Re: worth reading Mythbusting the Obama Magic

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Bob Frankston" <bob2-39 () bobf frankston com>
Date: January 4, 2010 3:33:48 PM EST
To: <dave () farber net>, "'ip'" <ip () v2 listbox com>
Cc: "'Jonathan S. Shapiro'" <shap () eros-os org>
Subject: RE: [IP] worth reading Mythbusting the Obama Magic

I already set a more general set of comments but this particular embrace is something that I’m very aware of . We saw 
this in the S&L crisis 30 years ago – prudent lenders were marginalized. And we tend treat lottery winners as 
investors. A Leonard Mlodinow observed in The Drunkard’s Walk about the right number succeed as would be indicated by 
chance.
 
We also need to be wary about the term “explaining” – there is a big difference between general explanations and 
actionable predictions. Predicting failure – what will not happen – is easier since most events are unlikely.
 
Instead of being more acutely aware of the risks we need to understand how systems thrive despite the risks. This is 
what evolution is about – accumulating success rather than being completely crippled by failure.
 
We do this by creating generative opportunity and having sufficient resilience and decoupling to survive failures. This 
allows sufficient risk taking so as to allow for a few to succeed.
 
If you read the book The Innovator’s Dilemma you’ll see the published version is misleading. He emphasizes one success 
in hindsight so that the book would sell. The real message is that you can’t win.
 
But we can win. By creating the opportunities such as the one success shown in that book. We are all investors in 
creating the opportunity so should share in the success and we do get the benefits. I’m not arguing that success is 
pure chance – not being stupid in itself is worth a lot. But being smart is not enough in itself and can be 
counter-productive in making us shy away from risk.
 
This is why I argue for decoupling value chains as the proper framing for antitrust. It liberates the elements to 
create generative value. But we need to cautious – some control is necessary for continued survival of the business.
 
And we do need money to provide liquidity. Money itself is just a mechanism and if we treat it as limited commodity or 
a moral instrument we may cut off our nose to spite our face.
 
 
From: Dave Farber [mailto:dave () farber net] 
Sent: Monday, January 04, 2010 14:02
To: ip
Subject: [IP] worth reading Mythbusting the Obama Magic
 




Begin forwarded message:

From: "Jonathan S. Shapiro" <shap () eros-os org>
Date: January 4, 2010 1:42:33 PM EST
To: dave () farber net
Cc: ip <ip () v2 listbox com>
Subject: Re: [IP] Re: Mythbusting the Obama Magic

I haven't time for a long post, which is probably good, but there is one point here that I think is worth considering.
 
While bank lending practices were, in my opinion, largely responsible for the mortgage crisis, it must be acknowledged 
that banks, trading houses, and insurers suffer in common under what might be termed "the competitive death embrace".
 
The death embrace is best illustrated by the thinking "If I don't do this marginal deal, my competitor will, so I 
should do the deal rather than let the benefit go to them." If you review the papers, you'll see countless variants of 
that statement, and if you pay attention, you'll notice that not one says "benefits and risk".
 
This attitude is responsible for many investment cycle failures. Most recently the mortgage crisis, but more commonly 
the cycle in which insurance companies lower their rates in lock step to stay in business, only to find during some 
catastrophe that their underwriting models were too optimistic. On investigation, they invariably find that (a) the 
models really weren't very good, but (b) the risk assessment assumptions in the models had been progressively 
downgraded in response to competitive pressure. This is not a consequence of stupidity. It is a requirement for the 
insurer's market survival.
 
In technical contexts, we see companies repeatedly engage in the the "Innovator's Dilemma." The cause can ultimately be 
traced to the fact that quarterly behavior can be explained to investors while long-term behavior can't. This problem 
is compounded by the short-term biases of corporate securities reporting. A Warren Buffet understands this very well 
and reads through it. Most readers of IP, I would hazard to guess, understand it but lack the investment discipline to 
profit from it (I'ld certainly include myself). Most of the world at large probably has no idea what I'm talking about.
 
Broadly speaking, investors and customers are quite bad at assessing the long term risk and benefit inherent in this 
behavior.
 
 
So one question that I think we need to be asking, as a nation, is: how do we make long-term risk and results more 
visible so that people can understand it better?
 
 
Jonathan S. Shapiro
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