Gill Eapen's Blog, page 84

Stuck memory

Recent research demonstrates that animals can get stuck in a state of pain by the memory in the brain even though the stimulus that caused the original pain is long gone. This is interesting at multiple levels. For humans, this may lead to a cure for ghost pain as well as the alleviation of true pain by dampening the possible feedback mechanisms in the memory.  The ability to erase pain in this way can be powerful in the treatment of a variety of conditions – both physical and psychological.

Large organizations, may be affected by a similar phenomenon – stuck memory leading to actions that are irrelevant to present conditions. Such organizational memories can easily transcend individuals and may be responsible for significant productivity loss. Actions taken in the presence of certain stimulus may continue even after the conditions that required such actions have long vanished. Or, organizations may react to new stimulus incorrectly by following the templates stored in its memory. For example, the planning processes in many companies continue to reflect attributes of the past, even though such processes have been rendered irrelevant by new information. Similarly, organizations may react to new information (for example, competitive entry or regulatory change) in a fashion that was characteristic of its past actions.

Selective and continuous erasing of organizational memories may be required to create a flexible and adaptable structure. This may be a necessary condition for success in the future.

Reference: Flexibility : Flexible Companies for the Uncertain World   http://tinyurl.com/flexibilitybook

Parochial life

Recent evidence of a bacterium that substitutes Arsenic for Phosphorous to sustain life further reinforces the futility of a narrow definition of Carbon centric life in aquatic environments. Such a picture has propelled humans to search for extra-terrestrial life following a singular criteria – presence of Carbon and water. Ironically, both Carbon and water have also been found in red giant stars – with no possibility of life. It is time to broaden the views and bring the entire Periodic table into play in the conception and maintenance of life at a broader scale. In this context, life can take a physical meaning – in that organization of chemicals and associated change in entropy – is a property of the present universe. Thus, the formation and possibly the evolution of life may be as systemic as physical laws. Hence, life is neither accidental nor designed – but something that will form and evolve anywhere in the present universe – regardless of the parochial considerations of Carbon and water.  Because of the limited view of life cultivated by present humans, it is conceivable that we have painted ourselves into a corner – sending rockets out to look for water, or toiling to find patterns in radio noise from outer space when extra-terrestrial life is parading in front of our very eyes – in unrecognizable forms.

If life is a property of the universe, then the most fundamental unit of life will be the atom (or sub-atomic particles). Just because such constructs do not exhibit prescribed notions of Carbon based complex biological systems, one cannot reject them as being not alive. Since both life (as we know it) and fundamental particles are driven by the laws of Physics, there is little to differentiate between them.

Uncertainty and entanglement

A recent paper proposes a radically interesting idea – use entanglement to get over uncertainty. Physics enthusiasts know that the Heisenberg's uncertainty principle states that it is impossible to measure the position and other properties such as momentum of a quantum particle precisely at the same time. Although the mathematics is hairy, the intuition is clear – measurement of either position or momentum, will require a disturbance (such as a photon) and in that process uncertainty will be introduced in one or the other measurement. Quantum entanglement, on the other hand, is the state in which two or more quantum particles are linked such that information travels instantaneously to the other regardless of distance – challenging the theory of relativity. The paper suggests the use of the entangled twin with quantum memory to store the results of the measurements, possibly getting over the limits of the uncertainty principle.

The established frameworks, now nearly 100 years old with no replacement in sight, have many holes in them. It is only theoretical physics and thought experiments have any hope of advancing knowledge. God, with an enormous sense of humor, has made it interesting in many dimensions – the further one digs, the more complex it gets. The keepers of the ever expanding particle zoo, with big machines are akin to a group of people with an excavator trying to dig a hole to the center of the earth to fully understand it.

Data is no substitute for imagination. We lack thoughts, not experiments.

Consumption is a bad, Income is a good

Tax debates are on the air waves again - most trying to figure out which income taxes to keep and which ones to cut. This is tactical policy making at its best - after all, most of the policy makers are focused on the next two years and the "real visionaries" perhaps, as long as four years. Policies made and implemented in two year slices, however, are not good.



Last few decades, economists and politicians alike, seem to have succeeded in imparting on the public a few incorrect notions. They point to the fact that almost 75% of the economy is driven by "consumption," and hence any policy that does not aid consumption is unlikely to be "growth oriented." This is a bit like saying if the gas gauge on your car is showing close to zero , you should really try to accelerate – use the last drop as fast as you can, so that you can reach the destination. Aiding consumption may help a few win elections in two years, but it is going to get the car stuck on the highway in between exits. There is no other way than finding another source for energy – jumping on the accelerator is not a solution – it is idiocy.



Taxes, by definition, are a distortion mechanism. The more complicated one makes it, the worse it is. And, taxing income is a lot worse than taxing consumption. These fundamental principles have been with us for over half a century – it is just that they do not help win elections in couple of years for some. Hence, it is unlikely we will enact good tax policies – creating a progressive tax regime on consumption – exempting basic food, clothing, health and shelter – and taxing everything else. Taxing consumption has to include societal costs – and not just an arbitrary measure created by bureaucrats. Consumption tax is a social necessity and income taxes are an inelegant and distorting substitute.



If economists, ever, are able to add value to society, it is by elevating these discussions in the context of societal utility and then explaining these to the masses so that something can be done.

Common markets

A recent article in science brings into question what many people intuitively believe – most humans maximize short term profits at the cost of society. This is rational behavior given the horizon problem – humans (currently) have a fixed lifespan. However, there are two important attributes that are missed by the short term maximization hypothesis. First, humans extend through the ages by perpetuating their genes and thus has an inherent incentive not to maximize short term profits at the cost of long term value and second, humans are not as bad as most consider them to be – many have objective functions that transcend material wealth. Thus, a large proportion of humans engage in irrational behavior – sub-optimizing local and tactical utility. Although the free rider problem is significant, it appears that a many find sufficient utility to engage in such behavior.

If humans are not universally profit maximizers within constraints, future societal designs should take this into account. As rationality is defined very narrowly in that it assures profit maximization in the tactical and clearly observable objective function, anything beyond that does not have a robust framework to analyze. A broader framework is needed that accommodates disparate objective functions – all rational but not maximizing tactical economic benefits. Ultimately, however, one could argue that any set of objectives can be reduced to a rational economic benefit. Many may object to this and the confusion emanates from prescriptive finance and economics that require cash flows. However, if benefits, timelines and needed investments are described in uncertain terms (as they typically are), then most of the apparent disconnect may disappear.

However, humans and societies are approaching a fork on the road. It has created classes of people – some stuck in the weeds, counting yesterday's money and others with their heads in the clouds predicting tomorrow's disaster. Neither optimizes utility – not for the individual or for the society. A better society needs to cultivate ability to think rather than act at the sign of first trouble. Such a process will train people to consider the systemic impacts of their actions and measure societal utility emanating from future uncertainty and flexibility. It is unclear that such a transition is possible, however. A more likely outcome is a fracture – some focused on tactics and others on irrelevant strategies. If so, it may not provide sufficient fodder for a second order society.

Risk-free fed bashing

TV pundits, ignorant politicians and self-proclaimed critics all have one thing in common – they have found arbitrage in bashing the fed. Typically, they have to take risks when they proclaim the future and bash the entity who is expected to bring in the calamity. In the fed, they find an avenue to do such bashing risk-free.

All of them dislike the fed actions. By opposing "any" fed action, they have found a way to appear smart while leaving the door open to defend themselves whatever happens. It does not matter if the fed actions lead to inflation or they are not enough to prevent a deflation.  Whatever the outcome is, all the bases are covered by simply criticizing any action. All they have to do is to make enough confusing noise in such a fashion that they can move to either direction as the future unfolds. The art of Nostradamus – predict the future in flowery and unclear constructs combined with arguments that may sound right in any outcome in the future – has been effective for many who practice this art.  The lost productivity in both who speak and write about these and those who listen and read their arguments is becoming significant for the economy.

As has been shown for for over half a century, no magician can keep the economy on a knife edge of optimal employment, growth and inflation. So, it is likely that one or the other outcome will unfold in the future. 

Antibiotic resistance and market completeness

Academics and finance professionals often assume complete markets in solving economic valuation and other similar problems. For some practitioners and pure academics, such an assumption has been difficult to make. Ironically, the difficulty in making this assumption drive them into irrelevant and stylistic solutions to common problems. There are indications that the march to market completeness is accelerating. The recent announcement of an index that tracks antibiotic resistance across countries is an example of ever creative ways to reveal available information broadly and continuously. Financial instruments can be created based on such indexes and they can be traded in the market place.

Such indexes and tradable instruments can be created for a variety of information sources. More obvious ones such as terror and climate have been established for some time leading to futures trading in these expectations. They allow businesses to hedge certain risks and improve overall performance. Those who believe markets are bad, should consider the risk management and information advantages of these instruments. Any instrument that allows market participants to hedge against or speculate on uncertainty, provide economic value to society through better decisions and market efficiency.

More information indexes and associated tradable instruments will bring us closer to market completeness. This may cure insomnia for those worried about wrong assumptions in their economic models.

Group Intelligence

A recent study from Carnegie Mellon University describes group intelligence by measuring the ability of a group of people to solve problems. This is interesting as most of the measurement studies in intelligence has been focused on individuals. The study finds that the individual IQ is not correlated with group IQ. It also finds three attributes – social sensitivity, democratization and gender diversity - as factors that are strongly correlated with group intelligence. Democratization, i.e. equal participation from all members of the group, is an interesting finding that has implications for leadership. Consensus building has always been considered a valuable trait but this takes it one step further. The ability to make use of complete information available in the group appears to be a leading indicator of success. Although gender diversity appears to be on target, such a measurement is fraught with issues related to control and correlations.

What the study does not measure is diversity in other aspects – such as education and orientation. Group think has been a major problem for companies where a large number of people with similar backgrounds and orientation drift to periods of low productivity and innovation. In this process, "not invented here syndrome," largely keeps good external ideas at bay. If this is an issue for groups, it should show up as a factor that affects the group intelligence over time. Hence, the amount of time, the group has been together, may be an important determinant of intelligence. It is possible that diverse, democratic groups show high intelligence at inception but slowly atrophies as it rejects all external stimuli. Although the study did not measure external influences to the group, that may be an important consideration in measurement.

Group intelligence is an interesting and important notion – something that has many implications for education, leadership and organizational structures. Further research in this area may prove to be valuable in many different dimensions.

Contagious bad decisions

An article in the Journal of Experimental Social Psychology last year described a study that indicates that bad decision-making may be contagious. In the study, observers were allowed to watch a bidding process in which an unknown bidder repeatedly made economically suboptimal choices. The observers were able to recognize the bad decisions made by the bidder. Later, when the observers were allowed to take over the bidding (instead of the bad decision-maker), for inexplicable reasons, they themselves made the same bad choices. The study concludes that bad decision-making may be contagious and argues that a leader from outside may be able to do better in a company with a habit of making bad choices.

The mechanisms of transmission of the disease of bad decision-making are the processes in a company. Such processes may be integral to and pervasive across the hierarchy.  So, just making a change at the top – with an outsider CEO – may not be enough. The company (and the new leader) has to be able to redesign status-quo processes. Unlike the bidding game, where decisions are made at a single level, complex organizations have decision-making across many different levels. If the organization is inward looking, all the layers may have reached a state of incompetence. Although an outsider may be better to bring a new perspective, equally important is the ability of the new leader to effect changes in the decision-making processes deeper into the organization.

Bad decisions may be contagious and symptomatic. But bad decision-making process is the real disease – curing that will require more than changing the leader.

The phenomena of science education

A recent article in Science asserts the following:



"There is a growing realization that nurturing scientists for the 21st century requires engaging students in the processes of doing science. For students to be engaged in the process of doing physics, they need to learn to think like a physicist. Much of its richness is the process through which physicists acquire knowledge and those specific "habits of mind" that are necessary to practice physics."



Experimentalism has been a driving force in science for many decades. The contemporary education system is already replete with the practice of science and the theory is considered bit of a luxury and reserved for a handful of nerds. During primary education, students head out to the pond to observe nature and thus to get a firm handle on science. They set up experiments - roll balls down an incline and stand amazed at their predictions working perfectly. Newton's laws in themselves are bit of a stretch, however. Later, they will embark on more complex experiments by mixing and shaking chemicals and then dissecting live animals. It is practical science in all the glory it can muster.



Such practicality, however, comes at a cost. The effects are already clear in the US as students keep slipping in science and mathematics compared to international standards. The science article seems to call for enhancing this practicality in education – by reinforcing the habits necessary to practice physics – if not in understanding it. Practicing, after all, is more valuable for most individuals because of one unchangeable characteristic – their lifetime is limited.