Gill Eapen's Blog, page 82

Doomsayers, Inc.

The doomsayers are out in full force again. The past 2 years have been somewhat difficult for those who make a living by peddling fear, oil and gold as the world economy continued to grow. Now with the natural disaster in Japan, they have gotten second wind – some bold enough to say, "I told you so." It is ironic that a natural disaster of this magnitude had to occur to prop up their sagging ego – as they have been predicting a collapse of the stock markets to zero accompanied by infinite prices for oil and gold for many years.



Financial advisory services are regulated in the US and for good reasons. Such advice can be doled out by anybody without an education, let alone competence. On the press, however, many are profiting financially by selling worthless information in nicely wrapped packages – most with no qualifications to do so. It is time that regulatory authorities have taken a look at the "advice" given out on the airways to unsuspecting and unsophisticated investors. In many cases such "advisers," are able to precisely predict the future. What is not known to the audience is that the "adviser," holds an option – to "switch" to something else if the "predictions," do not come true. For example, if the adviser predicted a bad outcome due to a war breaking out in the future and if the war does not occur but a natural disaster does, the adviser could quietly switch her reasoning and still look good. If nothing bad happened as predicted, the advisor still has an option – she can keep quiet till something bad happens – which is guaranteed to occur sometime in the future.



Doomsayers may want to carefully consider their approach. Internet and related technologies now allow the analysis of their past predictions and actions, systematically – exposing their incompetence. Regulators may also get interested in such "unsolicited financial advice."

Concentrated failure

Events last week in Japan are a sobering reminder that the loss of flexibility in concentrated power generation is significant. Power, modern era's equivalent of food, has surpassed everything else as the fundamental driver of value creation. With power, anything else can be created – oxygen, water and food and without it, humanity is left completely paralyzed. Thus, the design of power generation is critically important in the creation of modern societies.



Scale has been the dominant consideration in power generation till recently. Status quo designs always assumed that the economics is enhanced by scale and this has naturally led to significant concentration of power generation on the grid. The loss of efficiency as electrons move around from the point of production to that of use was considered a second order effect. More importantly, the loss of flexibility and the increase in the risk of catastrophic failure was never a consideration.



Business schools have been graduating tacticians and bean counters for many decades – highly capable of adding up costs neatly in spreadsheets and putting out quarterly financials in every color and hue imaginable for the street to feed on. This orientation led them to have significant blind spots in the design of systems. For many, the bigger has always been better. In power generation, such thinking has shoved engineers into boxes where status quo technologies were conjured in bigger sizes in a mad attempt to extract efficiencies from scale.



It is time to rethink power generation. It is time for the accountants to put down their pencils and the traditional engineers to step aside. Power has to be a distributed utility in production and use and it will require the application of creativity and imagination. Renewable technologies not based on scale but on flexibility are needed to mend this madness.



Ref: Flexibility: Flexible Companies for the Uncertain World



http://www.amazon.com/Flexibility-Fle...

Irish tea party in India

Under lights in Bangalore, the Irish pulled off an incredible victory against the status-quo. The impact of this victory will be far reaching, perhaps even into the dark corners of the control board. The cliquey game with even more cliquey law makers has been gaining popularity not because of its forward thinking governing body but because of the ever increasing passion for the game in the sub-continent. Of course, the established and the powerful have a reason to keep the game bottled in – only to be played by the chosen few. To further this idea, the ICC – the supreme governing body of the game – has unilaterally decided to reduce the number of "associate" countries that will be let into the next world cup championship, 4 years hence.



Cricket, if freed from the shackles of the aristocracy – both the real and the pretended versions – has the potential to become a true world game. Over 50 countries already play it and over half the world's population loves it. It needs a format that is inclusive and the introduction of technology to rip open the traditional notions of umpiring. There is no reason to limit the participants and it is time to open it up to the world. This will not be done by the traditionalists in power. Just as every other political body, cricket is also governed by senile, unimaginative and incompetent group of pretentious aristocrats.

Blue blood criminals

It appeared that one could not do any wrong with a blue chip consulting firm and a golden investment bank in her resume. Not true – the reality is just the opposite. Half a dozen companies in the US are responsible for most of the mischief and the dramatic loss of shareholder value in the economy in the last decade – some gold plated and others mesmerized. The size of their brain was never in question – but their integrity always has been. As they sat down in the bull pits of high learning – where men and women sneered at each other to show off the size of their intellect to solve the "cases," – their teachers asserting over and over again they were special – they drank their own cool aid to become intoxicated. Some cried for hours when they were rejected by consulting firms, that hold most of the world's brain cells and others simply tried over and over again to climb the pent houses.

The crimes committed by the blue blood are not civil – they are criminal – as it destroys the confidence in the financial system and destroys the dreams of many commoners. Such crimes should not be punished by a slap on the hand – it has to be dealt with as crimes against humanity – as it has affected a large number of people. It is also time to analyze the concentration of crime. If one school or institution is responsible for breeding most of the criminals – the populace has to ask if we need these even if their name is gold plated or ivy grow like hell on their walls.

I suspect the world will be a better place without the breeding grounds for criminals, however great they think they are.

Societal cost of stress

Stress has been implicated in many diseases including cancer. A recent study has demonstrated the impact of stress at cellular levels further reinforcing the initiation and progression of disease in humans due to stress. Disease, obviously, is costly not only for the individual but also for the society. Thus, stress has to figure into the design of optimal societies – at least in systems where societal costs are spread across the participants. Investments and actions to reduce individual and societal stress may be economically beneficial for both.

The upfront cost of actions to reduce stress need to be considered in the context of expected benefits. In traditional finance, a positive Net Present Value (NPV) of the investments required and the benefits expected, will be needed to conclude that such actions are optimal. For example, an investment that reduces the time of commute to work and an associated increase in sleep or family time may reduce stress for all commuters in a city. The benefits from such reduction (higher productivity, lower absenteeism, lower utilization of medical services) are positive but they have to be compared against the investments needed to achieve it. Just as many other business decisions, this is likely the wrong way to select and implement strategies.

What is more important is the consideration of flexibility. If the explicit actions at the societal level to reduce stress increases flexibility – the ability of the society to manage uncertainty (and stress more broadly), one cannot assess utility by traditional discounting of costs and benefits. Stress reduction, then, is akin to a general improvement of health allowing the individual and the society to benefit in a multitude of non-prescriptive ways in the future. By nurturing a healthy society, one can expect a higher level of innovation and progression of thought in arts and science. Further, it will have a dampening effect on depression driven negative actions by individuals such as crime and terrorism.

A decrease in societal stress improves overall health and its ability to deal with future uncertainty. It may reduce crime and enhance innovation – substantially increasing expected future benefits. Policies have to consider these non-linear effects to be most effective.

Ref : Flexibility  http://www.crcpress.com/product/isbn/9781439816325

Real democracy

As the information driven revolution spreads from autocracy to terrible autocracy, affected countries around the world have to think carefully how they are going to organize for the future. Democracy, an elegant organization principle, has solid credentials of success in systems that are free from other constraints. Secularism, for example, has been a necessary condition for a successful implementation of democracy. Democracy, after all, is a right and not an obligation - an expression of freedom - and it has been fully consistent with capitalism. However, it has not been in sync with prescriptive religious principles that are never a right and always an obligation. Thus, one cannot elect for democracy while holding on to religious principles that are inconsistent.



Even in countries, considered to be the bastions of democracies in the West and the East, there are troubling signs of the state mixing with religion and the predictable decline in the potency of the system. Democracy, by definition, has to provide an environment of freedom that cannot be manipulated by a few – however godly or intelligent – some may think they are. Democracy clearly does not guarantee the best outcome – it provides a higher likelihood of an outcome with least social cost. In the West, tea imbibers and grizzly hunters have been on the hunt posing significant challenges to the fundamental characteristics of democracy, that does not differentiate based on color, creed, religion or location. In the East, where the cast system and the fundamentalists have been battling against the democratic principles from the beginning, there are some positive signs that the youth actually get it. As soon as the senile and the insane are removed from power, the situation will improve.



The information revolution sweeping across the globe is a great opportunity to implement true democracy – one that is not tainted by the opinions of spectacle wearing idiots on TV or ancient and autocratic religious principles, completely inconsistent with modern democracy.

Distributed security

Security, an attribute most desire, is a public good.  In the current regime, assurance of security requires significant investments in many different dimensions, physical and informational. Such investments are made by central authorities that can claim efficiency by scale. Common wisdom is that the transaction costs incurred by individuals to assure security to themselves in the absence of a central authority will be too high and that will work against a workable social system. Thus, governments around the world have promised to provide security to their citizens and many leaders take pride in asserting that their first job is to protect the people. This makes sense but it may be time to think about creative alternatives. In a system where security is threatened by a small percentage of the combined inhabitants, creation of a central authority to assure security may not be the most efficient. After all, last century has provided ample evidence that a few with power are unlikely to make the best decisions for the system. Since only a small percentage of the system is involved in damaging security, it is the system that is in the best position to defend itself.

Let's do a thought experiment. Suppose there is a country called Futureville that has 1000 inhabitants. Ten of these are involved in activities that pose a threat to the security of the country. In the current regime, Futureville will elect 10 people and put them in charge of protecting them all. In this case, the problem is reduced to 10 in power battling with 10 violators of security. However, those in power do not know which 10 of the 1000 are the bad ones and there is a distinct possibility one of them could be bad as well. This is a highly inefficient way to solve the problem as the 10 in power need to create screening policies with very little information. More importantly, in most practical systems, most of the 10 are worried about how they are going to be elected next time around.  The real solution to this problem is to get all 1000 involved in the security question.

Distributed computing and power production have shown to be superior to their centralized cousins, especially for security.  From a policy perspective, it is time to seriously think about distributed security rather than incompetent spending of large amounts of resources in a centralized authority. Revisiting Futureville,  it is possible to conceive solutions that involve all 1000.  In fact, there are good proxies for this in complex biological systems. An organism, say a human or an ant, is an accumulation of diverse entities that work together to protect the system. Biological entities protect the system dynamically and not by prescriptive rules relegated to centralized authorities. Security has been a distributed competence in most complex systems.

It is time to think differently about problems we all face. To assure we find the best answers, we need to create processes that allow the best minds to come together to solve them. They will also require sufficient incentives to do so. Instituting competition and prizes to problem solving is the best way to assure that we do this well.

False prophecies

For most of the human history, information from the past have been useful for making judgments about the future. Those with higher competence in qualitative predictions to life saving attributes – such as the probability of food in certain direction, days before the next rain and the presence of wild animals in certain spaces – did well and survived. Generally, such predictions were made based on observable information and historical precedence – some handed down by the previous generation.  Prophets are considered superior in most cultures and religions – and for good reasons. Knowledge about the future is highly valuable for survival and success. The number of prophets per capita, however, was small compared to today.

In the modern world, prophets are found everywhere. However, the quality of predictions seem to have declined quite substantially. There are many reasons for this.

(1) Computers have helped prophets shut down their brains and rely on data and fancy extrapolations into the future.

(2) The cost of entry to the prophecy business now-a-days is very low. Anybody with a blog or website can easily start the business.

(3) Prophets are not held accountable continuously. For example, economic and stock market forecasters, who are expected to be right 50% of the time with no innate capability can skew the appearance of this by going quiet when they are wrong and marketing vigorously when they are right. Media and technology now allow the creation of the perception of a positive skew to incompetent prophets.

(4) Today's population, with vastly lower level of competence compared to their forefathers from many 1000s of years ago on almost every dimension, have come to rely on prophecies for almost everything. In effect, they run their lives to suboptimal outcomes based on prophecies –such as those present in stock markets, health, energy and others.

The most important reason why today's prophets are less potent than their predecessors is that the slope of change they are facing is steep and discontinuous. Most of today's prophets use extrapolation based on observable data – some have been worrying about running out of oil for nearly 100 years and others see a world full of people unable to find a spot to stand. Some see people running out of food and others water. Extrapolation from past data is a dangerous game – a fact that was well understood by competent forecasters of the past and something today's prophets are simply unable to comprehend.

As today's prophets  look forward to the end of the world in 2012 (many of the same people were ready to call it quits in Y2K) advising people to buy and hug "gold," they may want to consider that the social media now can record and analyze their prophecies more systematically. So, it is becoming more dangerous to predict the start of wars and the end of the world for the prophets.

Now what?

The departure of the autocrat under the chaotic pressure of the population he ruled is a somber reminder that systems built with false assumptions are bound to fail. Democracy, most intuitively elect to be good, is a highly inefficient form of governance without sufficient control of uncertainty. Humans, with novice brains, incapable of valuing actions under uncertainty, generally gravitate toward actions that demonstrate value in the short run. However, such actions, albeit with desired tactical outcomes, can lead to value loss. Value, after all, emanates from the ability to invest in ideas and not in chaotic and unpredictable outcomes.

As the press, with highly diminished brains at sub-human levels, laude the outcome – the departure of the autocrat - a more important question is, now what? Does the departure of the autocrat unambiguously increase the value of the country? A more interesting question is why they had an autocrat for over three decades and one day decided to throw him out. As they rejoice in the streets and in every capital city across the world, where the leaders laude the democratic outcome, without sufficient understanding of what they mean – one has to bring this all back to the fundamental question, now what? The country has a checkered history of over 5000 years of accepting and rejecting autocrats and so the present uprising is nothing different from what has been happening before.

As the democracy loving people around the world pop open Champaign bottles, they have to at least consider the more enigmatic question – now what?

Prized competition

Competition –  embraced by biologists and economists alike – is the fundamental building block of efficient societies. From the days of Darwin to those of Friedman, rational men and women knew the basic fact that one cannot drive complex systems with simple prescriptive rules and forecasts. For many decades now, those seeking better societies by decree have been pursuing designs, construed and implemented by a few for the apparent benefit of all. However, prescription almost always resulted in a decline in innovation, advancement and aggregate wealth. Yes, it is true that the alleviation of pain is vastly superior to incremental wealth to the comfortable, and such an asymmetry should favor policies in this direction. However, this is not sustainable in the long run and the challenge is to design policies where individual and group incentives are well aligned with societal utility in the long run.

It is in this context that one should analyze polices from the macro – where aids are given out to the regimes guided by those who apparently did not know they were autocrats for over three decades in power to those who have split personalities on either side of the mountain. For some, it has resulted in pain and dislocation of significant proportions and for others, these policies have held them prisoners to competing ideologies who take no prisoners. As some lock up minerals in underdeveloped lands for strategic reasons and others send up rockets to well known destinations to boost its own sinking ego and yet others fight one war in the daytime and another after sunset, one has to wonder how competition will change it all. In the land of the plenty, a young president with visions of the future, has been running well trodden paths – doling out resources to those who raise their hands with no results to show. His proximity to the centers of education, where competition was clearly shown to be the undisputable mechanism to improved productivity, hasn't had much effect. It is important to use competition as the guiding principle in policy making.

Thus, it is time to terminate grants and handouts and convert all such awards by governmental and non-governmental agencies to prizes set forth for solving tangible problems. From the recently concluded prize for discovering a measurement mechanism for the progression of the disease - ALS, to reaching the space economically by private crafts, the prize of competition has shown to be vastly superior to handouts. This is a tough message as most of the economy is now conditioned to expect forced nourishment in the false belief that such policies are civil. As these policies are concocted by the generation of the past – unable to cope with the accelerating pace of global integration and knowledge - one has to wonder if the governance systems of the last century are appropriate for the present. In the centers of high democracy from the biggest country in the West, the largest population in the East, many small ones in the middle and those who do not care for it, policies have become stale and unimaginative as they are made by those who should have taken themselves out of the reckoning many decades ago. On the face of exponential changes in technology, one has to question the norms for age restrictions for the voting public and the lack of it in elected officials.

It is important that the relevant generation leads and makes policies in the present. It is equally important that the fundamental building block of policy making and resource allocation is competition and not handouts.