Confirmation bias: reporting the story, or the story as one sees it?

In a letter to the Financial Times of July 6, Martin Staniforth engages in critical thinking and asks the right questions:

Sir, Peter Geiger (Letters, July 3) castigates public servants for relying on expert advice. However he seems only too happy to rely on the expertise of the fire officer he consulted. Could that be because the fire officer’s advice accorded with his prejudices – or what he calls common sense? And would he have been so content if the advice had been different from what he so clearly expected?


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Sundry observations

Among my reading and film watching, I occasionally come across something which confirms that I’m on the right track with my course – which tells me that what I am planning to tell students is on the right track, and that, while I may not have had any profound insights, I haven’t said anything wrong, let alone outrageously wrong.

This film of Daniel Dennett speaking about how the brain works reassures me that I am sending the right message about our cognitive architecture.

Similarly, this excerpt from the Ed Hess article in the Harvard Business Review, ‘In the AI Age, “Being Smart” Will Mean Something Completely Different’ reassured me that I have the right prescriptions for helping people to improve their thinking:

We will spend more time training to be open-minded and learning to update our beliefs in response to new data. We will practice adjusting after our mistakes, and we will invest more in these skills traditionally associated with emotional intelligence. The new smart will be about trying to overcome the two big inhibitors of critical thinking and team collaboration: our ego and our fears. Doing so will make it easier to perceive reality as it is, rather than as we wish it to be. In short, we will embrace humility. That is how we humans will add value in a world of smart technology.

Well I bloody hope so! It will do wonders for demand for my course and hopefully the books that I plan to write.

But I would go further, and say that this is precisely the way that humans can add value in any world, regardless of the level of AI. We needn’t wait for superintelligence to arrive – we can add value in this way now, and far into the future.

And this quotation, from neuropsychologist Michael Bishop, in Jordan Rosenfeld’s article, ‘I kicked my smartphone addiction by retraining my brain to enjoy being bored’:

The more a behavior is practiced, the stronger neurological connections grow.

They do indeed. As Heuer tells us, on page 21 of his magnum opus:

Retrievability is influenced by the number of locations in which information is stored and the number and strength of pathways from this information to other concepts that might be activated by incoming information. The more frequently a path is followed, the stronger that path becomes and the more readily available the information located along that path.

So: I’m on the right track.

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Epistemic rationality: the role of data in logistical planning and coordination

Epistemic rationality is the key to economic efficiency, as two pieces from the Financial Times make clear.

First, a letter from Richard Christian, August 23 this year:

Sir, Martin Sandbu is right when he says that crises are caused by the market’s failure to price assets correctly, but wrong when he suggests that this could be corrected with more honesty, and that Hayek had not perceived the problem (“From Lenin to Lehman – the big lies”, August 16).

Markets are good at some things and bad at others. They have an inherent weakness as information devices in that actors responding to current commodity prices are disposed by standard game theory not to communicate information about their production plans. Competing actors are structurally incapable of co-ordinating for future production. Crises of production, and mispriced assets, are the consequence – a problem recognised by Hayek, who had hoped that some harmonisation might be achieved through the information provided by interest rates.

The problem is at the basis of Marx’s analysis of crises. As Mr Sandbu says, the “socialist calculation debate” of the 20th century has mostly, and regrettably, been forgotten. But he himself forgets that Hayek’s principal opponent, Otto Neurath, rejected both central planning and markets in favour of “decentralised planning”, which as socialisation commissioner of the Bavarian Raeterrepublik in 1919, he sadly had too little time to test.

Another dumb idea coming out of interwar Bavaria. Thank heavens no-one tried this one out and it has sunk deep into the academic libraries where only academics like Dr Christian can find it.

I have many problems with this letter:

  • however disposed actors responding to current commodity prices might be not to communicate information about their production plans, the largest ones have to do so, and they have to do it completely publicly and in a timely fashion, through the continuous disclosure requirements of the securities markets on which they are listed;
  • the structural mechanism which allows competing actors to co-ordinate future production is the price mechanism – it doesn’t work perfectly, but it works very well;
  • the combination of a functioning price mechanism and a class of vigorous entrepreneurs works to minimise crises of production and the mispricing of interest rates – they do this very well, and better when there is lots of information and no central bank to aggravate and prolong asset mispricings and resource misallocations through its printing of fiat currency via credit extension;
  • Dr Christian should forget Neurath and take up with Mises.

The only part on which I agree with him is that the socialist calculation debate has been forgotten. But given that he doesn’t seem aware of Mises at all, Dr Christian is missing the best and most valuable parts of the debate.

Secondly, an article by Robin Wigglesworth, Cargo shop giant Maersk Tankers invests in quant hedge fund:

Maersk Tankers has invested in CargoMetrics, a quantitative hedge fund backed by the likes of Paul Tudor Jones and Google’s Eric Schmidt, in order to utilise its shopping data and analytical models to improve the deployment of its fleet of vessels.

The Copenhagen-based tanker company, which is part of Danish shipping group AP Moller-Maersk, has taken an undisclosed but “significant” stake in the Boston-based hedge fund set up by a former US Coast Guard officer and in return will gain exclusive access to its data and algorithms.

The tanker market is fickle, with rental rates fluctuating every day and varying across different regions in the world.  In just a week, the daily rate for a medium-range tanker in the Atlantic can roughly double or halve.

I wonder how Otto Neurath’s ‘decentralised planning’ would have coped with such frequent changes.

Maersk hopes that CargoMetrics will help it better predict demand and improve the deployment of its 160-strong fleet to take advantage of price trends.

“It’s a very volatile industry,” said Soren Christian Meyer, head of strategy at Maersk Tankers.

“It’s important to have tankers at the right place at the right time. It’s an industry that has been based on gut feeling on where and when to move capacity, but we want to challenge that industry paradigm. Our investment in CargoMetrics will speed up our digitalisation.”

CargoMetrics is a computer-powered hedge fund that crunches global shipping, satellite, and even weather data to track and trade international commodity flows.

Information! The life-blood of the economy, and of epistemic rationality.

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Freedom of speech: A.Z. Mohamed on the totalitarianism of islam and political correctness

Via the Gatestone Institute, a good piece on political correctness and its similarity with islam in they way they shut down dissenting voices and control the thoughts of others:

Thought-control is necessary for the repression of populations ruled by despotic regimes. That it is proudly and openly being used by self-described liberals and human-rights advocates in free societies is not only hypocritical and shocking; it is a form of aiding and abetting regimes whose ultimate goal is to eradicate Western ideals. The relationship between the two must be recognized for what it is: a marriage made in hell.

Posted in Cult-Marx Inversion, Freedom of speech, The Mind & Society, The Suicide of the West | Leave a comment

Confirmation bias: Zhou Enlai’s quip about the French Revolution

From a letter to the Financial Times by Jonathan Fenby, Chairman of China Research at TS Lombard:

Sir, The quip from Zhou Enlai that it was “too early to tell about the impact of the French Revolution, cited by Lex (August 24) apropos of fund manager Neil Woodford, must be one of the most misunderstood quotations of the last century.

Speaking to French visitors in Shanghai in 1972, Zhou was referring to France’s student revolt of 1968, not the events of 1789 and thereafter. But the words fit so neatly into the perception of Chinese statesmen taking the long view that they have assumed a life of their own.

The tendency to think of the Chinese as long-term focussed being fixed in our minds, confirmation bias works so as to cause us to interpret their actions and statements as being consistent with this assumption. The tendency is so strong as to generate even the unlikely conclusion that Zhou Enlai is still waiting for the results to come in on a revolution that had happened almost 200 years before.

One interesting implication of Zhou Enlai’s perspective is that he saw the student revolt as being on par with the original French Revolution – assuming he knew what the original French Revolution was [which, his being a revolutionary and having lived, studied and ‘organised’ in France as a young man, I assume is true].

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False positive: over-zealous securities market regulation in India

Again, from the Financial Times – I’ve been reading a lot and have collected many stories in the last couple of months, but haven’t had time to write them up here – Ham-fisted crackdown sparks Indian companies’ ire:

The directors of Assam Company India, which has been growing tea in northeastern India for 178 years, were shocked recently when trading in its shares was suspended on the grounds that it appeared to be a “shell company”.

It was one of 331 groups, many of them quoted, on a list passed to regulators in June by the central government. This month the Securities and Exchange Board of India ordered that shares in the companies may trade only once a month until the concerns are addressed. the sweeping move was part of a major drive by Narendra Modi’s government to clean up India’s markets, enabling more efficient allocation of capital while reducing corruption and tax evasion.

Market observers have long fretted about the use of dormant companies as vehicles for money laundering, and the government is on a mission to flush them out. In July, finance minister Arun Jaitley boasted that more than 162,000 inactive entities had been deregistered since 2013.

But the fightback from many of this month’s alleged shell companies has been furious, casting doubt on the rigour that the government is applying to this drive.

Assam Company India, which says it has 20,000 employees on its tea estates, claimed that incompetent officials had included it on the list “inadvertently by mistake”.

Another bitter volley, accusing the regulator of acting in a “mechanical and flippant manner”, came from SQS India BFSI: a subsidiary of the German IT group SQS, which is listed on London’s Aim Market …

While their shares have now resumed trading, 10 of the 11 companies have suffered steep falls in their market valuations, reinforcing their claims to have incurred serious damage from regulatory clumsiness.

So, seems like a lazy regulator, responding to a ministerial request, drew a conclusion that shares in shell companies were likely to be lightly traded, and therefore suspended trading in those companies’ shares – not realising that, while all companies that are shell companies have lightly-traded shares, not all companies whose shares are lightly traded are shell companies.

We might characterise this as [yet another] instance of the fallacy of the undistributed middle.

All shell companies have shares that are lightly traded.
The Assam Company India’s shares are lightly traded.
Therefore, Assam Company India is a shell company.

The major and minor premisses are correct [so far as I know – I only read the article and am second-guessing the Indian regulator], but the middle term – shares that are lightly traded – is not distributed in the major premiss. We could re-write the major premiss to distribute the middle term:

All companies that have shares that are lightly traded are shell companies.
The Assam Company India’s shares are lightly traded.
Therefore, Assam Company India is a shell company

but that means that the major premiss is now likely incorrect – as the reaction of companies whose shares have been incorrectly suspended from trading would attest.

So, a failure of logic means that these companies have now suffered significant loss of valuation on the market. The negative of this is that they are now more vulnerable to takeover than they were before, and their shareholders are likely to be unhappy with the directors and managers, regardless of the fact that they aren’t responsible for the incorrect suspension and the subsequent fall in valuation.

On the plus side – there are now some significantly mispriced shares going begging on the Mumbai Stock Exchange. Fortuna fortis favorit, if you have the money.

Posted in Epistemic Rationality, Formal fallacies in reasoning, Instrumental Rationality, Poor reasoning | Tagged , | Leave a comment

Aphorism: Hayek on institutional development

Once the apparatus is established, its future development will be shaped by what those who have chosen to serve it regard as its needs.

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Habituation: Japan and their difficult neighbours

Also seen in the Financial Times on Friday, from Japan, missiles and bad 1980s bands:

There are tow leading answers to why the Nikkei 225 Average only dropped 0.9 per cent in intraday trading on Tuesday despite the heightened risk of war: both of them – unflustered robots and apocalypse ennui – sound like bad 1980s bands [kudos to the author for this line].

The backdrop to the market’s decidedly modest Tuesday sell-off was the dawn flight of a North Korean ballistic missile directly over Japan. Even sober analysis points to an un nerving escalation of an already white-knuckle stand-off: residents across northern Japan were warned to take cover; Japan’s defence minister said more missiles were sure to come; seasoned North Korea watchers suspect the regime may conduct another nuclear test over the next 10 days.

And yet, bar predictable wobble, none of this fundamentally rattled the Japanese stock market. The yen, which ended Tuesday 0.42 per cent weaker against the US dollar rather than running up on the traditional “safe-have” story, also resisted any panic trade. A sub-1 per cent Nikkei dip is what happens when the producer price index undershoots consensus, explains one Tokyo broker, not when the market starts pricing in Armageddon.

Analysts have spent the past couple of days attempting to justify this relative non-reaction, and to put some numbers (along with tips for defence industry stocks) on what future missiles launches, nuclear tests and regional sabre-rattling might do. Some argue that the market reaction to these events has become counter-intuitively more muted as the threat (and Pyongyang’s ever more menacing nuclear capability) has risen. Others point to data showing that Japanese equities and the yen have been consistent in shrugging off the neighbour’s antics …

But apocalypse ennui theory alone does not explain why market reactions have become more muted within the last couple of years. For most of the early 2000w, say analysts, provocation on the scale of Tuesday’s missile would have triggered a 3-4 per cent collapse in the Nikkei.

The striking absence of any panic this week may be because Mr Kim’s antics are now falling on what are, for now at least, the comparatively deaf ears of AI investment strategies and the relentless rise of passive funds. When the Bank of Japan’s Y6tn annual ETF buying is included, around 70 per cent of all net flows of Japan equity this year have been driven by passive, machine and AI strategies, says Wisdom Tree head Jesper Koll.

Flying missiles, blood-curdling rhetoric and school children diving for cover do not scream “sell” to a program that still looks at the Nikkei and detects rising earnings, rising dividends and low interest rates. But that may prove fragile and the risk is clear. For now, the machines are dulling the market’s senses; when humans decide they can no longer resist an Armageddon trade, the momentum-sensitive machine strategies could suddenly turn them very acute.

The article’s argument about the machines being insensitive to geopolitical conditions doesn’t make much sense, to me: if they were sensitive at all, they would have been sensitive this week.

The problem seems to lie in Japanese people’s habituation to the signals from North Korea, a result of years of false alarms and no-one doing anything in response to them. I think this is a mistake: the quality of the signal has changed: Kim Jong-un is now much more dangerous than in the past, both in his intentions and his capabilities. This is no time to be complacent.

Posted in Epistemic Rationality, Mind-sets and Logic-Bubbles, Problems with perception intuition and judgement, Strat. Assumptions v. Tac. Indicators | Tagged , , | Leave a comment

Affect Heuristic and Investing

Spotted in the Financial Times on Friday, in an article about Northern Rock [Martin Arnold, ‘Northern Rock investors accuse Treasury of profiting from bailout’, Friday, September 4, 2017]:

Many small shareholders lost their life savings when  Northern Rock was nationalised. Pradeep Chand, a 70-year-old former finance director who advises the shareholder association, switched all of his self-invested personal pension into Northern Rock shares in 2005 “in the belief this was a safe, profitable, provincial UK bank.”

“I had kept buying more as the share price declined hoping to average down and in the belief that once [the Bank of England] loans had been agreed the value would slowly recover over three years,” said Mr Chand, who retired 12 years ago because of heart problems. He lost more than £415,000 on Northern Rock shares and now lives with his son and is dependent on his children to support him.

The affect heuristic has struck before, and now it has struck again.

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Aphorism: Smith on Predation

I hadn’t seen this in Smith, when I read him, but it is worth quoting:

All for ourselves, and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind.


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