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Where did it all go so badly wrong? (Last – incentives, and stasis)

February 13, 2011 Leave a comment

[This is the last in a series of posts relevant to the all-consuming topic in Ireland at the moment: the fall of the Fianna Fail/Green Party Coalition Government, and the resulting general election to take place on the 25 February 2011. My title approximates a question/comment posed by a guest (I think it was Jim Glennon, the former FF TD) on George Hook’s programme on Newstalk].

Note 1: The full series is available as an article:  Where did it all go wrong article in pdf.

Note 2: Dermot Desmond has just published a remarkable document addressing some of the same issues as treated here from a sociopolitical reform point of view.

A truism of human behaviour is that people are incentive-driven (even by perverse incentives). Our economy became focused lopsidedly on property development because of tax incentives which people rationally responded to, resulting in a huge excess of un-needed properties. Groupthink suggests bulldozing them. However, we could incentivise property purchases by granting Irish residency to non-EU Nationals who purchase these properties for cash (no mortgages please)! If it is possible to incentivise investment in fixed assets such as property, it is possible to incentivise investment in new asset classes and businesses that are tradeable and saleable. Anglo-Irish Bank would not be in such trouble if it had a diversified loan book. Ireland Inc would not be in similar trouble, if there were multiple investment vehicles for rational investment in intellectual property, as opposed to the singularly obsessive concentration on investment in commercial and residential property. If we want an entrepreneurial culture which creates desperately-needed mass employment, then entrepreneurial activity needs to be incentivised. Adding taxes and other burdens on the self-employed reduces the risk-taking required to create employment on the scale needed to rescue the economy quickly. Risk-taking needs incentives; otherwise, why bother?

There are many other cognitive errors (for example, availability and affect heuristics, motivated reasoning, competence illusions, illusory superiority) which humans are also prone to (especially under duress). Memory (particularly recall) is badly affected by stress and lack of sleep. The decisions taken on the night of the infamous bank guarantee surely would have been better, if the Government had access to expertise and bought itself time (for example, by having a forced bank closure for 48 hours). This would have led to decisions in the cold light of day, with appropriate supports and inputs (of course, having an Economic Advisory Council in place would have helped). Memory for the precise sequence of events would be improved too!

Our elites must recognise that individual rationality and cognition is limited and error-prone. A system driven by the unrestrained cognition of individual ministers or others will fail; imposing political control where good policy formation should obtain is a recipe for disaster. And we know this, but this is the mistake we repeatedly make. Thus, our institutions must be re-engineered to be adaptive, plastic, and capable of learning (especially upsetting and unpleasant truths). Robust institutional processes are required to recognise error and failure quickly and to change course rapidly. However, the glacial pace with which our elites move leaves me believing this is a forlorn hope; we have seen little recognition of the need for change, despite the disaster that has occurred.

Where did it all go so badly wrong? (Part II: Attribution error and leadership)

February 8, 2011 Leave a comment

[This is the second in a series of posts relevant to the all-consuming topic in Ireland at the moment: the fall of the Fianna Fail/Green Party Coalition Government, and the resulting general election to take place on the 25 February 2011. My title approximates a question/comment posed by a guest (I think it was Jim Glennon, the former FF TD) on George Hook’s programme on Newstalk].

(II)

The iron law of institutions is the name given to the concern of people who have power in institutions to preserve their power within that institution (even when the institution is failing), rather than being concerned with the success of the institution itself. We have seen this law in action during the recent ructions in Fianna Fáil. Taoiseach Brian Cowen continually asserted as he fell from 52% to 8% in the polls that he was the democratically-elected party leader. Fianna Fáil found itself incapable of terminating (as it fell from 40% to 14% in the polls) his badly-ailing leadership.  And this despite the electoral cliff that Fianna Fáil was driving over! Disputes over Brian Cowen’s leadership convulsed Fianna Fáil. There is a substantial literature on successful and unsuccessful leadership. One major review suggests successful leadership requires obeying a few simple precepts. Leaders must be sensitive to their followers, support them, treat them with respect and exceed their expectations; to be positive and inspirational; to work hard and to be seen to work hard for the group; and not be overbearing or arrogant. Which of our leaders, past and present, can tick off these precepts successfully?

Solely focusing on individual leadership and ignoring the situations within which behaviour occurs is known as the fundamental attribution error, and is a cognitive bias caused by the salience of the person, and the relative invisibility of the system (group norms, laws, rules, etc.).  The lesson for Irish politics is simple: changing personnel is not enough to solve our problems, because the dysfunctional system itself persists. We need substantial systemic changes too. Political decisions are often (usually?) taken within a group context (think Cabinet collective responsibility). Groupthink occurs when a group makes poor decisions because of high levels of within-group cohesion and a desire to minimise within-group conflict (as might happen in an exhausted, embattled and worn-out Government Cabinet!). The necessary critical analysis does not occur. NAMA would hardly have emerged as the optimal policy response had there been a competitive public forum to test and vet competing policy ideas (with the Cabinet adjudicating). The hugely-criticised ‘Credit Institutions (Stabilization) Act 2010’ (e.g., e.g., e.g., e.g.) would hardly have emerged from such a process. Such a process would show that vesting such astonishing power and authority in the frail, bounded rationality of a single individual (the Minister for Finance) is a recipe for future catastrophe. Groupthink can be reduced by the group having an extensive network of weak ties to other individuals and groups. Weak ties provide us with novel ideas and knowledge, and provide a route to ‘reality-test’ planned courses of action. An extensive national and international weak tie network would provide Government Ministers knowledge, insights and ideas unavailable within the Dáil bubble.

Where did it all go so badly wrong? (Part 1: Anosagnosia, cognitive biases, cognitive diversity, expertise, incompetence)

February 7, 2011 Leave a comment

[This is the first in a series of posts relevant to the all-consuming topic in Ireland at the moment: the fall of the Fianna Fail/Green Party Coalition Government, and the resulting general election to take place on the 25 February 2011. My title approximates a question/comment posed by a guest (I think it was Jim Glennon, the former FF TD) on George Hook’s programme on Newstalk].

(Figure with apologies and thanks to a variety of similar figures floating around the web)

‘We need to take difficult decisions’   Brian Lenihan

No, we actually need to take much better quality decisions, ones that acknowledge the frailty and error-proneness of human cognition, and which are capable of changing as circumstances change and knowledge evolves

Four times in eighty years (the 1930’s, ‘50’s, ‘80’s and now) the economy has been wrecked.  Rightly, there has been plenty of economic analysis (e.g.) of our current problems. There have also been attempts to locate our recurrent problem in the Irish personality (but nations don’t have personalities!), or in dispositions inherited from our colonial past (a novel research area for epigenetics, I suppose). Whatever about the Irish personality, there is no-one in power, and few alive, who remember Ireland as it was pre-1916/1921. We need to look for more proximate causes in the decisions made and executed by our national elites (the administrative, political and commercial classes in charge of the institutions powering the country).

How did our elites get it so spectacularly wrong? A useful way of looking at the problem is to focus on persistent and enduring cognitive biases and errors leading to faulty decision-making by individuals (political leaders, civil servants, bankers, etc.) and institutions (social systems and organisations: Government departments, banks, churches, etc). Looking for proximate causes in pervasive and enduring cognitive errors by individuals and institutions (the social systems within which collective cognition is organised) provides a route to prevent us persisting in correctable mistakes. Happily, we have a guide from more than fifty years of data in experimental psychology and experimental brain research to understand how human rationality and reason is bounded and error-prone. [UPDATE: see note at bottom]

(I)

The phrase ‘delusional’ has been used to describe the behaviour of certain members of our elites, but delusions imply the psychiatric diagnosis of pathological beliefs maintained contrary to all evidence. Anosagnosia (a more useful description) is the condition of literally being ‘without knowledge’ (being unaware) of a cognitive or other impairment, and behaving as if there is no problem. This might describe the issues regarding the lack of a regulatory response to capital adequacy in our banks!  Additionally, the knowledge and expertise required to solve the problems confronting us is both greater than our elites understand and can acknowledge. This leads to anosagnosia within the cultures of these organisations. Irish elites do not know that they do not know, nor do they even know what they need to know. The figure at top tries to capture this idea. Both the party political system and the civil service systems undervalue expertise and suppress cognitive diversity. Substantial data show that complex and difficult problems (for example, how to rescue a collapsing economy) are best solved by groups with substantial intellectual strength and capacity (obvious), and substantial diversity of experience (not obvious).Truth be told, the problems we are grappling with are beyond the judgement and capacity of the few teachers and the couple of lawyers comprising the bulk of the Cabinet just leaving office. And we still lack (with some exceptions) the high-level policy formation and broad expertise inputs required to support the Cabinet when it has to make crucial decisions.

Our political system is constructed so that the proving ground for national politics is local council politics. This experience leaves politicians good at political manoeuvring and vote-getting, but ill-prepares them for the national game, which ends up reflected through the prism of the local, rather than the national or international. This is why many of our competitor countries deliberately bring extra cognitive diversity into their political systems. Famously, the Cabinet of the US Government has only one elected politician (the President). However, it can field a Nobel Prize in Physics (Secretary of State for Energy, Steven Chu), and world-class economics expertise (Timothy Geithner; Austan Goolsbee). Some have disputed the necessity for some form of national list system because it would have resulted in Sean Fitzpatrick being nominated to the Dáil. (Has this been a conspicuous problem in countries with national list systems?) This is an interesting cognitive error – not exploring counterfactuals to this example, as these would falsify the claim. It is even more possible that many people of capacity and ability are turned off by the system as it currently stands. After all, we have plenty of talent, but it shies away from electoral politics (to all our costs). Such arguments may result from cognitive dissonance (the unpleasant feeling caused by holding two contradictory beliefs simultaneously: for example, “our system isn’t delivering; I and my colleagues are good people and are part of the system; therefore it isn’t the system; the problems lie elsewhere” (with bad bankers, for example, although logically this may also be true!).The potential reduction in available Cabinet slots for non-list constituency candidates because of a list system presumably discommodes some too.

UPDATE: I forgot the Dunning-Kruger effect – a quote from the Wikipedia entry:

The Dunning-Kruger Effect is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to appreciate their mistakes.[1] The unskilled therefore suffer from illusory superiority, rating their ability as above average, much higher than it actually is, while the highly skilled underrate their own abilities, suffering from illusory inferiority. This leads to the situation in which less competent people rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence. Competent individuals falsely assume that others have an equivalent understanding. “Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.”[2]

And:

Kruger and Dunning proposed that, for a given skill, incompetent people will:

  1. tend to overestimate their own level of skill;
  2. fail to recognize genuine skill in others;
  3. fail to recognize the extremity of their inadequacy;
  4. recognize and acknowledge their own previous lack of skill, if they can be trained to substantially improve.

Now, who does this remind you of?

‘We need to take difficult decisions’
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