The focus of paradigm revision, or developing a new paradigm, is upon markets. Here are a couple of excerpts from the two essays appearing in the Fall 2007 Newsletter supplement, the issue reporting on the research roundtable launching the HHI subprime Crisis Research Program and the Subprime Crisis Research Council, the principle coalition implementing the program. Fall 2007 contains lead story of roundtable, Fall 2007: Don't Panic Yet contains two essays.
"Don't panic yet! Strategies are emerging to deal with the subprime mortgage crisis. A broad spectrum of options was discussed at a research roundtable sponsored by the Homer Hoyt Institute in conjunction with the Hudson Institute, the Institute for Urban Research at the University of Pennsylvania, and the Institute for Public Policy at George Washington University. The roundtable included presentations and discussions ranging from the causes of the crisis, a variety of proposals to deal with it and prevent it from recurring in the future, and the outlook for the mortgage markets and the US economy. In convening the conference, the sponsoring institutes noted that the subprime mortgage crisis has two aspects: (1) the problems confronting homeowners who are unable to meet their mortgage payments, notably those with subprime ARMs that will automatically reset to higher interest rates and payments after two or three years; (2) the appropriate policies and actions to prevent or minimize the risk of a repetition in the foreseeable future. Current policy attention is directed largely toward the first of these issues, but it is reasonable to anticipate that the second will attract more attention over time." This is from the lead story "Don't Panic Yet: Strategies Emerging to Deal with Subprime Crisis." Fall 2007
"A Strategy for Averting Housing Bubbles The strategy is to mitigate the possibility of a downward spiral in housing prices and the side effect of bringing on a recession. This paper is not focusing on the policies for dealing with the financial crisis as a whole, including preventive measures. That is for parallel work. Rather, the focus is on the avoidance of the financial crisis generating excessive impact on the housing market and the housing market generating an excessive impact on the rest of the economy including the capital market. Housing markets are generally local. The strategy is to focus on those housing markets that have the greatest risk of an addition to supply of available housing because of foreclosures or threats of foreclosures. The idea is to keep people in their houses whenever possible… The whole idea is to reduce the risk of a cascading price level that would reverberate throughout the local economy and perhaps the national economy in addition to helping homeowners that are in over their heads because they were led astray by aggressive marketing techniques and didn't realize the risks." This is from the first essay, "Don't Panic Yet: A Strategy for Dealing with the Risk of the Emergence of a Housing Bubble Resulting from the Interdependence of Space and Capital Markets." Fall 2007: Don't Panic Yet
The second essay, in the same insert, is "The Market as an Icon: The Case of the Subprime Mortgage Debacle." The quotes are "The current subprime mortgage debacle is a failure of the market. The institutional arrangements need to be modified if we are to buttress our faith in the system in which the market represents a good way to induce production and provide distribution using price as a vehicle. Perfect market systems have sets of conditions such as a level playing field with symmetric rather than asymmetric information and equal bargaining power among players. In the absence of some of these conditions, or with some shortfall, governments intervene with regulation in order to make the system work better…A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an'-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments… A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an'-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments."
See my notes on reviewing three books for the seminar at ASPEC. Maury's Notes on Three Books Related to the Subprime Crisis
The comment, again from the ASPEC seminar essays, is as follows:
Complex Systems - Jack Lillibridge
This is a follow-up to our discussion in the Seminar on Strategic Decision Making and my presentation of comments on some books relevant to how concepts from psychological economics may contribute to understanding the current economic situation and what might be done about it. My presentation focused on three books; Predictability Irrational: The Hidden Forces that Shape Our Decisions by Dan Ariely; The Mind of the Market: How Biology and Psychology Shape Our Economic Lives by Michael Shermer; and Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler & Cass Sunstein. However, in the follow-up presentation I tied the discussion to complex systems which you mentioned in your main essay, Subprime Crisis Strategic Decision-Making: A Discussion of What Went Wrong and Strategies to Deal with It and which Paul Carr discussed in his presentation which included Complexity, Risk, and Financial Markets by Edgar Peters.
The theory of complex adaptive systems identifies component processes that undergird these two aspects of nature, such as positive and negative feedback. A notable instance of a complex adaptive system is a living organism, which includes elements of interaction with the environment and of memory.
This view of nature is characterized by two interrelated aspects. One is characterized by equilibrium, balance, continuity, renewal, etc., resulting in maintaining the existing order. I call this first aspect stability. Nature is also characterized by creativity, learning, exploration, risking, etc., resulting in a new, more complex, order. I call this second aspect growth. These aspects are both complementary and mutually interacting, relating to a dynamic ongoing overall process.
There is a dynamic process described as part of the theory that perhaps will contribute to an understanding of the current economic crisis, especially how it could occur as it did. This dynamic process is the time course from a persisting, stable order, through a transition or threshold, to a new, persisting stable order that is more complex. There are at least three things to understand: what could cause a transition, how could the transition occur, and what might the new order look like. For instance, what triggered the transition and what will influence the kind of new order that results?
Posted by Maury Selding on behalf of Jack Lillibridge. The comment was prepared prior to the blog opening and the link is to an essay prepared by Mr. Lillibridge for Maury's seminar at ASPEC. Dr. Lillibridge has a Ph.D. in Psychology.
Wednesday, October 28, 2009
Liberty without Law: Financial Chaos
Considering the forecasts of outcomes made, and not made, that led to the subprime crisis and its aftermath, it is time to create a new paradigm for real estate and capital markets, or at least to modify the existing paradigm. Former Chairman Greenspan’s testimony Such a new paradigm was called for in the Soros book Maury's Notes on Three Books Related to the Subprime Crisis where the author focused on his reflexivity concept. There are, however, numerous other concepts not adequately integrated into standard economics. These include cognitive science that not only goes beyond bounded rationality and behavioral economics, but is heavily interdisciplinary.
Additional concepts worthy of integration include the science of networks, emergence, and complexity. Integrating these concepts into the economics paradigm dealing with mortgage markets is an application of the concept of consilience. Furthermore, dealing with the risks and uncertainties cries out for better strategies. Therefore, it is time to examine the paradigms that predominate and come up with something much more reflective of reality.
The list of readings recommended in this essay is a start. It is provided as part of Maury's Blog in order to facilitate others to modify the recommendations for reading and to comment on relevance of the concept. Reading Recommended to Improve Forecast of Outcomes
The comment, again from the ASPEC seminar essays, is as follows:
Liberty without Law: Financial Chaos - Paul Carr
(Liberty Without Law)
The discontinuities in the complexity versus uncertainty figure can be attributed to non linear phase transitions and the Matthew Effect, "to him who has more shall be given." This is similar to Shermer's "Cumulative advantage and best seller effects."
Should laissez-faire economics be regulated? Too much liberty can degenerate into unaccountable chaos. Thaler & Sunstein (2008) argue that totally free markets can lead to disasters precisely because autonomous individuals are not good decision-makers. Too little liberty may cause stagnation. What is an optimum balance between autonomy and heteronomy (law) ?
Peters (2001) and Shermer ((2009) build on Adam Smith's invisible hand and chaos/complexity theory to show how free markets are by their nature continually evolving, emerging systems that require uncertainty to operate successfully. Let us apply this to the gross domestic product (GDP). Counties with too much regulation, control, and law (such as the USSR and China before 1989) had a low GDP. At this time, Europe and the US had a high GDP, indicating an optimum mix of law and liberty to innovate. In countries without enough law, i.e. anarchy, like Zimbabawe, the GDP was again low. Trust and the Matthew Effect (Shermer) contribute to maximizing the GDP. Reading Recommended to Improve Forecast of Outcomes
Freedom decreases as the price of oil increases. (Friedman's (2008) Law of Petropolitics).
Alan Greenspan, when asked about the present financial crisis, said he had "overestimated the correcting power of free markets." The delicate balance between law and liberty had been tilted too much toward the latter.
"Confirm thy soul with self control, thy liberty with law." (Bates 1895 "America The Beautiful").
(References and additional comment are in the essay: (Liberty Without Law)
Posted by Maury Seldin on behalf of Paul H. Carr, AF Research Laboratory Emeritus. The comment was prepared prior to the blog opening and the link is to an essay prepared by Dr. Carr for Maury's seminar at ASPEC. Dr. Carr has his Ph.D. in Physics.
Additional concepts worthy of integration include the science of networks, emergence, and complexity. Integrating these concepts into the economics paradigm dealing with mortgage markets is an application of the concept of consilience. Furthermore, dealing with the risks and uncertainties cries out for better strategies. Therefore, it is time to examine the paradigms that predominate and come up with something much more reflective of reality.
The list of readings recommended in this essay is a start. It is provided as part of Maury's Blog in order to facilitate others to modify the recommendations for reading and to comment on relevance of the concept. Reading Recommended to Improve Forecast of Outcomes
The comment, again from the ASPEC seminar essays, is as follows:
Liberty without Law: Financial Chaos - Paul Carr
(Liberty Without Law)
The discontinuities in the complexity versus uncertainty figure can be attributed to non linear phase transitions and the Matthew Effect, "to him who has more shall be given." This is similar to Shermer's "Cumulative advantage and best seller effects."
Should laissez-faire economics be regulated? Too much liberty can degenerate into unaccountable chaos. Thaler & Sunstein (2008) argue that totally free markets can lead to disasters precisely because autonomous individuals are not good decision-makers. Too little liberty may cause stagnation. What is an optimum balance between autonomy and heteronomy (law) ?
Peters (2001) and Shermer ((2009) build on Adam Smith's invisible hand and chaos/complexity theory to show how free markets are by their nature continually evolving, emerging systems that require uncertainty to operate successfully. Let us apply this to the gross domestic product (GDP). Counties with too much regulation, control, and law (such as the USSR and China before 1989) had a low GDP. At this time, Europe and the US had a high GDP, indicating an optimum mix of law and liberty to innovate. In countries without enough law, i.e. anarchy, like Zimbabawe, the GDP was again low. Trust and the Matthew Effect (Shermer) contribute to maximizing the GDP. Reading Recommended to Improve Forecast of Outcomes
Freedom decreases as the price of oil increases. (Friedman's (2008) Law of Petropolitics).
Alan Greenspan, when asked about the present financial crisis, said he had "overestimated the correcting power of free markets." The delicate balance between law and liberty had been tilted too much toward the latter.
"Confirm thy soul with self control, thy liberty with law." (Bates 1895 "America The Beautiful").
(References and additional comment are in the essay: (Liberty Without Law)
Posted by Maury Seldin on behalf of Paul H. Carr, AF Research Laboratory Emeritus. The comment was prepared prior to the blog opening and the link is to an essay prepared by Dr. Carr for Maury's seminar at ASPEC. Dr. Carr has his Ph.D. in Physics.
Supplemental Comments on The Great Recession
This is a supplemental comment to the previous blog entry quoting former Federal Reserve Chairman Alan Greenspan testifying before Congress “I did not forecast a significant decline because we never had a significant decline in prices.” He was referring to housing prices.” See Insert
Psychological Perspective of Standard Economics - By Jack Lillibridge
In my blog comments on Psychological Perspective of Standard Economics built on my presentation for the Seminar on Strategic Decisions I explored how the theory of complex adaptive systems might suggest ideas to help us understand the current economic crisis, how it happened, possible key causal variables, and likely outcomes. Here is an excerpt with the link to the comments. Psychological Perspective of Standard Economics
A central idea from the theory is that complex systems, such as the economic system, have a dual nature: a stability aspect and a growth aspect. The stability aspect is characterized by balance, continuity, equilibrium, renewal, etc., and the growth aspect is characterized by creativity, learning, exploration, risking, etc. A human being has a similar dual nature: a stability aspect to insure survival and a growth aspect to deal with unexpected challenges and anticipated needs.
The three books: Predictably Irrational by Dan Ariely, Nudge by Richard Thaler and Cass Sunstein, and The Mind of the Market by Michael Shermer, present and illustrate psychological factors that may influence economic decisions in ways not accounted for in the standard economic model. Reading Recommended to Improve Forecast Outcomes
Nudge also describes many examples of a general strategy that may improve such economic decisions. The strategy structures the array of decision options of an economic actor in such a way as to make choosing the most beneficial option more likely without restricting free choice.
A brief recap of some of the psychological factors:
o Anchoring is where first impressions and initial decisions shape many others that follow. Once an initial value or percept is set, we are biased toward that original choice.
o Status quo bias is exhibited as a kind of inertia when making decisions. We opt for what we are used to.
o Loss aversion is where people fear losses more than they desire gains.
o When something is free we forget the downside. We perceive what is being offered as being much more valuable than it really is.
o An automatic pilot mode is where people are not actively paying attention to the task at hand.
o A variation of this is where people rely on beliefs, heuristics, models, theories,
etc. without paying attention to whether they are still appropriate in the current situation.
There are many other psychological factors that might be relevant, such as expectations, short-sightedness, self-justification, curiosity, etc., not explicitly dealt with in the books reviewed.
A nudging strategy is based on affecting the array of choices available to the decision maker in the context in which the decision is made. A nudge then is any aspect of the set of choices that alters people's behavior to make a beneficial choice more likely while maintaining real freedom to choose.
A possible limitation to the implementation of nudging strategies is that we don't know our preferences completely - we discover them through market processes and through the process of making decisions. We also don't fully know what future choice sets will look like, let alone what our preferences will be at that time. Designing strategies to affect unknowable incentives and outcomes will be difficult and perhaps not possible in some cases.
A few nudge examples to illustrate how they work:
o Anchors can serve as nudges. We can influence what you will choose in a particular situation by subtly suggesting a starting point for your thought processes.
o A default option serves as a powerful nudge. Providing a well-diversified and balanced investment portfolio is a default.
o Synchronizing pay raises and savings increases means participants never see their take-home amounts go down, and they don't view their increased savings as losses.
o Just before a dangerous curve, white stripes are painted every so often perpendicular to the direction of traffic. At first they are equally spaced. As the curve comes close, the lines begin to be progressively closer together. This gives drivers the sense that their driving speed is increasing and they slow down.
The effectiveness of each example is based on one or more of the above noted psychological factors. For instance, the use of painted stripes to get drivers to slow down is based on a kind of automatic pilot mode, where drivers pick up indications of things happening in their environment outside of their conscious awareness.
An important issue for those trying to understand the current economic crisis is how psychological factors could impact decisions collectively arrived at by economic actors, both individuals and institutions. It important to understand how such factors could be appropriately incorporated in a modified economic model.
One way to address this issue is to see psychological factors as reducing the quality and completeness of the actor's information. The standard economic model has erroneous assumptions relevant to the decision. {Please read the entire essay, Psychological Perspective of Standard Economics)
Posted by Maury Selding on behalf of Jack Lillibridge. The comment was prepared prior to the blog opening and the link is to an essay prepared by Dr. Lillibridge for Maury's seminar at ASPEC. Dr. Lillibridge has a Ph.D. in Psychology.
Alan Greenspan is a brilliant professional, and that is the point in noting
that he missed the Black Swan referred to in the discussion of the great recession and vision problems of experts. The point of this supplemental entry is to pose a potential explanation of why that happened in order to aid in enhancing the body of knowledge and improving analytical systems.
The premise for the position spoken by Chairman Greenspan is that that housing prices would not develop behavior different from previous behavior. However, my reading of the Greenspan book, The Age of Turbulence: Adventures in a New World, indicates that may be a too simplistic answer. It could work for congressional testimony, but a better answer is far more complex.
Part of it may be precedent. That part is built upon the fact that econometric models use historic data. However, Greenspan points out that econometricians may make ad hoc adjustments called “add factors.” He notes that “Modern, dynamic economies do not stay still long enough for an accurate reading of their underlying structures.” [See page 36.] He makes the point that “add factors,” ad hoc adjusts are “…often far more important to the forecast than the results of the equations themselves.” He also notes that “But business-cycle and financial models still do not adequately address the innate human responses that result in swings between euphoria and fear and repeat themselves generation after generation with little evidence of a learning curve…we tend to label such behavioral responses as irrational. But forecasters’ concerns should not be whether human response is rational or irrational, only that it is observable and systematic.” He sees this as a missing variable treated with add-factoring. [See page 522.]
The comment, again from the ASPEC seminar essays, is as follows:
Psychological Perspective of Standard Economics - By Jack Lillibridge
In my blog comments on Psychological Perspective of Standard Economics built on my presentation for the Seminar on Strategic Decisions I explored how the theory of complex adaptive systems might suggest ideas to help us understand the current economic crisis, how it happened, possible key causal variables, and likely outcomes. Here is an excerpt with the link to the comments. Psychological Perspective of Standard Economics
A central idea from the theory is that complex systems, such as the economic system, have a dual nature: a stability aspect and a growth aspect. The stability aspect is characterized by balance, continuity, equilibrium, renewal, etc., and the growth aspect is characterized by creativity, learning, exploration, risking, etc. A human being has a similar dual nature: a stability aspect to insure survival and a growth aspect to deal with unexpected challenges and anticipated needs.
The three books: Predictably Irrational by Dan Ariely, Nudge by Richard Thaler and Cass Sunstein, and The Mind of the Market by Michael Shermer, present and illustrate psychological factors that may influence economic decisions in ways not accounted for in the standard economic model. Reading Recommended to Improve Forecast Outcomes
Nudge also describes many examples of a general strategy that may improve such economic decisions. The strategy structures the array of decision options of an economic actor in such a way as to make choosing the most beneficial option more likely without restricting free choice.
A brief recap of some of the psychological factors:
o Anchoring is where first impressions and initial decisions shape many others that follow. Once an initial value or percept is set, we are biased toward that original choice.
o Status quo bias is exhibited as a kind of inertia when making decisions. We opt for what we are used to.
o Loss aversion is where people fear losses more than they desire gains.
o When something is free we forget the downside. We perceive what is being offered as being much more valuable than it really is.
o An automatic pilot mode is where people are not actively paying attention to the task at hand.
o A variation of this is where people rely on beliefs, heuristics, models, theories,
etc. without paying attention to whether they are still appropriate in the current situation.
There are many other psychological factors that might be relevant, such as expectations, short-sightedness, self-justification, curiosity, etc., not explicitly dealt with in the books reviewed.
A nudging strategy is based on affecting the array of choices available to the decision maker in the context in which the decision is made. A nudge then is any aspect of the set of choices that alters people's behavior to make a beneficial choice more likely while maintaining real freedom to choose.
A possible limitation to the implementation of nudging strategies is that we don't know our preferences completely - we discover them through market processes and through the process of making decisions. We also don't fully know what future choice sets will look like, let alone what our preferences will be at that time. Designing strategies to affect unknowable incentives and outcomes will be difficult and perhaps not possible in some cases.
A few nudge examples to illustrate how they work:
o Anchors can serve as nudges. We can influence what you will choose in a particular situation by subtly suggesting a starting point for your thought processes.
o A default option serves as a powerful nudge. Providing a well-diversified and balanced investment portfolio is a default.
o Synchronizing pay raises and savings increases means participants never see their take-home amounts go down, and they don't view their increased savings as losses.
o Just before a dangerous curve, white stripes are painted every so often perpendicular to the direction of traffic. At first they are equally spaced. As the curve comes close, the lines begin to be progressively closer together. This gives drivers the sense that their driving speed is increasing and they slow down.
The effectiveness of each example is based on one or more of the above noted psychological factors. For instance, the use of painted stripes to get drivers to slow down is based on a kind of automatic pilot mode, where drivers pick up indications of things happening in their environment outside of their conscious awareness.
An important issue for those trying to understand the current economic crisis is how psychological factors could impact decisions collectively arrived at by economic actors, both individuals and institutions. It important to understand how such factors could be appropriately incorporated in a modified economic model.
One way to address this issue is to see psychological factors as reducing the quality and completeness of the actor's information. The standard economic model has erroneous assumptions relevant to the decision. {Please read the entire essay, Psychological Perspective of Standard Economics)
Posted by Maury Selding on behalf of Jack Lillibridge. The comment was prepared prior to the blog opening and the link is to an essay prepared by Dr. Lillibridge for Maury's seminar at ASPEC. Dr. Lillibridge has a Ph.D. in Psychology.
Thursday, October 22, 2009
The Great Recession
The American economy is in what I believe history will call “The Great Recession.” The recession is part of the fallout of the subprime crisis discussed elsewhere on this site. The linked to the essay, "The Great Recession: Vision Problems of the Experts and Concepts Useful in Avoiding Such Debacles" is the point of departure for the seminar along with a reference to the concept of consilience.
The opening paragraph of the “Great Recession” item is: "Former Federal Reserve Chairman Alan Greenspan testified before Congress I did not forecast a significant decline because we never had a significant decline in prices. He was referring to housing prices. A decade earlier, the debacle of Long-Term Capital Management, with leadership from two Nobel Prize winners, occurred when forces exogenous to the sophisticated mathematical models drove prices down to devastating levels. Both cases were outliers in the distribution of expected events seen by application of the inductive reasoning used in the sophisticated econometric models."
This is from the essay shown by the Great Depression.pdf. That essay contains many links to the rest of the site and presents an overview of topics that may be included. Readers may comment on that paragraph or any other item or link in that essay.
The intent is bring other disciplines into the analytical system so as to get a better forecast of outcomes. Progress will depend, in large part, on bringing in researchers early in their career because as Max Plank said in an earlier era "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and new generation grows up that is familiar with it."
As part of this first blog entry it is important to consider the concept of consilience. The idea is that, “everything in our world is organized in terms of a small number of fundamental natural laws that comprise the principles underlying every branch of learning. That is the thrust of the Edward O. Wilson book, Consilience: The Unity of Knowledge, argues for the fundamental unity of all knowledge. Notes for Consilience When I reviewed the book at ASPEC one participant asked what were the natural laws or principles. My response was that Wilson did not specify. However, in thinking about the answer I came up with a few; balance, leverage, inertia/momentum, and especially important in real estate timing and location (or Einstein’s time and space). These are discussed in a general sense near the end of Part II of the Book in Progress, What Were They Thinking? In Chapter 6. Addition discussion of an application is in Part III, Improving Decisions: Toward a New Age of Enlightenment, Part III: Strategic Decision Making , of the Book in Progress.
The comment that follows this blog entry is one extracted from as essay presented at a seminar I led at ASPEC.
Consilience: A Biological Example by John Khosh
The human body is a good example for demonstrating consilience which implies that what is true for part of nature is true for all of nature. A single set of laws of nature is applicable to all things in the universe, animate and inanimate. The laws of thermodynamic, electromagnetic, gravity etc. are subsets of the single set of laws.
A dynamic and holistic approach is applicable to all biosystems including cells, students and colleges. The phenomena in biosystems are not isolated events, nor stationary. For example, consider health. Our biological system attempts to be self corrective. It is dynamic. As a whole, our health is a matter of degree; and, the degree keeps changing as the biological systems get results from a dynamic process. The tendency is to move toward balance.
Each bodily system is made of organs, which are made up of tissues, which are made up of cells, which are made up of molecules etc. The complexity process in our hierarchical organizations creates some differences in properties in higher layers of organization that may not exist in the lower layer of the system, but the underlying principles are the same for a heart that pumps blood and a water pump in an automobile.
The linked essay Consilience: A Biological Example provides examples from the human body as system, with its various subsystems. The concern is with the wide range of the body’s scale of subsystems that are treated as systems. The synchronization of their dynamic activity is responsible for survival of a biosystem. This biosystem includes the fourteen human's biological systems Synchronization is only possible because of information present in the DNA.
Posted by Maury Seldin on behalf of John Khosh. The comment was prepared prior to blog opening and the link is to an essay prepared by Dr. Khosh for Maury's seminar at ASPEC. Dr. John Khosh is a founding member of the American Hoslistic Medical Association.
The opening paragraph of the “Great Recession” item is: "Former Federal Reserve Chairman Alan Greenspan testified before Congress I did not forecast a significant decline because we never had a significant decline in prices. He was referring to housing prices. A decade earlier, the debacle of Long-Term Capital Management, with leadership from two Nobel Prize winners, occurred when forces exogenous to the sophisticated mathematical models drove prices down to devastating levels. Both cases were outliers in the distribution of expected events seen by application of the inductive reasoning used in the sophisticated econometric models."
This is from the essay shown by the Great Depression.pdf. That essay contains many links to the rest of the site and presents an overview of topics that may be included. Readers may comment on that paragraph or any other item or link in that essay.
The intent is bring other disciplines into the analytical system so as to get a better forecast of outcomes. Progress will depend, in large part, on bringing in researchers early in their career because as Max Plank said in an earlier era "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and new generation grows up that is familiar with it."
As part of this first blog entry it is important to consider the concept of consilience. The idea is that, “everything in our world is organized in terms of a small number of fundamental natural laws that comprise the principles underlying every branch of learning. That is the thrust of the Edward O. Wilson book, Consilience: The Unity of Knowledge, argues for the fundamental unity of all knowledge. Notes for Consilience When I reviewed the book at ASPEC one participant asked what were the natural laws or principles. My response was that Wilson did not specify. However, in thinking about the answer I came up with a few; balance, leverage, inertia/momentum, and especially important in real estate timing and location (or Einstein’s time and space). These are discussed in a general sense near the end of Part II of the Book in Progress, What Were They Thinking? In Chapter 6. Addition discussion of an application is in Part III, Improving Decisions: Toward a New Age of Enlightenment, Part III: Strategic Decision Making , of the Book in Progress.
The comment that follows this blog entry is one extracted from as essay presented at a seminar I led at ASPEC.
Consilience: A Biological Example by John Khosh
The human body is a good example for demonstrating consilience which implies that what is true for part of nature is true for all of nature. A single set of laws of nature is applicable to all things in the universe, animate and inanimate. The laws of thermodynamic, electromagnetic, gravity etc. are subsets of the single set of laws.
A dynamic and holistic approach is applicable to all biosystems including cells, students and colleges. The phenomena in biosystems are not isolated events, nor stationary. For example, consider health. Our biological system attempts to be self corrective. It is dynamic. As a whole, our health is a matter of degree; and, the degree keeps changing as the biological systems get results from a dynamic process. The tendency is to move toward balance.
Each bodily system is made of organs, which are made up of tissues, which are made up of cells, which are made up of molecules etc. The complexity process in our hierarchical organizations creates some differences in properties in higher layers of organization that may not exist in the lower layer of the system, but the underlying principles are the same for a heart that pumps blood and a water pump in an automobile.
The linked essay Consilience: A Biological Example provides examples from the human body as system, with its various subsystems. The concern is with the wide range of the body’s scale of subsystems that are treated as systems. The synchronization of their dynamic activity is responsible for survival of a biosystem. This biosystem includes the fourteen human's biological systems Synchronization is only possible because of information present in the DNA.
Posted by Maury Seldin on behalf of John Khosh. The comment was prepared prior to blog opening and the link is to an essay prepared by Dr. Khosh for Maury's seminar at ASPEC. Dr. John Khosh is a founding member of the American Hoslistic Medical Association.
Friday, August 21, 2009
Developing a New Paradigm
The focus of paradigm revision, or developing a new paradigm, is upon markets. Here are a couple of excerpts from the two essays appearing in the Fall 2007 Newsletter Supplement, the issue reporting on the research roundtable launching the HHI Subprime Crisis Research Program and the Subprime Crisis Research Council, the principle coalition implementing the program. Fall 2007 contains lead story of roundtable, Fall 2007: Don't Panic Yet contains two essays.
“Don’t panic yet! Strategies are emerging to deal with the subprime mortgage crisis. A broad spectrum of options was discussed at a research roundtable sponsored by the Homer Hoyt Institute in conjunction with the Hudson Institute, the Institute for Urban Research at the University of Pennsylvania, and the Institute for Public Policy at George Washington University….The roundtable included presentations and discussions ranging from the causes of the crisis, a variety of proposals to deal with it and prevent it from recurring in the future, and the outlook for the mortgage markets and the US economy. In convening the conference, the sponsoring institutes noted that the subprime mortgage crisis has two aspects: (1)the problems confronting homeowners who are unable to meet their mortgage payments, notably those with subprime ARMs that will automatically reset to higher interest rates and payments after two or three years; (2) the appropriate policies and actions to prevent or minimize the risk of a repetition in the foreseeable future. Current policy attention is directed largely toward the first of these issues, but it is reasonable to anticipate that the second will attract more attention over time.” This is from the lead story “Don’t Panic Yet: Strategies Emerging to Deal with Subprime Crisis.” Fall 2007
“A Strategy for Averting Housing Bubbles The strategy is to mitigate the possibility of a downward spiral in housing prices and the side effect of bringing on a recession. This paper is not focusing on the policies for dealing with the financial crisis as a whole, including preventive measures. That is for parallel work. Rather, the focus is on the avoidance of the financial crisis generating excessive impact on the housing market and the housing market generating an excessive impact on the rest of the economy including the capital market. Housing markets are generally local. The strategy is to focus on those housing markets that have the greatest risk of an addition to supply of available housing because of foreclosures or threats of foreclosures. The idea is to keep people in their houses whenever possible… The whole idea is to reduce the risk of a cascading price level that would reverberate throughout the local economy and perhaps the national economy in addition to helping homeowners that are in over their heads because they were led astray by aggressive marketing techniques and didn’t realize the risks.” This is from the first essay, “Don’t Panic Yet: A Strategy for Dealing with the Risk of the Emergence of a Housing Bubble Resulting from the Interdependence of Space and Capital Markets.” Fall 2007:Don't Panic Yet
The second essay, in the same insert, is “The Market as an Icon: The Case of the Subprime Mortgage Debacle.” The quotes are “The current subprime mortgage debacle is a failure of the market. The institutional arrangements need to be modified if we are to buttress our faith in the system in which the market represents a good way to induce production and provide distribution using price as a vehicle. Perfect market systems have sets of conditions such as a level playing field with symmetric rather than asymmetric information and equal bargaining power among players. In the absence of some of these conditions, or with some shortfall, governments intervene with regulation in order to make the system work better…A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an’-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments… A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an’-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments.”
See my notes on reviewing three books for the seminar at ASPEC. Maury's Notes on Three Books Related to the Subprime Crisis
The comment, again from the ASPEC seminar essays, is as follows:
Complex Systems - By Jack Lillibridge
This is a follow-up to our discussion in the Seminar on Strategic Decision Making and my presentation of comments on some books relevant to how concepts from psychological economics may contribute to understanding the current economic situation and what might be done about it. My presentation focused on three books; Predictability Irrational: The Hidden Forces that Shape Our Decisions by Dan Ariely; The Mind of the Market: How Biology and Psychology Shape Our Economic Lives by Michael Shermer; and Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler & Cass Sunstein. However, in the follow-up presentation I tied the discussion to complex systems which you mentioned in your main essay, Subprime Crisis Strategic Decision-Making: A Discussion of What Went Wrong and Strategies to Deal with It and which Paul Carr discussed in his presentation which included Complexity, Risk, and Financial Markets by Edgar Peters.
The theory of complex adaptive systems identifies component processes that undergird these two aspects of nature, such as positive and negative feedback. A notable instance of a complex adaptive system is a living organism, which includes elements of interaction with the environment and of memory.
This view of nature is characterized by two interrelated aspects. One is characterized by equilibrium, balance, continuity, renewal, etc., resulting in maintaining the existing order. I call this first aspect stability. Nature is also characterized by creativity, learning, exploration, risking, etc., resulting in a new, more complex, order. I call this second aspect growth. These aspects are both complementary and mutually interacting, relating to a dynamic ongoing overall process.
There is a dynamic process described as part of the theory that perhaps will contribute to an understanding of the current economic crisis, especially how it could occur as it did. This dynamic process is the time course from a persisting, stable order, through a transition or threshold, to a new, persisting stable order that is more complex. There are at least three things to understand: what could cause a transition, how could the transition occur, and what might the new order look like. For instance, what triggered the transition and what will influence the kind of new order that results?
“Don’t panic yet! Strategies are emerging to deal with the subprime mortgage crisis. A broad spectrum of options was discussed at a research roundtable sponsored by the Homer Hoyt Institute in conjunction with the Hudson Institute, the Institute for Urban Research at the University of Pennsylvania, and the Institute for Public Policy at George Washington University….The roundtable included presentations and discussions ranging from the causes of the crisis, a variety of proposals to deal with it and prevent it from recurring in the future, and the outlook for the mortgage markets and the US economy. In convening the conference, the sponsoring institutes noted that the subprime mortgage crisis has two aspects: (1)the problems confronting homeowners who are unable to meet their mortgage payments, notably those with subprime ARMs that will automatically reset to higher interest rates and payments after two or three years; (2) the appropriate policies and actions to prevent or minimize the risk of a repetition in the foreseeable future. Current policy attention is directed largely toward the first of these issues, but it is reasonable to anticipate that the second will attract more attention over time.” This is from the lead story “Don’t Panic Yet: Strategies Emerging to Deal with Subprime Crisis.” Fall 2007
“A Strategy for Averting Housing Bubbles The strategy is to mitigate the possibility of a downward spiral in housing prices and the side effect of bringing on a recession. This paper is not focusing on the policies for dealing with the financial crisis as a whole, including preventive measures. That is for parallel work. Rather, the focus is on the avoidance of the financial crisis generating excessive impact on the housing market and the housing market generating an excessive impact on the rest of the economy including the capital market. Housing markets are generally local. The strategy is to focus on those housing markets that have the greatest risk of an addition to supply of available housing because of foreclosures or threats of foreclosures. The idea is to keep people in their houses whenever possible… The whole idea is to reduce the risk of a cascading price level that would reverberate throughout the local economy and perhaps the national economy in addition to helping homeowners that are in over their heads because they were led astray by aggressive marketing techniques and didn’t realize the risks.” This is from the first essay, “Don’t Panic Yet: A Strategy for Dealing with the Risk of the Emergence of a Housing Bubble Resulting from the Interdependence of Space and Capital Markets.” Fall 2007:Don't Panic Yet
The second essay, in the same insert, is “The Market as an Icon: The Case of the Subprime Mortgage Debacle.” The quotes are “The current subprime mortgage debacle is a failure of the market. The institutional arrangements need to be modified if we are to buttress our faith in the system in which the market represents a good way to induce production and provide distribution using price as a vehicle. Perfect market systems have sets of conditions such as a level playing field with symmetric rather than asymmetric information and equal bargaining power among players. In the absence of some of these conditions, or with some shortfall, governments intervene with regulation in order to make the system work better…A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an’-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments… A major failing of the market in the subprime case emerged from a mismatch of the distribution of risks and rewards. Great rewards went to originators, packagers and distributors of the mortgages and investment instruments derived from their packaging and slicing-an’-dicing. The great risks were borne by borrowers and by investors who wound up holding the long term instruments.”
See my notes on reviewing three books for the seminar at ASPEC. Maury's Notes on Three Books Related to the Subprime Crisis
The comment, again from the ASPEC seminar essays, is as follows:
Complex Systems - By Jack Lillibridge
This is a follow-up to our discussion in the Seminar on Strategic Decision Making and my presentation of comments on some books relevant to how concepts from psychological economics may contribute to understanding the current economic situation and what might be done about it. My presentation focused on three books; Predictability Irrational: The Hidden Forces that Shape Our Decisions by Dan Ariely; The Mind of the Market: How Biology and Psychology Shape Our Economic Lives by Michael Shermer; and Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler & Cass Sunstein. However, in the follow-up presentation I tied the discussion to complex systems which you mentioned in your main essay, Subprime Crisis Strategic Decision-Making: A Discussion of What Went Wrong and Strategies to Deal with It and which Paul Carr discussed in his presentation which included Complexity, Risk, and Financial Markets by Edgar Peters.
The theory of complex adaptive systems identifies component processes that undergird these two aspects of nature, such as positive and negative feedback. A notable instance of a complex adaptive system is a living organism, which includes elements of interaction with the environment and of memory.
This view of nature is characterized by two interrelated aspects. One is characterized by equilibrium, balance, continuity, renewal, etc., resulting in maintaining the existing order. I call this first aspect stability. Nature is also characterized by creativity, learning, exploration, risking, etc., resulting in a new, more complex, order. I call this second aspect growth. These aspects are both complementary and mutually interacting, relating to a dynamic ongoing overall process.
There is a dynamic process described as part of the theory that perhaps will contribute to an understanding of the current economic crisis, especially how it could occur as it did. This dynamic process is the time course from a persisting, stable order, through a transition or threshold, to a new, persisting stable order that is more complex. There are at least three things to understand: what could cause a transition, how could the transition occur, and what might the new order look like. For instance, what triggered the transition and what will influence the kind of new order that results?
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