The Overestimation of Knowledge

When it comes to dealing with risks and understanding the distribution of risks, we greatly over estimate what we know. We use mathematical models derived from observable phenomena which may in fact be random or misleading.  Even worse many take as proof that because it never happened “here”, the threat must be exaggerated.

Right now some are turning to their respective governments demanding they “deal” with the current recession.  What do these men know, many of whom are academics? Does reading make one omniscient?  Does living your entire life on the taxpayer make you unequally qualified to make market policy?  Like a  blind folded passenger jerking the steering wheel and stomping on the gas,  they are far more likely to send an economy headed for a ditch  into a tree.    All the mathematical models in the world, designed by academic geniuses did not prepare the financial industry for the collapse that happened.

Who today is any different?  One  hears many information security professionals speaking with such assuredness about their perimeter security.    I see lax practices in major corporations where as long as it passes audit they are happy.  One supposes if something goes wrong they can always blame an outside auditor or at least the junior member on the team.  What did Mel Brooks playing the Governor William J. LePetomane say in Blazing Saddles?  “We’ve gotta protect our phoney-baloney jobs, gentlemen, we must do something about this immediately!”  That something is frequently find the scapegoat.  Leaders  who brag about their decisiveness and bark orders to subordinates, who are the epitome of knowledge and confidence, who spout advice on success to the lesser  suddenly become hapless victims,  mere naïve children.   Irrespective of whom one blames, the end result is the same and the damage is done.

The drive to grow the modern enterprise quickly is the source of many kinds of these problems.  Every successful quarter reinforcing the risky behaviour, every interview an opportunity to put one’s knowledge on display;  an tireless parade of sycophants anxious to win trust.  When cells grow quickly in the body it means one is a  fetus.  If one is an adult, it means cancer.

Rapid growth may lead to capital appreciation and nice dividends for a decade but it also leads to failure to hedge against catastrophic risks, reckless behaviour,  and frequently  fraud.   When one person wins 300 million in a lottery they say he got lucky.  When 10,000 entrepreneurs enter the market with the same basic idea and one of them succeeds, they call it genius.

Perhaps instead mankind  is a blind squirrel grubbing for the proverbial nut and only some of them have the humility to admit it.  It is impossible to identify every risk, anticipate every possible outcome and for the last fifty years we have had the benefit of being relatively free of want in the west.  Our ancestors saved and prepared themselves for unpredictable disaster, braced themselves emotionally for loss of children because the world was uncertain.  Many of those uncertainties have been reduced but others abound.  Dealing with risk means building robustness, redundancies, establishing financial reserves, going slower because mitigation of risk slows you down.  This recession might have shown us who was properly prepared by watching those who weren’t disappear into financial history, instead we socialized the risk across the whole of America and it feels a lot like a suicide pact.   They have the knowledge; we have the exposure.


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