step in and set about fixing things with much hope of helping. This realization is one of the sore discouragements of our century.... You cannot meddle with one part of a complex system from the outside without the almost certain risk of setting off disastrous events that you hadn't counted on in other, remote parts. If you want to fix something you are first obligated to understand ... the whole system ... Intervening is a way of causing trouble.

IN reality there are no side effects, there are just effects.

Unanticipated side effects arise because we too often act as if cause and effect were always closely linked in time and space. (p 11)

And, this crucial comment by Sterman, reflecting the same observation by persons such as John Maynard Keynes.

Most of us do not appreciate the ubiquity and invisibility of mental models, instead believing naively that our senses reveal the world as it is (p16).

My additional note on this crucial insight. The reality is that the world, as it shows up on the mental TV screen we watch, is NOT the world that is actually out there. It has been more than rose-tinted by our brains. It has had entire chunks of the scene edited out entirely, and other chunks that "should go there " put in their place. A whole set of things that have given us pain or conflict in the past have been summarily removed, without so much as a place-holder left where they were. A set of things we hope might be true have been "helpfully" added to the scene. People's behavior, where it deviated from what we expected, has been "corrected" to show us them acting "the way we KNOW the are", not the way they actually are.

We are, in other words, flying almost entirely blind. We have papered over the front and side windows of our cars with pictures of the way we WANT the road to be, and are driving and turning the steering wheel based on those internal delusions.

Throughout evolution, this has been useful to reduce the immense fire-hose of data to a smaller set we can live with -- and, if we do a bad job of managing it, heck, we just die off and don't reproduce and others who do better jobs have children and go on. No big deal.

The problem comes when those living in such delusional and self-confirming, often self-congratulory worlds are given the power to rule our communities, our corporations, or our governments and they continue onwards believing that what shows up on their mental TV screens IS in fact what is going on out there, and believing, therefore, that those voices of dissenting views are, in fact, some kind of misguided or enemy action that should best be suppressed, shut out by locked cockpit doors or isolated fortress war-rooms, etc.

I'm not saying that solving this problem of filtering the fire-hose of complexity down to a size we can comprehend and use as a guide for steering is an easy one -- but I am saying that it is the kind of hard, complex problem that can yield its secrets to methodical research and study, and it is THAT research we desperately need at this time in our lives on Earth.

This is where it is breaking.

This is where we need to fix it.

Well, at least, that's what MY internal mental TV is showing me right now as the "obvious truth".

Wade

The illusion of consensus on deficit

image: from http://www.moillusions.com/
The two vertical red bars are the same height on the screen if you measure them with a ruler. "All" you have to do is ignore the the subway walls and just look at the two red bars. (or get a ruler, or move to the side and look across the screen.) Some illusions are so powerful they work even when you know they are working.

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The cartoon figure Dennis the Menace once wondered "How come dumb stuff seems so smart when you're doing it?"

It's a very insightful question we should not rush by.

I think what's missing here the most is a popular understanding of the power of fear and desire to distort one's thinking.

There are three errors related to that most popular human activity, yielding to temptation.

The first is the incredible power of desire to overcome reason and twist perception so that the reasons for doing what you want to do anyway seem solid and strong, and the reasons against it seem distant and weak.

The second is the remarkable ability of people to be unaware of the difference between how things look from the inside and how they look from the outside. In the same breath as condemning home-buyers and banks for going way too far into debt, the same people turn and suggest with a straight face that the solution is "obviously" for the country to go much further into debt.

There is zero realization that the sin they accuse the bankers of looked exactly the same to the bankers as this "consensus" of going a few more trillion in debt looks to politicians today. And the actions that make so much sense today will look as unfathomable as the homebuyers and hedge-fund's actions look to us today.

"How could they have been so stupid?" It's worth understanding exactly how they could have been so stupid, and why very bright people end up doing very dumb things.

And the third is the remarkable power of group-think to solidify an opinion in a closed room and decide that those who have a different opinion are enemies of all that is right and decent, again obviously. And, as everyone knows, once everyone around you is sinning, it is much harder not to fall in line with them yourself, especially if you wanted to all along.

Again, rationality comes up behind, making up and changing justifications on the fly to make the choice look sane and rational and even fair and balanced.

Prompt for this post was the following
==========================================


The New York Times hs an article this morning

Deficit Rises, and Consensus is to let it Grow
Louis Uchitelle and Robert Pear
Excerpt:

Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

and

But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

“Right now would not be the time to balance the budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

Confronted with a hugely expensive economic crisis, Democratic and Republican lawmakers alike have elected to pay the bill mainly by borrowing money rather than cutting spending or raising taxes.

First, I noted that the vast majority of the comments on this article were very negative, so, like the bailout itself, it seems the consensus in Washington flies in the face of the concensus on Main Street.

I did comment myself, as follows:

The cartoon figure Dennis the Menace once wondered "How come dumb stuff seems so smart when you're doing it?"

Teenagers with their first credit card, families with their first great deal on a mortgage, hedge funds and even conservative banks with their soaring debt, all are so swayed by the temptation that they forget the bills will come due some day.

Regardless of the consensus on the issue, I would suggest that letting the debt out of the bag is less "river water over the banks" and more "water over-topping the earthen levee". God help us all.

and, later,

If more debt is acceptable, why not just borrow $3 trillion and give everyone $10,000?

I think that's a reasonable alternative to compare any other borrow-and-spend scheme to for pros and cons.

U.S. Prison System a Costly Failure: report

The ability to reveal feedback loops and distant causes is not an academic exercise. It has very real implications for social policies based on what people "see" happening. An article by Reuters this morning on a new study of the U.S. Prison system shows the divide, of people who clearly see that harsh punishment is working, to people who clearly see that it's a disaster.

There are many other social policies, and social actions, such as the War in Iraq, that similarly divide people into "camps", which polarize and decide that the "other" groups are clearly idiots and out of touch with reality, or motivated by evil forces, or dupes of evil leaders, or something -- which leads to the conclusion that the "other" group needs to be "stopped" or "attacked" so that "we" can "win."

In a great many of these situations, the problems are less those of "bad people" and more those of feedback systems that take on a life of their own and cause events to transpire despite the best efforts of those caught up in the system to stop them.

John Gall, in his absolutely marvelous book on Systemantics, uses humor to make it easier to delve into these "system problems" comfortably and safely. The book is at first read just roll-on-the-floor-laughing funny, but after some reflection, it is profound and deserves rereading at least once a year.

(see also "Failure is perhaps our most taboo subject" )

I used to buy copies for all my staff. ("Systemantics - The underground Text of Systems Lore; How Systems Really Work, and How they Fail", (c) 1975, 77, 86, 88,90, ...) Gall is a doctor, now emeritus last time I checked, and was at the University of Michigan Medical Center in Ann Arbor, where he observed the remarkable difficulties in getting computer systems, and for that matter most everything, to work in a sensible fashion.

Let me quote John Gall's book, then look at the morning's news on prisons in that frame of mind.

Gall says (and this is in 1975, mind you):

All around us we see a world of paradox: deep, ironic, and intractable. A world in which .. the richest nations slip into demoralizing economic recession; the strongest nations go to war against the smallest and weakest and are unable to win; a world in which revolution against tyrannical systems themselves become tyrannies....

Why is this? How does it come about that things turn out so differently from what common sense would expect?

... Reformers blame everything on "the system" and propose new systems that would -- they assert -- guarantee a brave new world of justice, peace, and abundance. Everyone, it seems, has his own idea of what the problem is and how it can be corrected. But all agree on one point - that their own System would work very well if only it were universally adopted.

The point of view espoused in this essay is more radical and at the same time more pessimistic. Stated as succinctly as possible: the fundamental problem does not lie in any particular System, but rather in Systems As Such.

No one can afford not to understand the basic principles of How Systems Work. Ignorance of those basic laws is bound to lead to unrealistic expectations of the type that have plagued dreamers, schemers, and so called men of affairs from earliest times.

All over the world, in great metropolitan centers as well as in the remotest rural backwaters in sophisticated electrons laboratories and in dingy clerical offices, people everywhere are struggling with a Problem:

THING AREN'T WORKING VERY WELL.
...
This observation ha gradually come to be recognized as an on going fact of life, an inseparable component of the Human Condition. We give it here in full:

• THINGS ARE INDEED NOT WORKING VERY WELL,
• IN FACT THEY NEVER DID...
• REALITY IS MORE COMPLEX THAT IT SEEMS....
• THE OLD SYSTEM IS NOW THE NEW PROBLEM....

A short list of some of his other axioms are on Wikipedia here, but those lose the flavor of the book, which is a must-read item.

I could not agree more with Gall. The effects of feedback are just not obvious to untrained humans, and hard to see for those with extensive training, according to Professor John Sterman at MIT, in his 1000 page textbook "Business Dynamics." Not only does feedback make all kinds of problems that appear to be the "fault" of other "bad people" we love to blame, but first it distorts our perceptions, and then it alters our beliefs and convictions in order to support the first mistake.

The impact is amazingly strong, and the illusion that things are "clearly" and "obviously" the fault of some other person is powerful enough to lead entire societies to actual warfare.

Here's the report on the US Prison system that I promised, with a few key phrases bolded that relate to what Gall is talking about.

U.S. Prison System a CostlyFailure: report

Randall Mikkelsen

Nov 21, 2007

WASHINGTON (Reuters) - The number of people in U.S. prisons has risen eight-fold since 1970, with little impact on crime but at great cost to taxpayers and society, researchers said in a report calling for a major justice-system overhaul.

... the U.S. prison population of 2.2 million -- nearly one-fourth of the world's total.

It recommends shorter sentences and parole terms, alternative punishments, more help for released inmates and decriminalizing recreational drugs. ...

But the recommendations run counter to decades of broad U.S. public and political support for getting tough on criminals through longer, harsher prison terms and to the Bush administration's anti-drug and strict-sentencing policies...

"Our contemporary laws and justice system practices exacerbate the crime problem, unnecessarily damage the lives of millions of people (and) waste tens of billions of dollars each year," it said.

The report was produced by the JFA Institute, a Washington criminal-justice research group, and its authors included eight criminologists from major U.S. public universities. It was funded by the Rosenbaum Foundation and by financier and political activist George Soros' Open Society Institute.

The Justice Department dismissed the recommendations and cited findings that about 25 percent of the violent-crime drop in the 1990s can be attributed to increases in imprisonment....

More than 1.5 million people are now in U.S. state and federal prisons, up from 196,429 in 1970, the report said. Another 750,000 people are in local jails. The U.S. incarceration rate is the world's highest, followed by Russia, according to 2006 figures compiled by Kings College in London.

Although the U.S. crime rate began declining in the 1990s it is still about the same as in 1973, the JFA report said. But the prison population has s soared because sentences have gotten longer and people who violate parole or probation, even with minor lapses, are more likely to be imprisoned.

"The system is almost feeding on itself now. It takes years and years and years to get out of this system and we do not see any positive impact on the crime rates," JFA President James Austin, a co-author of the report, told a news conference.

The report said the prison population is projected to grow by another 192,000 in five years, at a cost of $27.5 billion to build and operate additional prisons.

At current rates, one-third of all black males, one-sixth of Latino males, and one in 17 white males will go to prison during their lives. Women represent the fastest-growing segment of the prison population, the report said.

"The massive incarceration of young males from mostly poor- and working-class neighborhoods, and the taking of women from their families and jobs, has crippled their potential for forming healthy families and achieving economic gains," it said.

We have here all the elements John Gall mentions. We have a system that seems to have a life of its own, and is tending to expand to fill the known universe, despite no change in the crime rates in 34 years. We have a country that proclaims itself the model for "freedom" with the highest imprisonment rate in the world, higher than Russia, China, or any of the "Evil Empire" -- a fact that is well document but seems to keep coming as a surprise to many people.

We have a system ostensibly designed to resolve the problems of urban crime that seems to be sustaining the problem of urban crime by destroying black families and the ability of blacks to find employment.

And, we have adamant people, most of whom I'm sure are well intentioned, who see different "parts of the elephant" from which they have polarized into camps that are convinced the other camps are not only wrong, but must be driven by misguided or evil motives.

And, as John Gall points out, we have almost everyone convinced that the world would in fact work marvelously well if only everyone else would see the wisdom of accepting the solution and System that the first group is proposing, which frames the problem as one of trying to "win" the debate, to elect "candidates" who will "do the right thing" and finally "fix the problem."

And, we have the very few, like John Gall and systems thinkers, who realize this is all a huge misunderstanding and are wringing their hands trying to find out how to explain the issues so that people can finally see what is going wrong and where.

Again, following Gall's spirit of advice, we need to focus not on any one particular issue and get bent out of shape over that, regardless how obvious our righteousness is, and step back and focus on why it is we are having all this trouble reaching an actual consensus on the issue.

Hint - the answer is not "bad people" or "dumb people." The answer is that we need to learn how to make "systems" become visible so that we can see where it is going wrong. Things are breaking in places where we didn't even realize there were places, so we don't look there.

And blame is so easy. But generally wrong.

We should start with the assumption that most people, MOST people, are relatively sane and well intentioned, so

the question we need to stop acting as if it's solved is"Why can't we reach a consensus on this?"

The same battle is going on between sects or branches of major religions, and between religions and between religions and science. We settle for the easy conclusion that the "other camps" are clearly populated by demented fools or bad people, but that's not it at all.

The "why" has to do with systems effects, with feedback, that distorts causality, distorts time and space, distorts our perceptions, and then distorts the social markers we use to latch down those perceptions into beliefs and convictions we can act on, which then changes the people we are comfortable interacting with so we end up talking mostly to people who agree with us, further increasing our mistaken certainty.

Humans are extraordinarily good at discounting "facts" that don't agree with their beliefs, and waving around triumphantly "facts" that do agree with their beliefs, so the net effect is to inform their visual system to help out and start making the "wrong facts" completely invisible, which it helpfully does, and to make the "right facts" vivid, which it does. Then we "see" the world in "obvious" colors and can't comprehend how any sane person could disagree with us. We are not good at "hypothesis testing" and looking for evidence that our cherished beliefs are in need of an update in some areas. That's uncomfortable anyway. It's more fun to exult in how stupid "they" are and how "right" we are.

It's easy to use the "OR" model and say the problem is that EITHER they are right OR we are right. It's hard to use the "AND" model and say "Maybe we're BOTH right... and both incomplete" and search for the unity above diversity, the "elephant" instead of the "tree" or "leaf" solution. But that's where we are now, and it means nothing important is getting resolved.

This is a very expensive error. It is ripping apart our society, making our governments dysfunctional, leading to intractable wars and economic depressions, none of which are necessary.


The first step in civilization is the minimal amount of humility to accept that, despite all the evidence, it is barely possible that we, ourselves, might be wrong on something that we are sure is right. The second step is to figure out how to compare notes and "learn" from each other without jumping up and down in gloating glee when we prove to be "right" and someone else proves to be "wrong" on some fact -- as that just shuts down the whole process again.

And we need enough faith in each other to believe that long ago, before they got so mired in self-fulfilling error, most of the other people in the room were sane and well-intentioned and, under that idiotic front they have now, is a person you could actually talk to and relate to.

If we could get that far, it might be enough, with a lot of public discussion of how systems effects work, to start defusing and disentangling the social bottlenecks that are strangling us today.

Instead of trying to shout each other down and win by 51%, we need to say "I don't see anything that supports your point of view, but maybe I missed it. Help me understand. What is it that you see that I don't that might explain why we conclude such different things are going on?"

That's "civility". We seem to have lost it somewhere and need to turn the car around and go get it back again.

Communication and control - the LAPD and Moslems

A hornet's nest was stirred up by a recent announcement by the Los Angeles Police Department that it was collecting data on Muslim communities.

"LAPD to build data on Muslim areas; Anti-terrorism unit wants to identify sites 'at risk' for extremism.", Los Angeles Times, Nov 9, 2007, also titled "LAPD defends Muslim mapping effort". Those aren't available for free, but a brief restatement is on the LAPD weblog at http://www.lapdblog.org/

What went wrong, and how could this work better next time? One hint is that the LA Times story had over 250 comments posted, and the LAPD weblog story had two.

The core problem, as I see it:
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I think it is almost impossible to communicate to someone, you can only communicate with them. Otherwise, you are really only talking at them -- most of it is bouncing off unheard.

This is like the teacher who said "I taught that material - the students just didn't learn it." That's not teaching, it's spouting. A DVD can spout. It takes a human being to teach.

When the FAA wants to read a flight clearance to a pilot, where it matters if the message is received, it waits until the pilot says "ready to copy." There's no point in running the faucet if the glass isn't under it.

What our K-12 or college systems seldom teach, however, is a fact that's obvious when you think about it, but overlooked all the time in planning:

People are not machines.

I've gone on at length in prior posts about what this means, but the most important take home message here today is this:

Human communication paths are not copper wires

that are either "attached" or "not" -- they are dynamic paths that you have to grow from both sides and continually nurture and weed. The are, in most senses of the word, living things.


And, like the way you talk with your wife, one harsh word or insult, even if unintended, can shut the whole thing down in an instant. To do this right requires heavy lifting over a long period of time. It doesn't just "happen." It's worth it, but it doesn't come easily.

It's as if you each have very low power walkie-talkies with invisible antennas, but your antenna is at right angles to hers, and essentially no signal gets through. You have to jockey around for a while on each end to get them more closely aligned before you can carry on a conversation.

You can't make up for this with volume. If the person is misunderstanding what you mean by a word, shouting doesn't improve the communication. What helps is noticing that their face registered a blank, or anger, when you used the word, which you didn't intend as your message, and stopping right there to ask what they just heard instead of what you meant.

Except that, you have to do that several hundred times, and they have to do it several hundred times, with both sides making a good faith effort to avoid jumping to conclusions, for it to work. There is no way to avoid this step. People are not machines. There is no magic wire, no Mr. Spock kind of Vulcan Mind-Meld that will let you communicate directly.

And, as my other posts go into at length, we live in silos in very different worlds, where words are attached to very different meanings, and it is misleading that we might all speak English, say. Then we think what I mean by a word is what you mean by it, and that's not true at all. Actually, it's amazing we manage to ever communicate at all with other people.

"What you heard is not what I meant" is the norm.

Anyway, at the end of this give and take dance of adjusting our internal antennas to get more aligned, there is, in fact a sweet spot at which a new thing takes over. In signal theory this is called "phase lock". Suddenly, briefly, you are 100% aligned. For a moment, the air is crystal clear, not filled with smoke and debris. But, people are not machines and this doesn't last very long, per event. But it can happen. Then you have to repair the channel again.

Sometimes you see this in sports teams that "get their act together", for a few seconds they play as if mind-reading, like a single person, totally synchronized and coordinated. There's a joy in watching this few seconds that makes the rest of the miserable weather worth while.

LAPD and Muslims
==============

Anyway, what triggered this post was the announcement (above) this week by the Los Angeles Police Department that they were going to start ... and I should stop there, because at the next word, communication already broke down.

The LAPD, after some false starts and use of the term "mapping Muslim communities" changed to the phrase "engaging". Too late! The community heard "mapping, followed implicitly by forcing to wear stars, surrounding with barbed wire, and shipping off to concentration camps, or worse. "

Again the basic rule of communication had shown its face:

What you say is not what they'll hear.

So, which side is "right"? I have no idea what is "really" going on, in terms of engagement between the LAPD and Muslim communities, aside from noting the obvious dysfunctional communication that set things back quite a bit.

Is the conclusion "Oh, I give up. There's no way to talk to her?" No. But there's no way to talk "TO" anyone, as I described above, unless you actually plan to take a lot of time listening as well, hearing surprising things that you weren't originally aware were issues.

In other terms, your antennas or mental models of each other have to both shift around somewhat and play this dance that we used to hear computer modems playing, alternating various beeps and squawks at each other, searching for a communication protocol that both sides understood before trying to start the actual conversation.

That step cannot be skipped, or your faucet is over here and their glass is over there, and there ain't any water making it across the gap.


The LA Fire Department
==============
By a remarkable coincidence, this month's issue of the magazine "Government Health IT" had a story about the LA Fire Department's use of Web 2.0 technology, including Flickr, Facebook, YouTube, and Twitter, to build communication paths with the public.

The LA Fire Department weblog is here.

The whole point of "Web 2" or "Web 2.0" is that the communication goes both ways. In "Web 1" systems, the company posts a "website" and the viewers, as on TV, well, "view it". It goes one way, period. Sometimes a letter to the editor might get a tiny bit of feedback loop going, but not really -- it's to little, and too late. Delay time matters, to humans. Remembering your wife's birthday ON her birthday is way better than remembering it the next day.

All of the "Web 2" tools are different, and not different inside the box -- they are different outside the box. They are used differently. They are social-networking tools that allow communications to go BOTH directions.

So, like a weblog, not only does the blog owner get to post an item, but everyone and his brother gets to post a response. That's one cycle. Then, people start posting responses to other people's comments, and it takes off. It is, in some sense, much less controllable.

The trade off that makes it valuable, despite this lessened sense of control, is that it lets the customers stop being "viewers" and start being "participants." It goes from the world of "selling" to resistant "customers" to actually hearing what people are saying and asking for and changing the product line to fit those actual needs. This is the key of the whole Toyota Way, known to Toyota as "customer pull", and Toyota could not operate without it.

Toyota knows how to LISTEN.

It turns out, it is not trivial to listen. It is not even easy to listen. Being in the room with the TV on is not listening, it's being near something spouting. TV trains us to be "subjected to" messages, which is like standing under a cold shower. People "tune out."

You want people to "tune in", you need to go interactive, where both sides talk, AND, both sides listen. AND, both sides adjust their frequency and antenna position slightly to improve the channel bandwidth, and go through that mutual learning cycle over and over again, each time getting a little better at hearing.

It's a loop, like the clothes line pictured above. It either goes both ways, or it doesn't go at all. If there's no loop, you're simply trying to "push with a rope."

If you want them to hear you, you have to spend a lot of energy listening to and hearing what they are really trying to tell you. The "density" is a property of the CHANNEL, not either side. If your listener seems "dense", it's because the whole communication LOOP isn't flowing adequately, full cycle.

Anyway, what's the LAFD doing?

Brian Humphrey and Ron Myers are described as having 80 different Web 2.0 efforts in the works, at the LA Fire Department's public information office.

I quote the Government Health IT article (Nov 2007, pages 42-43, Crisis Communications 2.0")

Humphrey and Myers see the new tools as opening more channels of communication between the department and the public. "Some might make the mistake of thinking these web 2.0 tools will allow us to get our message out louder and to more people," Humphrey said. "I think that is is wrong. What they enhance is the ability to listen."

He said some emergency agencies seek to control the public. "Instead, we want to empower them," he added. "And that lends itself to Web 2.0"

Well, I mostly agree. I am afraid that their phrasing could be heard as saying that it is not important to get OUT the message, and that it is not important to have public control and order."

In point of fact, as a friendly amendment, the reason for listening better is that you have to listen better IN ORDER TO get your communication channel built, IN ORDER TO be able to get your message not only broadcast and spouted, but actually heard and understood correctly.

The listening part is not just "for nice". The honest listening part is part of the requirement humans have to build a channel.

And, providing a spot for comments that are ignored is not "listening".

True story - once at Cornell the Building and Grounds department decided they were going to undertake some ill-advised project, which I think involved demolishing part of the beloved "Arts Quad" to put in something ugly. There was a huge outcry over the fact that this had not been discussed in public and there had been no chance for public input. As a result, the B&G department scheduled a huge public hearing. I went. They started off the meeting with, as near as I can recall, these words. "Thank you for coming tonight. We welcome your input. After the discussion, on your way out, please pick up your copy, from the boxes in the back,
of the booklets that describe the construction we will be doing next week. "

Communication only has value if it contains surprises. This is a basic law of signal theory. If the communication has no news in it, it's pretty useless. We already know that.

Which means, if you want to communicate, and build this loop, you need to accept the astounding fact that the party you're talking with knows something that you don't.

And the point of the conversation is to mutually surprise each other with facts that the other side didn't realize. This only works if both sides are willing to be surprised with information as good as, or better than, the information they had been working with and assumed was true.

The notion of "fairness" is very strong in human communication, unlike computers. People really resent being talked down to, and shut down the link. On the other hand, people sit up and take notice when their comments are heard and responded to, and come sit closer and start listening themselves. But it takes time. And humility. And listening. And hearing. And responding to what is heard by updating your mental model of what is going on.

The other point I have to disagree with, or tweak, in the statement above by the LAFD, is the implication that this communication process could lose "control".

As I've discussed before, no company or hospital or armed force is going to abandon the level of control they worked so hard to get, to be able to deliver their mission. BUT, they can, and must, adjust their internal mental model of what they thin they're doing, based on real information from the real world, not on some old, outdated concept of reality. Or, there's no point in "control" - you get that level of "control" by welding the steering wheel in place as the car drives off a cliff. You see that level of control in GM as they refuse to hear the message that people want cars with better mileage.

So, even the US Army, with a very strong hierarchy and a very strong need for control, has embraced the idea that they also need how to listen. (See the US Army Leadership Field Manual, FM22-100.)

The core "cybernetic" loop requires two things -- that the body respond to the brain's control commands, and that the brain stay current on what's going on in the body. Then it's a win-win.

Brains issuing controls based on how the world was last week or last year or "when I was in school" are like driving a car with the windshield blocked with a full-size photograph of the road taken last month.

Two kinds of authority
==================

As I've discussed elsewhere, the two meanings of "authority" have to be disentangled. Authority, in the sense of being able to issue lawful orders has to be retained, and enhanced.

Authority, in the sense of being right and being up to date an an authority on a subject, has to be obtained, and can only be obtained, by listening to real-time updates from the field, and being prepared to be surprised with what you hear.

The two together is a terrific combo. Control without actual paying attention is very short-lived, and expires at the next bend in the road one wasn't expecting or that wasn't on the Mapquest or Google Map of our planned route -- it is pointless.

The communication and response loops are key. One, vertically, has to let the guys at the top listen to, and actually hear, what they guys at the bottom are saying. One, horizontally, has to let everyone hear what the customers are actually saying. Then, you have a recipe for a very agile and adaptive powerhouse. Otherwise, you have a blind monster at large.

Wade

Related posts:

Unity in diversity and the two feedback loops (horizontal and vertical):

Nature of Feedback

(photo of man and woman , "Worn out" by by Avid Maxfan)

New York City Schools get graded

Today the New York City School systems are getting done to them what all our schools been doing to students - ranking them and assigning grades -- and they don't like it one bit.

I've posted before on how some things, like the "magic dice", have no "best" and cannot be put into some kind of rank-order.

The New York Times today has an article "Schools brace to be graded" that runs into this problem head-on and is producing a great deal of social conflict.

The point is an important one and I want to mention it again. I keep on seeing cases where people, absolutely sure that there must be some way to do this, valiantly try new and more complicated ways to "get it right" and rank something.

It is a dangerous concept and we need to grow up and get over it. It is a damaging concept. The whole idea is one of the pillars of intense competition between people, cultures, and nations and one of the ultimate causes of outright warfare - to be "best", to be "number one" - our people are killing themselves or going into deep depression over a quest that can never possibly be achieved because the idea is meaningless.

First they try one measure, which everyone knows is incomplete. Then they try a variety of different measures, which are also incomplete. Then, that's complex and confusing to have some high and some low scores, and they know nothing about "unity in diversity", so they try everything they can to "combine" all that information into a uniform single number or letter.

So, first they'll compute an average, then maybe a "weighted average", then something like the square root of the sum of the squares, then even more complex calculations that raise up so much dust that no one can figure out what they did, like the New York Schools, probably trying to be more "accurate" or possibly hoping that no one can challenge what they can't understand or explain.

But I challenge it, on fundamental grounds, that have nothing to do with how it was "computed" at all. It doesn't matter how it was computed - something as multidimensional and complex as a person or a school cannot be meaningfully reduced to a single number, period. The whole concept is flawed.

There is a direct analog in physics, which we can be confident is simpler than society and life as a whole. Scientists have a concept called "rank", but it is the nature of the beast that some set of measurements can be reduced to, and that is as far as you can reduce it.

So, yes, a few things can be reduced to "scalars", which are single numbers, like "temperature", that don't depend on context or what the observer is doing at the time.

Most physical things, however are more complex than that. The next more complex thing than a scalar is a "vector", which you may vaguely recall from school - a directed arrow kind of thingie, like "velocity". Velocity is different from speed, in that speed can be reduced to a number, like 85 miles per hour, but velocity includes a direction as well, such as "85 miles per hour heading due North." And, of course, physical things have those pesky "units" or "dimensions" that are somehow attached, so that talking about a number without units doesn't get the answer right.

So, most easy classical mechanics requires these "vectors" to write down the equations at all and solve them. You really can't even begin to solve the problems using just scalars, period.

That, however, is just the beginning of complexity. Scalars are the first of a long series of types of things called "tensors", and an be described with a single number. Vectors are the the next one up, described with "arrows", and cannot be reduced to single numbers, period.

Another example would be the torque you want to apply to something. You can't say you want a torque of "2", and skip the direction part. Clockwise or counter-clockwise? It matters a lot!!

The complex part cannot be left off just to make your math "simpler" or because you never felt like doing the work required to learn how to do the math correctly. It will not "come to you" -- you have to go to it.

Then there are things physicists deal with daily that cannot be reduced to vectors, even. An example is the "electromagnetic field". This field requires the next higher level tensor,. a second-dimensional one, to capture it correctly, which needs a matrix of numbers and rules for how it changes depending on where you stand and how you're looking at it.

If you use that math, it is actually relatively "easy" to describe in equations, and you get the "Maxwell equations", and can correctly figure out what's going on. If you don't use that math, you can't get answers that match reality and should stop trying.

Things get more complex than that fairly quickly. To describe gravity requires a mix of tensors up to a 4-dimensional thingie called the Riemann space-time curvature tensor.

Once you stop kicking and screaming in protest and accept that you have to use complex tensors, not scalars, and figure out how to do that, the equations suddenly get much easier, actually. It's like why scientists use metric not feet and pounds -- not because it's more sophisticated, but because it's easier.

Alfred Einstein stated that "All physical equations are tensor equations." That's it. You can't get away from this, if you believe Einstein.

And, the equation for space-time, in that formalism works out to this:

R= zero

Cool. Once you start putting mass and planets in there, it gets messy fast, but in a way you can manage with just careful bookkeeping. If you use tensors, you can write simple equations, and solve the problems. If you don't use tensors, and try to use scalars, forget it.

So, that's our social dilemma here. The description of people, schools, sports-teams, presidential candidates, etc. all require a level of math that we wish wasn't true, so we just go on pretending that we can say something meaningful without going to all that effort.

And, we end up assigning "grades" to students, then trying to aggregate different "grades" into single overall "grades" (grade point averages), and then trying to make meaningful decisions based on those single composite numbers, like rank students or schools -- and discover that we get absurd results.

Then, we punish those with "low scores" and apply pressure for them to "shape up" or "teach to the test", and have a mess on our hands.

The core problem here is that the physical objects we are trying to study - school systems -- are not intrinsic "scalars" but are probably at least level 3 or higher "tensors".

Actually physicists and mathematicians squabble over exactly what kind of complexity is required and whether it should be "tensors" or something else -- but they all would agree instantly that you can't reduce the world to a set of equations using just "scalars", like grades.

The first question we should have asked is "What is the smallest rank tensor we can use to meaningfully capture the complexity of this thingie?" and it would immediately be clear that scalar numbers ("grades") are too simplistic.

We don't like that answer, so we just go on doing the wrong thing, then we wonder why we have so much conflict, and why some well-loved schools end up getting low grades. Then we set social policy, public policy, and feedback based on those "grades".

Evaluate, yes. Try to reduce to single scores using the axe of some magical computation? NO!
New York City Schools

What is public health?

What is "public health" anyway?

One way to look at life is the clinical approach: we see a new stream of urban gunshot victims coming into the Emergency Room, and decide to do things like:

• Expand the ER
• Add staff
• Develop a specialty in treating gunshot wounds
• Improve communications between the ambulance and ER

Public health, on the other hand, goes "upstream". We look at that situation and ask "Why are there so many gunshot victims suddenly?" We leave the ER and go look at what is going on in society that is resulting in all these shootings.

Then we ask the annoying question that parents and teachers often discouraged, "Why?", five time more after that to get to the root-cause, and find a place we can intervene that has "leverage". The problems often spring from culture, beliefs, society, industry, economics, and other issues. Unless those are fixed, we're just fixing symptoms and the root problem may get worse.

The illness we are treating is the tendency of society's members to shoot each other, not the wounds themselves. The point is that if we can put out the fire, it will stop the smoke.

These days, the problems hospitals have are more often too many patients, not too few, and the interests of public health and clinical health coincide. If half as many people got shot, or got sick, then the hospitals would have capacity to deal with the others more promptly, and get rid of 3 month delays for surgery. There would be room to treat those we currently leave in the gutter, figuratively or literally, as a society. It would be a win-win.

The current president of the American Medical Association has a specialty in preventive medicine, and understands this overlap -- which has not always been true in the past.

Which one is more important? They're both more important, just on different scales. Life has different levels, and a good solution to a problem will address them all. We need clinical doctors to fix individuals, and public health to fix societies. They both matter.

It doesn't matter which end of the boat we're in has a hole in it -- we need to fix the hole. Right now, there are holes at both ends.

Wade

Why do smart people do dumb things - Countrywide

Countrywide Financial Corporation is the latest case study of how smart people do dumb things. What is surprising, in retrospect, is that failures of this magnitude are not studied with the zeal that commercial airline accidents are studied. After all, probably as many people are hurt or killed by the indirect effects.

Still, are we learning from experience? Or simply repeating the same mistake over and over? Airliners use cockpit simulators to train pilots to avoid errors -- what do we need for CEO's and average home buyers?

What comes to mind is a short poem by Shel Silverstein " The Slithagadee. I can find many variations of it on-line, so I'll just quote it as I remember it:

The Slithagadee.

Oh, the Slithergadee
Came out of the sea.
He caught all the others,
But he won’t catch me.

No, you won’t catch me,
You old Slithergadee.
You caught the others,
But you wo...

—Shel Silverstein

Anyway, here's a few facts on Countrywide Financial from today's LA Times. My excerpts focus on two things:

1. the psychology of feeding frenzy and how, as with "only a foot" of water on the road, you can find your car swept away, and
2. How "systems" effects mean everything affects everything else -- there is no immunity.

Credit crunch imperils lender

Worries grow about Countrywide's ability to borrow -- and even a possible bankruptcy.

By E. Scott Reckard and Annette Haddad
Los Angeles Times Writers

August 16, 2007

[Excerpts]

Angelo Mozilo, chief executive of Countrywide Financial Corp., has been fond of saying that the company became America'sNo. 1 mortgage lender by being smarter than the competition.

In a harangue to Wall Street analysts early last year, the combative Mozilo denounced upstarts for shoveling out too many loans, too easily, to too many people with bad credit, heavy debt and skimpy income.

"I've been doing this for 53 years, and I've never seen that situation sustained," said Mozilo, who co-founded Calabasas-based Countrywide in 1969. "Eventually they gag on it."

Dozens of home lenders have indeed collapsed as defaults have surged on loans made to people with poor credit during the housing boom and as Wall Street has turned off the money tap that funded many of those sub-prime mortgages.

But rather than emerging bigger and stronger as Mozilo predicted, Countrywide -- which made 1 of every 6 home loans in the U.S. in the first half of this year -- now finds itself battling not just its own growing defaults but also a widening credit crunch stemming from the nationwide sub-prime mortgage meltdown.

On Wednesday, the company was said to be having trouble borrowing money on a short-term basis, securities analysts discussed the possibility of a Countrywide bankruptcy and the firm's stock price tumbled 13%, bringing its loss for the year to 50%.

An insolvent Countrywide could also do more damage to the country's already weakened housing market, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md.

"It would be a huge shock to the U.S. housing system and the mortgage system as perceived around the world -- and make an already bad situation terrible," Cecala said....

"The problems Countrywide is experiencing has nothing to do with its mortgage business," Cecala said. "By all measures, Countrywide is a well-run, profitable company. What they're finding out is that although they thought they had diversified funding sources, nothing is diversified in a worldwide credit crunch like we're in now."

In 2003, old-fashioned 30-year loans with fixed interest rates and substantial down payments made up about two-thirds of Countrywide's loans, said mortgage executive Bill Dallas, whose Agoura Hills-based sub-prime lender Ownit Mortgage shut down early this year.

By last year, only one-third of Countrywide's loans were of the traditional type, with the rest spread among the more exotic loan variety, Dallas said. He said Mozilo, who had often been quick to criticize rivals for being overly aggressive, had found himself immersed in the same businesses as his competitors.

"Every section of the business that has failed, they're in there big time," Dallas said.

At some branches, managers would buy lunch every day for their staff to keep them at their desks working.

At the height of the boom in 2004 and 2005, it wasn't uncommon for a typical Countrywide loan officer to sell 20 sub-prime loans a week. "It was a feeding frenzy," said one former Countrywide employee who said he joined the company in 2004 and, after six weeks of training, made $6,000 to $8,000 a month. As fast as loans could be signed, they could be sold to investors, according to the former employee, who declined to be identified....

Over the years, Mozilo's pay packages -- $48.1 million in 2006 alone -- ballooned along with his company's fortunes.

Countrywide also bills and collects payments on $1.4 trillion in mortgages for itself and other lenders. What's more, Countrywide is the largest customer for Fannie Mae, the big government-sponsored mortgage buyer. More than one-third of all mortgages sold to Fannie Mae comes from Countrywide.

"The question is, is Countrywide too large to fail? Will the Fed allow it or will it need to step in and bail it out?" Cecala said.

A bailout of Countrywide would make the government's efforts to save automaker Chrysler in the 1970s look puny.

"Countrywide is more important than Chrysler was back then, particularly given the fragile state of the economy and so much tied to housing," Cecala said.

Of course, what's not mentioned is why a healthy company needs to borrow money in the short term to survive. Where did they put all their rainy-day savings from prior profits? Hmm. IT does sound like the "hedge funds" who were so sure of profits that they borrowed against the value of everything they owned and bet it on this "sure thing" -- except the nag broke a leg on the far turn of this track.

If so, this is really no different than the employee who "borrows" $10,000 from the bank till at lunchtime to go bet it on a sure thing and return it by the end of the day and no one will know.

Maybe we need to learn to recognize the typical signs and symptoms of unjustified reliance on ... hot air ... as a basis for business decisions or governmental policy decisions.

What is particularly dangerous, as I've pointed out before, are positive feedback loops, where the "reason" something is becoming more attractive is that "it's becoming more attractive." This phenomenon accounts for some Hollywood fame, where the only reason one can see for why this unremarkable person is famous is that they are famous and it feeds on itself.

That may even be a great strategy to make a buck on as it rises, as long as you stay aware that on any morning the wind may shift and suddenly it is falling just because it is falling, and the spiral up becomes a death spiral down.

Also, "amplifiers" are wonderful things, used correctly. For financial investments, "leveraging" you funds so that you only have to actually shell out 5% of the cost of something (right now) to "buy" it can make sense if the "it" will make you piles of money rapidly. Again, the problem comes in feedback, where you start amplifying the amplifier, etc.

Before long this vortex "takes on a life and momentum of its own", for exactly the same mathematical reasons that a hurricane or tornado starts sucking in surrounding air and "feeding on" the energy in it to become even larger, which lets it feed more, etc.

But, all such "fools gold" will have to turn around some day. This sort of thing is like "silly putty" or cornstarch fluids, that act "solid" if you keep moving fast, but turn instantly to "liquid" if you ever stop moving. (YouTube video worth watching of college students dared to run across such a vat of "liquid". This is great! )

In other words, this is a "good idea" only if you are a heart-beat away from an exit strategy. Otherwise, it is a pure pyramid or "Ponzi scheme" and the company "built on" it is a "house of cards."

There are many examples of such spirals that appeared as magical money machines and seemed from within that they would never end, like a credit card on a company that never remembered to bill you. Then, one day, the accumulated bill arrives. And you better have saved up enough "profit" to be able to bail out, and not sent it all to stockholders on re-invested it.

Tulips were the international craze in the 1700's, I think. Dot.com's. Pet Rocks. The Hula Hoop, 5 cents worth of plastic that sold for $2.00. Actually, the company that made Hula Hoops lost money, because they put everything they had earned into a brand new factory for making even more Hula Hoops, just as the craze ended.

So, again, the "hazards" of this strategy are well known in the business literature. The "right" way to win money in the long run is known. And the reality, that frail humans succumb to the "momentum" is also well documented.

But human ego is a fickle friend. "Just one drink." "Just one more investment and then we'll get out." "Just wait until it comes back up to where we bought it, and we'll sell it without recognizing a loss. "

Oh, the Slithergadee
Came out of the sea.
He caught all the others,
But he won’t catch me.

No, you won’t catch me,
You old Slithergadee.
You caught the others,
But you wo...

This is why a long solid history of "consultation" with a very diversified group of friends, preferably of different cultures and located in different counties, is a good idea. In fact, it's the only strategy I'm aware of that can prevent this kind of localized shared blindness, group-think, from taking the reins away from even very strong, very solid thinkers.

And, even then, that won't work if you reserve the right to just ditch you best friends and redefine them as "enemies" with "negative thinking" when they tell you that you are wrong and making a terrible mistake.

Of course, it never looks like a mistake from inside to the person making it. Think about it. That's the subtlety our school system doesn't train us for. Humility, or just experience ( which is wisdom acquired just after it was needed. ) Maybe a simulator game.

Here's the key lesson: the mind is a fickle friend. Your "obviously" creating sense has blind spots that can ruin your whole day.

Or, as Dennis the Menace said, sitting in the corner being punished - "How come dumb stuff seems so smart when you're doing it?"

Karl Weick teaches a need for "mindfulness" that maybe our "mental model" is outdated, but thats a fancy way of saying the same thing. Neither IQ nor will power nor genetics nor training can overcome the ability of people to fool themselves.

Only a wide grid of interlocking people is robust against such vortices of "easy money". And "wide" has to mean diversified, over a wide area of the planet, where some are not within the range of the "obviously" perception-distorting perceptual vortex.

This is a very common phenomenon, but we, as humans, remain in denial or think we are somehow different and immune to it.

No, you won’t catch me,
You old Slithergadee.
You caught the others,
But you wo...

Sources for the Slithagadee.

"The Norton Book of Light
Verse" (page 314)
source.

Often wrong but never in doubt - credit crunch

There were a few items on the credit crunch or "market turmoil" this week. I pulled a few quotes that reflect the errors in thinking that led people to lose so much money, so we can look again at how to reduce these in the future. It would be good to learn from experience!

From Housing Haven to Foreclosure Leader (Stockton, CA)
New York Times 8/13/07
Jesse McKinley
xx

STOCKTON, Calif., Aug. 11 —...

Once considered a safe alternative to the overheated Bay Area real estate market, Stockton and its streets are now filled with “For Sale” signs and evidence of foreclosures. While hundreds of thousands of people nationwide are being affected by troubles in the lending market, Stockton has the highest foreclosure rate of any city in the country, according to RealtyTrac, a real estate data firm.

“It is disturbing, there’s no question about it,” said Mayor Edward J. Chavez, who himself has two houses on the market, with no sales in sight. “A year to two years back, this area was seen as being affordable compared to other areas, the Bay Area, the South Bay. But what was once a vibrant market has kind of hit a brick wall

But those deals quickly soured for new homeowners when higher monthly payments kicked in after two or three years.

“It’s gone from the most liberal financing I’ve ever seen a few years ago to the most foreclosures and delinquencies I’ve ever seen now,” said Art Godi, 71, a longtime Stockton real estate agent and the former president of the National Association of Realtors. “And there’s a connection between those two things, obviously.”

When the housing market was hot a couple of years ago, Mr. Godi said, house prices here were increasing 20 percent a year. Now, he said, the prices are falling as much as 10 percent to 12 percent a year.

“We made bad decisions,” said Ms. Neri, ... We just didn’t see the downturn coming.”

Six California cities rank in the top 10 nationwide for foreclosure rates, according to RealtyTrac, with the top three spots — Stockton, Modesto and Merced — situated in the Central Valley, where longtime agricultural towns have turned into small residential cities.

California has the third-highest rate of foreclosures in the country, RealtyTrac says, behind Nevada and Colorado. In July, another real estate data firm, DataQuick, reported that the state had its highest level of foreclosure in two decades, with nearly 54,000 notices of default sent to delinquent homeowners in the second quarter of 2007.

In May, the California Reinvestment Coalition, a nonprofit group which seeks to promote access to credit in low-income families, wrote to lenders asking for a moratorium on foreclosures.

“Immigrants, seniors and people of color are more likely to have been victimized by bad lenders,” said Kevin Stein, the coalition’s associate director. “But what’s evident looking at these numbers is that the problems being faced are cutting across racial and ethnic lines.”

In June, several state leaders called for a forum in Stockton to help people avoid foreclosures, but most people had dallied too long to address the problem. “There’s denial,” said State Senator Michael J. Machado, a Democrat whose district includes Stockton and who is chairman of the Banking, Finance and Insurance Committee. “People get into these homes, it’s the American dream, and then they wait too long to go to the lender to say they’re having problems.”

I added the emphasis (bolding.) So, even with conspicuous evidence of people around them running into trouble, people don't see their own. And even though the mortgage contract says the rates will go up in 3 years , people can't figure out that means that in 3 years, the rates will go up. Or ask "by how much?" and demand a credible answer. Desire clearly can overcome logic, and tens of thousands of consumers can see no better than one what is happening even when it is happening, or particularly when it is happening and they are "in denial."

Hmm. Surely the professionals are not subject to such flimsy reasoning, right? Apparently not.
Again we see here how a lack of "diversity" can suck even bright people into a vortex of behavior they can't "see" their way out of, resulting in the same "stay the course" error that the homeowners in Stockton displayed.

Pack Mentality among Hedge Funds Fuels Volatility
NY Times
Landon Thomas Jr.
8/13/07

On Wall Street, there is a rage against the machine.

Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month.

The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models.

The cross-fertilization has raised fears among some analysts that it is not only the hedge funds that are being hit, but the trading desks at the banks as well.

“These guys all know each other, and they all have the same strategies,” said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. “They came from the same schools, and they get together for drinks after work.”

As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply.

Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed — the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month.

Wild swings in stock prices have become the norm as fears about the mortgage securities market have expanded into the broader markets. Last week, the Dow Jones industrial average was sharply higher on Monday and Wednesday, only to drop 387 points on Thursday, eventually ending the week about where it began.

A common thread has often been a rise or fall in prices late in the day, a pattern that many analysts attribute to computer models, which are driving a much larger volume of the trading.

Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion.

Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds.

Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago.

In one respect the swoon of these computer-reliant funds is the result of managers, who are faced with a deluge of investor money seeking accelerated returns, using their models to make higher risk market bets by following day-to-day trends. It is an approach that seems to run contrary to the original philosophy underlying a quantitative approach, called statistical arbitrage.

But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities.

“You can build a computer model for anything that is tradable,” Mr. Chan said. To some extent, that explains the outbreak of losses in these funds.

With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out.

“We cannot predict the duration of the current environment,” Mr. Simons wrote. “But usually such behavior causes first pain and then opportunity. Our basic plan is to stay the course.”

So, again we see the all to human tendency towards magical thinking and the concept that, if an error is not "recognized" or "admitted" it is somehow less "real."

There is the well known error of investing to figure "I see that this went down instead of up, so I will just hold on a little longer until it goes back up to where I started so at least I can get out without a loss. "

Loeb wrote a book on how he got rich on the opposite strategy, of course - namely, if it is going down, sell the sucker, and "stay the course" only when it is going up.

This seems a more rational strategy. Drop your losers, hang onto your winners.
Humans, however, are not driven by rationality, judging from observation. They desperately seek to avoid "having been wrong", even when everyone else around them can already see that they were wrong.

Again, let me cite a prior post and the brilliant work of John Gall.
Failure is Perhaps our Most Taboo Subject

====== I"ll requote it here since it's in my prior weblog (cscwteam.blogspot.com) and
a search here might miss it. We should note as well that the use of computers has amplified this problem, not made it go away. There is no magic bullet, aside from facing up to the fact that we are frail, faulty reasoning units that only can deliver reliable results when we
(a) work together and
(b) maintain as great a diversity of views as possible so we don't get stuck in the same hole
at the same time.

==============================
As John Gall says:

"At the very least it is hoped that this little book may serve as a warning to those who read it, thus helping to counter the headlong rush into Systemism that characterizes our age...

SYSTEMISM n. 1. The state of mindless belief in Systems; the belief that Systems can be made to function to achieve desired goals. 2. The state of being immersed in Systems; the state of being a Systems-person."

(John Gall, "Systemantics - How Systems Really Work and How they Fail.)

Gall, continues

Systems-functions are not the result of human intransigence. We take it as given that people are generally doing the very best they know how. Our point, repeatedly stressed in this text, is that Systems operate according to Laws of Nature, and that Laws of Nature are not suspended to accommodate our human shortcomings. There is no alternative but to learning How Systems Work... Whoever does not study the Laws of Systemantics and learn them that way is destined to learn them the hard way...

S. Freud, in his great work on the Psychopathology of Everyday Life, directed attention to the lapses, failures, and mishaps resulting from forces operating within the individual. We, on the other hand, are intestesed h those lapses, failures, and mishaps that are attributable to the (mal)functioning of the Systems surrounding the individual, within which the individual is immersed, and with which he or she must interact and attempt to cope in everyday life.

Specifically, we are interested, not in the process of forgetting to mail a letter, but in the Post Office Box that is too full to accept the letter.

...

And like those lapses followed up by Freud, these lapses have a way of eluding us, of disappearing from our consciousness once the painful event is over. Failure is perhaps our most taboo subject.

...

When Memory is thus deliberately frustrated in its basic task of protecting us from too much awareness, we see what we had hitherto failed to notice: that malfunction is the rule and flawless operation the exception.

...

The advent of the Computer Revolution merely provides new opportunities for errors at levels of complexity and grandiosity not previously attainable.

...

The world may largely consist of Fuzzy Systems, but fuzzy thinking is definitely not the way to Cope with them, let alone to Prevail.

Comment - John Gall's book is, in my mind, one of the most delightful and yet profound books on "Systems" ever written. I have made a point to reread it at least once every year since 1975, and to buy copies for all my staff and friends at the slightest excuse.

Based, presumably, on his experiences as a physician at the University of Michigan, be captures with humor the best attitude any of us can hope for to take and use to frame the indelicate problem of "systems" in our lives, or, God forbid, systems we are part of and partly responsible for.

A very brief sampling of his summary rules is here. Wikipedia has many more, but I heartily recommend the trip to Amazon to get the latest updated version of his wit and wisdom.

Some of his Rules:

REALITY IS MORE COMPLEX THAN IT SEEMS.

Under precisely controlled experimental conditions,a test animal will behave as it damn well pleases.

THINGS AREN'T WORKING VERY WELL (and never did).

SYSTEMS IN GENERAL WORK POORLY OR NOT AT ALL.

(The behavior is often an unexpected way of failing.)

NEW SYSTEMS MEAN NEW PROBLEMS.

SYSTEMS TEND TO EXPAND TO FILL THE KNOWN UNVERSE.

THE SYSTEM ALWAYS FIGHTS BACK.

THE OLD SYSTEM IS NOW THE NEW PROBLEM.

A LARGE SYSTEM, PRODUCED BY EXPANDING THE DIMENSIONS OF A SMALLER SYSTEM,
DOES NOT BEHAVE LIKE THE SMALLER SYSTEM.

TO THOSE WITHIN A SYSTEM, THE OUTSIDE REALITY TENDS TO PALE AND DISAPPEAR.

THE CHART IS NOT THE PATIENT.

Unfortunately, this slogan with its humanistic imlications, turned out to be misleading. The nurses were neither attending the patients nor making notations in the charts. They were in the hospital auditorium, taking a course in Interdisciplinary Function. (The art of correlating one's own professional activities more and more with those of other professionals, while actually doing less and less. )

"In cold fact, a SYSTEM is building ships, and the SYSTEM is the shipbuilder."

PEOPLE IN SYSTEMS DO NOT DO WHAT THE SYSTEM SAYS THEY ARE DOING.

THE SYSTEM ITSELF DOES NOT DO WHAT IT SAYS IT IS DOING.

and, "Closely related to Orwellian Newspeak and Doublethink, The confusion of Input and Output."

A giant program to Conquer Cancer is begun. At the end of five years, cancer has not been conquered, but one thousand research papers have been published. In addition, one million copies of a pamphlet entitled "You and the War Against Cancer" have been distributed. These publications will absolutely re regarded as Output rather than Input. The cancerous multiplication of paperwork will not be regarded as a malignancy.