Thursday, August 25, 2005

Big Blowup

Having found a focus in the "peace mom", and relentlessly trumpeted a casualty list devoid of context for two years, the ministry of propaganda MSM has managed to reduce support for the war effort.

People now question not only whether we should stay in Iraq, but whether we should have gone there at all, with a majority calling it a mistake, according to recent polls.

The reasons both for the "why" and the "still" are, truly, self-evident and as valid now as ever. They've been gone over ad nauseaum. Those posing the question really are not in a psychological mood to rationally assess those questions. They are instead enormously frustrated by the steady drumbeat of bad news.

This psychological effect is well known.

In short, propaganda works, and for the first time ever our own media has acted as an enemy propaganda outlet rather than the opposite.

Humans are just hardwired to act irrationally in certain circumstances. This is known in the financial world, for instance. See this article from the New Yorker about hedge fund risk, entitled Blowing Up:
What Empirica has done is to invert the traditional psychology of investing. You and I, if we invest conventionally in the market, have a fairly large chance of making a small amount of money in a given day from dividends or interest or the general upward trend of the market. We have almost no chance of making a large amount of money in one day, and there is a very small, but real, possibility that if the market collapses we could blow up. We accept that distribution of risks because, for fundamental reasons, it feels right.

In the book that Pallop was reading by Kahneman and Tversky, for example, there is a description of a simple experiment, where a group of people were told to imagine that they had three hundred dollars. They were then given a choice between (a) receiving another hundred dollars or (b) tossing a coin, where if they won they got two hundred dollars and if they lost they got nothing. Most of us, it turns out, prefer (a) to (b). But then Kahneman and Tversky did a second experiment. They told people to imagine that they had five hundred dollars, and then asked them if they would rather (c) give up a hundred dollars or (d) toss a coin and pay two hundred dollars if they lost and nothing at all if they won. Most of us now prefer (d) to (c). What is interesting about those four choices is that, from a probabilistic standpoint, they are identical. They all yield an expected outcome of four hundred dollars. Nonetheless, we have strong preferences among them.

Why? Because we're more willing to gamble when it comes to losses, but are risk averse when it comes to our gains. That's why we like small daily winnings in the stock market, even if that requires that we risk losing everything in a crash.

At Empirica, by contrast, every day brings a small but real possibility that they'll make a huge amount of money in a day; no chance that they'll blow up; and a very large possibility that they'll lose a small amount of money. All those dollar, and fifty-cent, and nickel options that Empirica has accumulated, few of which will ever be used, soon begin to add up.
"We cannot blow up, we can only bleed to death," Taleb says, and bleeding to death, absorbing the pain of steady losses, is precisely what human beings are hardwired to avoid. "Say you've got a guy who is long on Russian bonds," Savery says. "He's making money every day. One day, lightning strikes and he loses five times what he made. Still, on three hundred and sixty-four out of three hundred and sixty-five days he was very happily making money. It's much harder to be the other guy, the guy losing money three hundred and sixty-four days out of three hundred and sixty-five, because you start questioning yourself. Am I ever going to make it back? Am I really right? What if it takes ten years? Will I even be sane ten years from now?" What the normal trader gets from his daily winnings is feedback, the pleasing illusion of progress. At Empirica, there is no feedback. "It's like you're playing the piano for ten years and you still can't play chopsticks," Spitznagel say, "and the only thing you have to keep you going is the belief that one day you'll wake up and play like Rachmaninoff." [or have a freer, functioning Iraq! -- ed.]

Was it easy knowing that Niederhoffer -- who represented everything they thought was wrong -- was out there getting rich while they were bleeding away? Of course it wasn't. If you watched Taleb closely that day, you could see the little ways in which the steady drip of losses takes a toll. He glanced a bit too much at the Bloomberg. He leaned forward a bit too often to see the daily loss count. He succumbs to an array of superstitious tics. If the going is good, he parks in the same space every day; he turned against Mahler because he associates Mahler with the last year's long dry spell.
The parallel with the war effort is nearly exact.

Those who wish for it to just end want the news to turn good for most days, even if it means risking the "big blow up" from another 9/11 that's made much worse by having rogue state sponsorship that provides a nuclear weapon. On the other hand, putting up with the "bad news" (which future posts will show is an illusion anyway) runs the small but real chance of a big victory -- true change in the Middle East that saps islamism of its appeal!

The only rift in the analogy is we can't reduce the risk of the "big blow up" to a quantified actualy zero, but we are surely reducing it drastically.

And this we must do EVERYTHING in our power to do!


Again, the well-spoken Aristides sums it up at Belmont Club; in response to someone who posited:
The consequences of being wrong about WMDs -- a simple nuke detonated in in Rotterdam, Hong Kong or Newark/New York would effectively shut down global trade, throw hundreds of millions out of work, and lead to chaos and misery on a scale modern humans can't imagine -- are too awful to contemplate.
Aristides elaborated:
"Too awful to contemplate" is a formulation that seems at first to be sophistry, a brief rhetorical flourish to make an otherwise non-radical point about some impending circumstance.

It is not.

We do not know, nor cannot know, what the world will look like after D-Day. Will markets crash? Will commerce stop? Will grocery stores be raided by armed men who want nothing more than to feed their families and stock up on canned food? What about our power grid? Will we have running water?

The kinetic force emanating from a nuclear explosion in Manhattan will seem small compared to the entropy that will envelop our system and our way of life. We must not allow this to happen, yet many Americans are fatalistic about it. Worse, many Americans don't think it is even worth avoiding (Iran!).

It may be inevitable, no matter what we do. To paraphrase Wretchard in an earlier post, it may be that some decision taken in 1991 has already killed most New Yorkers in 2011.

More likely, there is something we can do, but we won't. In hindsight our lost chances will look so obvious, like Atta's flight lessons or bin Laden's declaration of war, but they will be small comfort to those that survive. If such destruction indeed awaits, there's nothing for it but to buy yourself some guns, store up on ammo, plan for your family and make real nice with your neighbors. When the flash hits, these will be all you've got.
Many like to complain that Bush "hasn't made the case", and unless he does, they're not going to support the war.

In this country, we don't have warriors or dictators running the show. We have politicians. They respond, when forced, to We The People, who are really in charge. As adult citizens we are resonsible for informing ourselves, evaluating the evidence, and taking a stand.

Victory is the only option.

We must are on the frontlines of a meme-war and must steel ourselves to withstand the pessimism and defeatism so that we keep down the risk of the Big Blowup.


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