The Cultural Theory of Risk

Financial bubbles and crashes are a form of collective madness: a catataxic moment when suddenly more of the same is different. Perhaps you think there is no more to be said about financial crisis? You might be right from about economists, who failed to see it coming anyway but the most interesting analysis on financial crises, risk and blame, comes from cultural anthropologists.

Though Mary Douglas first developed this framework in a different context, it seems to add much more insight than standard economic models. Douglas suggested we could view societies (all societies) within a framework of four different groups within a society, all acting rationally and consistently from their own perspective.

These groups are: i) self seeking individualists, ii) fatalists, iii) hierarchical bureaucrats and iv) egalitarians. Crises happen when one of these groups becomes too powerful and too popular, which of itself creates instability.

The anthropologists have gone further and use the mathematics of biological ecosystems to model this instability. In the early 20th century, a Ukrainian chemist, Alfred Lotka, and an Italian mathematician, Vito Volterra, built a famous model to describe the volatility created by interactions between predator and prey. Imagine an island populated by foxes and rabbits, as the rabbit population grows, the foxes eat more rabbits: the fox population increases and the rabbit population falls. Yet the growth in fox population means that there is less food available per fox, while surviving rabbits have more food available. The system never settles down, but swings back and forth in favour of foxes, then in favour of rabbits. The ups and downs do not come from an outside source, they are built into the very structure of rabbit and fox populations on the island.

For a while the anthropologists experimented with the two agent version of Lotka-Volterra, but in the end found that their four agents of i) self seeking individualists, ii) fatalists, iii) hierarchical bureaucrats and iv) egalitarians was a more useful framework.

What does this mean for protections ourselves from future crises? Perhaps instead of trying to maintain stability as a goal “no more boom and bust!” we should accept that instability and volatility are the natural state of societies. And instead of looking for specific causes such as “bad lending decisions” or “greedy bankers” which economists, regulators and journalists can only see with the benefit of hindsight; we should instead look for warning signs when one group’s narrative becomes too widespread. And so, despite the financial crisis, perhaps the views of economists are still too popular.

 

This is a guest post by my good friend Bruce Packard

Riots: hysteria and hysteresis

police and community frustrationI am on holiday in France this week. Every cafe and hotel has a TV screen with a French presenter gleefully covering the riots in the UK. Shocking footage of looting and burning buildings, so far from the traditional image of the English on the continent. Whatever happened to the tradition of repressed feelings and the stiff upper lip?Clearly something is terribly wrong with British society. If only they had the sense of community that we French have here in France. Britain clearly can learn a lot about how to organise society from us.

If you cast your mind back a few years you will probably remember British commentators making exactly the same points at the time of the French riots but in reverse. How the French have a lot to learn from the Brits about multiculturalism and how to make minority groups feel included. Maybe that is not too much of a surprise because all coverage of riots in all countries is always the same. The story runs like this a) riots are sign that something is terribly wrong b) the government’s policies are clearly to blame c) something must be done to fix them.

Do riots really mean that something is wrong? The alternative view is that they are a naturally occurring phenomenon like stock market crashes or tsunamis. They happen from time to time regardless of government policies. If you look back in history in any country one conclusion must be this: communities riot. That’s how a level 3 entity loses it’s temper. Its not unnatural for an individual to feel angry from time to time. Quite the opposite, any human who lived their whole life without ever losing their temper would not be human. Likewise with communities and riots. Sudden summer storms clear the air, a build up of static electricity clears with a shock and riots vent community frustrations. Everyone feels much better afterwards. They are not a sign that something is wrong. It’s just part of the natural behaviour of complex systems. It’s a sign that everything is working normally.

Firefighters in California and Australia are coming to the worrying conclusion that the recent spate of costly and highly destructive forest fires are a direct result of their tampering with nature. By being so efficient at eliminating small forest fires for the last century, they have left the woodlands surrounding their towns with an unnaturally large load of dry wood. This sets the stage for an inevitable monster conflagration which, when it comes, is beyond their power to control. Firefighters are coming to the conclusion that they should maybe just let a few forest fires burn every few years along with a few houses too. That way they avoid the big one: a few high tides but no tsunami. So firefighters have learnt the counterintuitive trick of standing by and doing nothing when a fire rages. What chance is there of a politician doing that when a riot happens?

Not much.The reaction to the riots has been hysterical. There is no shortage of ‘reasons’ given for causing the riots: moral decline, absence of authority, lack of religion, poor schooling, government budget cuts, the breakdown in family values, soft policing and consumer advertising. Yes, the last one argues that if you bombard the underprivileged  with too many adverts for high end aspirational consumer goods  in the end they will crack under the pressure and just help themselves by looting. Each of these ‘reasons’ then has it’s own ‘solution’ which you can pick according to your bias and your political agenda. Only a very few commentators, like my friend Harriet Sargent in the Sunday Times, are able to keep a cool head. Looking at the extraordinary diversity of the rioters passing through the courts, it’s clear that there is no one reason. Looters included a postman, a social worker, an heiress and several university graduates along with the usual youth suspects from underprivileged minorities. What links this disparate group together other than a thrill seeking urge to counter the long, hot boredom of the summer?

The hysterical reaction and the rush to find ‘reasons’  is only to be expected. Its the natural  counter reaction of the body politic. Its an involuntary response, like white blood cells rushing to the site of infection. But beyond the hysteria there is another deeper mechanism at work. Engineers call it hysteresis, which crudely speaking means ” you can’t get back to where you started “. Hysteresis is a type of memory or lagging effect that is a common phenomenon in nonlinear complex systems. It is often seen in magnetic devices, thermostats, electric circuits, neurons in the brain, cells when they divide,economic systems and, of course, communities that riot.

A hysteresis loop is characterised on a graph as a rectangle or lozenge rather than a single line. It is ‘nonlinear’ because a particular input can have two different outputs. Think of a thermostat controlling the heating in your house. You want the temperature to be 20 C. You could just set up a switch which turns on or off at precisely 20 degrees but this could get very irritating because the system would be constantly switching on and off every minute. So instead you set up a thermostat with a hysteresis loop that does this : turn on at 18 degrees and turn off at 22 degrees.  Now you have a system that only switches on once or twice an evening and keeps the temperature nicely hovering around 20 degrees. Now consider this: when the temperature is 20 degrees is the system on or off? The answer is it could be both ( it’s a nonlinear system). It could be in heating phase moving from 18 to 22 or it could be in cooling phase moving back the other way. It depends which path the system is on.

In economics,  exports often show a hysteresis effect. It can take a big effort to start up an export program but once it is set up it takes little effort to maintain that momentum. However, once exports begin to tail off it can take another big effort to reverse the negative momentum. So the answer to the question “how much effort is required to get exports to a certain level” is that it depends which part of the path you are on. Just like with the thermostat, there is more than one possible answer when you have a hysteresis loop.

Back to riots. Let’s take one of the ‘reasons’ for the riots: soft policing. We can ask the question “How much policing is required to prevent rioting”. The answer is it depends which part of the path you are on: before the riots not much, after the riots a lot. A community is a complex nonlinear system that exhibits hysteresis effects. It has a collective memory. You can’t put things back to how they were before, at least, not quickly. We need fewer hysterical reactions and more recognition that riots are a natural phenomenon. Communities have hysteresis loops; memory effects and lagging results that will sort themselves out in the end. Like the firefighters, maybe the politicians should have the courage to do nothing.

Trial by Catataxic Jury

Trial by Jury Trial by jury is one of the underpinning notions of justice. Juries, made from 12 people chosen at random from the community, inject a societal element into the legal system. They act as a check against the power of the state, and were one of the key principles established in the Magna Carta which curtailed the power of the King. Juries are proof that justice arises from the community. While judges concern themselves with issues of law, juries are responsible for determining the facts of the case. In other words, they are there to decide who is telling the truth: juries are a 12 body community lie detector. The only problem is that this time worn mechanism for establishing truth has a lie, or at least a fiction, concealed in its own heart.

The lie is this: the unanimity of the juries verdict. Twelve people of different backgrounds are expected to coalesce together into a single viewpoint. This is a catataxic transformation. Twelve individual voices on level 1 merge to form a single, representative community voice on level 2. This magical mutation happens in private; nothing must disturb the seclusion of this sacred metamorphosis. Anyone who violates this will be severely punished. Just look at today’s news that a juror who facebooked the defendant has been given a eight month sentence. Social networking can be criminally dangerous!

When touched at their weakest point , the strong react with disproportionate violence. Maybe the reason for this excessive reaction from the judicial system is that their vulnerable underbelly has been poked. The protective veil drawn around the jury’s deliberations conceals a fatal weakness: it is not possible for twelve people to speak as one. Not without a lot of back room bullying, threats, posturing and other social unpleasantness.

The inherent conflict of a jury’s deliberations had been exploited to dramatic effect in the movie 12 Angry Men (1957) and to comic effect by Tony Hancock in a TV episode of the same name. Recent research shows that jurors often feel intimidated and do not speak out in a group as large as 12. A better size for a proper, balanced group discussion is a group of four. This implies that a smaller jury , or a “best of three system” based on subgroups of 4 might give a more representative result. To traditionalists, suggestions like this which tamper with the fundamental rock of justice is anathema. The catataxic transformation of individuals to a single community voice is sacred. It should not be messed with even if it pushes the bounds of credulity. In fact, it may be sacred because it pushes the bounds of credulity. It is an article of faith just  like the transubstantiation of bread to the body of Christ at the heart of the Christian ritual. Or the belief that anointing with sperm whale oil transforms a mere mortal to a monarch. This is the only part of a British coronation that is so sacred it has never been photographed or televised.

Apocalypse (not right) now

Harold Camping, an 89 year old televangelist, has spent the last 8 years preaching that the end of the world will occur on 21st May 2011. He spread his message through the Family Radio network in the USA. His followers sold all their positions to raise more than $100m in assets to fund a media campaign. On that day of judgement, true believers would ascend to heaven in “The Rapture” with everyone else dying in a cataclysmic wave of earthquakes. Of course, on the day nothing happened. Shamefaced proselytisers returned to their place work the next day. The world carried on as normal, beset by the evils of globalisation and the rising threat of terrorism which can be taken as a sign of God’s displeasure.

Globalisation and the rising threat of terrorism? We have all been here before. Cast your mind back to 1900. The world’s economy is truly global with little hindrance to the flow of goods and people. Western investors are pouring money into emerging markets: Brazilian rubber plantations, Chinese railways and African mines. Passports do not exist and emigrating just means catching the next ship to anywhere in the world to seek your fortune, whether you are an Irish farmer, an Indian shopkeeper or a Chinese labourer. This globalisation exists because most of the world is under the control of European empires.

At the same time, many heads of State are being killed by anarchists or, as we call them today, terrorists. In a few short years around the turn of the century the Austro-Hungarian Empress Elizabeth, King Umberto I of Italy, the King of Serbia and the US President McKinley are all assassinated. A decade later, the assassination of Archduke Franz Ferdinand of Austria triggers World War 1, a nationalistic war between empires.

Recognising the dangers of nationalism, the first supranational organisation, the League of Nations is set up in 1919. Sadly, this is too weak to prevent the even more destructive nationalistic conflict of World War 2. The second attempt in the form of the United Nations has a longer shelf life. It still exists today, as do other supranational organisations such as the EU, the IMF and the International Court of Justice. But consider this. If it took the horrendous, destructive conflict of World War 2 to create these dysfunctional, toothless, supranational paper tigers, just how bad must things get before sovereignty is passed up to an entity that can really fix today’s problems.

Take global warming or the depletion of the world’s fish resources. Although international organisations exist that theoretically address these issues they have no power. Sovereign states rarely wish to pass up their sovereignty to a higher entity. It is possible to coerce them. The last time this was attempted was the US Civil War. The northern states forced the southern states to join the club and submit to a higher federal government. Higher level entities are forged in the furnace of conflict. The carnage of the US Civil war was hot enough to fuse the United States together. Unfortunately, World War 2 was not ferocious enough to make a powerful United Nations, despite the death of 60 million people. It created something, but it was something too weak to properly address global issues.

In the late 1940s, most of the world was impoverished and happy to follow orders after years of war. Today we have TV, the internet, sexual liberation and the consumer society. There is far less chance of citizens doing what they are told voluntarily. Just think how hot the fire would have to be to sinter those disparate citizens together into a common purpose.

So there might be one good thing that could arise from a forthcoming apocalypse. It could give birth to a global institution capable of solving our environmental problems. As the Vietnam general said “ It may become necessary to destroy the village in order to save it”

Immanuel Kant and Walt Disney, but Kublai Khan*

Who remembers Kubrick’s Vietnam movie Full Metal Jacket ? It starts with young cadets being brainwashed in boot camp under a torrent of salty abuse from Sergeant Hartman (played by R. Lee Ermey).  The middle part of the film was shot in Galleons Reach in London’s Docklands. The addition of a few strategic palm trees transformed this global financial centre into a perfect facsimile of a Vietnam warzone. (Yes, yes, I know …but they do say story telling is all about the willing suspension of disbelief…)

The film ends with US Marines marching into the darkening night singing the Mickey Mouse March. It’s meant ironically, of course, “Mickey Mouse” as a slang term meaning something petty, useless and senseless. It also emphasizes the soldiers’ youth. This final scene is trying to sum up the film’s core statement :  Brainwashed young men follow orders from above and commit atrocities in a pointless war.

The military is almost synonymous with top down control. Generals tell Colonels what to do, Colonels tell Majors, and so on down the line until it reaches the poor grunts in the line of fire. The emphasis seems to be on following orders and the chain of command. Don’t question what you are told to do. Just do it.

In fact, things are changing and it is becoming more important for soldiers to think for themselves. They are teaching US Cadets about Immanuel Kant in West Point these days. The BBC recently broadcast a report on Radio 4 about how moral philosophy has become a key part of the syllabus when training soldiers in the USA.

The wars in Iraq and Afghanistan can not be won through force. That may have worked for Kublai Khan, which was the last time both countries were under the thumb of the same foreign invader. But today it is all about winning hearts and minds. So what a US soldier does when patrolling in a dusty village makes all the difference. He needs to make the right moral choices. He is not following orders from above so much as using his own independent judgment.

Part of the reason America lost the Vietnam War was the obsessive top down control from Washington. The military has learnt its lesson. There are two different levels. High level strategy that can be planned and moral choices made by an individual on the ground. One is top down the other bottom up. Different levels, different rules. That is catataxis.

*   if you didn’t get it, try reading this title aloud in a Glaswegian accent

Theory of everything explains nothing

Stephen Hawking’s new book “The Grand Design” has been all over  the press in the last week. His last book  “A Brief History of Time” published in 1988 ended with the door left open for God the Creator. This book slams that door shut. It concludes that God is not required to explain the creation of the universe. The laws of physics can do this perfectly well without the need for a divine creator. He writes “Because there is a law such as gravity, the universe can and will create itself from nothing. Spontaneous creation is the reason there is something rather than nothing, why the universe exists, why we exist”. The book puts forward M-theory, a multifaceted collection of string theories, as the ultimate theory of everything.

There is an old joke that goes like this: A man walks into a bar. The bartender asks him what he wants. “Nothing,” he replies. “So why did you come in here?” “Because nothing is better than a cold beer.” This joke is the backdoor entrance to the long standing philosophical debate about whether nothing is in fact something or literally no thing at all.

We can rephrase the question mathematically like this: is zero a number? Hawking’s book says that you don’t need God to explain how to get from zero to one. That is a perfectly logical numerical sequence. But where do the numbers come from? Who created those?

“If you look at zero you see nothing; but look through it and you will see the whole world.” That is the opening sentence of Robert Kaplan’s exquisite book “ The nothing that is” which is a far more illuminating read. It is a history of the concept of zero. The number zero is something that we all take for granted, but imagine how hard it is to do simple addition without it. The Romans had no zero; what is MCMLXXIII plus CLIV?

How do you create something out of nothing?  How do you take the first step on the catatactic ladder? Hawking says God is not required in the explanation. It is hard not to feel that he is being a bit of a kill joy.  Science aims to explain the magic, to illustrate the workings of the conjuring trick. Where is the fun in that?  Don’t you feel a twinge of regret when something is explained?

The rational response is that only the truth matters. I would say two things in reply. First the enigmatic line on Keats’s urn “Beauty is truth, truth beauty “. The second is this: sometimes the truth is that which can not be put in words. Wittgenstein’s last line of his Tractatus Logico-Philosophicus sums it up quite wellWhereof one cannot speak, thereof one must be silent.”

Inception: Celluloid Catataxis

Just finished watching Inception. I loved it. It reminds me of the first time I saw the Matrix. I had no idea what the movie was about – I just walked in off the street and saw it. I was completely blown away. The ad campaign had just been “What is the Matrix?”. It was the ‘not knowing in advance’ that made the impact much greater. Its almost impossible to have an experience like that these days, since everything is trailed so far ahead of time.

It was almost like that with Inception. They had done a pretty good job of keeping the plot under wraps. But I had seen the two most impressive visual scenes already in the trailer – ‘Paris bends back on itself’ and the ‘floating in the hotel corridor’. The latter is an example of Catataxis… plot spoiler alert …the bodies are floating in the corridor scene  because they are being influenced by the reality one level below. So this is a beautiful, balletic visual representation of level confusion. Celluloid Catataxis!

To see a really cool explanation of the movie Inception and a visual guide to its levels see this link