Books – Page 122 – artdiamondblog.com

People “Reward the Providers of Dangerously Misleading Information”

(p. 262) As Nassim Taleb has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid. However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty.
The social and economic pressures that favor overconfidence are not (p. 263) restricted to financial forecasting. Other professionals must deal with the fact that an expert worthy of the name is expected to display high confidence. Philip Tetlock observed that the most overconfident experts were the most likely to be invited to strut their stuff in news shows. Overconfidence also appears to be endemic in medicine. A study of patients who died in the ICU compared autopsy results with the diagnosis that physicians had provided while the patients were still alive. Physicians also reported their confidence. The result: “clinicians who were ‘completely certain’ of the diagnosis antemortem were wrong 40% of the time.” Here again, expert overconfidence is encouraged by their clients: “Generally, it is considered a weakness and a sign of vulnerability for clinicians to appear unsure. Confidence is valued over uncertainty and there is a prevailing censure against disclosing uncertainty to patients.” Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors, who are better able to gain the trust of clients. An unbiased appreciation of uncertainty is a cornerstone of rationality–but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Macaulay Argues that a Limited Government that Protects Property Will Promote Economic Growth

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

Source:
Macaulay, Thomas Babington, Lord. “Review of: Robert Southey’s “Sir Thomas More; or, Colloquies on the Progress and Prospects of Society”.” In Critical and Historical Essays Contributed to the Edinburgh Review. London: Longman, Green, Longman, and Roberts, 1830.
(Note: the quote above appeared on the back cover of The Cato Journal 30, no. 1 (Winter 2010); Macaulay’s full review, including the quote, can be viewed online at: http://www.econlib.org/library/Essays/macS1.html )
(Note: the online version does not give page numbers, but gives what I think are “screen” numbers. The passage quoted is all of “SC.96” which appears at the very end of the essay.)

Renaissance Florence: “A Really Vibrant, Flexible, and Free-Market City”

Source of book image: http://covers.booktopia.com.au/big/9781421400594/the-economy-of-renaissance-florence.jpg

(p. 176) Chapters 4 and 5 deal with manufacturing, by far the main source of employment in the city. The Florentine textile industry had developed thanks to the Arno River, which provided water and power, and had become a market leader in Europe for high-quality products. Production was based, as everywhere in Europe, on a putting-out system–but strictly confined to the city. The author describes the organization and its changes over time, stressing, as for international banking, the flexibility of firms and their high turnover. Workers were organized in guilds, but the author stresses their nature as political associations rather than their economic role. Florentine guilds did not restrict the access to profession nor stifle innovation. Chapter 6 describes the banks catering for urban market–including local branches of international banks as well as smaller local firms, plus pawnbrokers, both Catholic and Jews. Local banks appeared thoroughly modern in their business and the resort to banking services was quite widespread. Artisans and workers were routinely paid with checks and had bank accounts. And the whole system worked well with almost no state intervention, at least until the late sixteenth century.
. . .
. . . , the author argues that Florentine society was very upwardly mobile, at least for the standard of the time and that the distribution of wealth by household according to the 1427 Catasto was fairly equal (although inequality increased in the next century).
(p. 177) As a whole, at the end of the book one has the impression of a really vibrant, flexible, and free-market city. The standard of living was undoubtedly high and not only for the wealthy, as witnessed by the art treasures of the city, but also for the working class. Literacy and numeracy was very common, and the majority of children attended a primary school.

For the full review, see:
Federico, Giovanni. “Review of: The Economy of Renaissance Florence.” Journal of Economic Literature 48, no. 1 (2010): 175-77.

Book under review:
Goldthwaite, Richard A. The Economy of Renaissance Florence. Baltimore, MD: The Johns Hopkins University Press, 2009.

Big Firm CFOs Were Confident about Their “Worthless” Stock Forecasts

(p. 261) For a number of years, professors at Duke University conducted a survey in which the chief financial officers of large corporations estimated the returns of the Standard & Poor’s index over the following year. The Duke scholars collected 11,600 such forecasts and examined their accuracy. The conclusion was straightforward: financial officers of large corporations had no clue about the short-term future of the stock market; the correlation between their estimates and the true value was slightly less than zero! When they said the market would go down, it was slightly more likely than not that it would go up. These findings are not surprising. The truly bad news is that the CFOs did not appear to know that their forecasts were worthless.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Mitt Romney on Innovation and Creative Destruction

Source of book image: http://mittromneycentral.com/uploads/No-Apology1.jpg

(p. 108) Innovation and Creative Destruction

The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited–in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.
The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It’s sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such “creative destruction,” recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.
Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America’s new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.

Source:
Romney, Mitt. No Apology: The Case for American Greatness. New York: St. Martin’s Press, 2010.
(Note: bold in original.)

Failed Entrepreneurial Firms that Signal New Markets Are “Optimistic Martyrs”

(p. 260) Colin Camerer and Dan Lovallo, who coined the concept of competition neglect, illustrated it with a quote from the then chairman of Disney Studios. Asked why so many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied: Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re (p. 261) going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.
The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios. The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one. The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect. The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss. The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive. In fact, Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”– good for the economy but bad for their investors.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“People Were Being Infantilized and Made Dependent”

Mayor of London Boris Johnson. Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 16) While I was reading your book “Johnson’s Life of London,” in which you take readers on a tour of the city while discussing some of history’s most famous Londoners, I thought to myself, Being mayor of London can’t be that taxing if you could find time to write such a decent book.
The job of mayor of London is unbelievably taxing, particularly in the run-up to the Olympics. It just happens I write fast and always have done. Some people play the piano, some do Sudoku, some watch television, some people go out to dinner parties. I write books.
. . .
Do you remember the moment you knew that you were a Conservative?
When I was a 22- or 23-year-old reporter in a place called Wolverhampton. I got impatient with some of the stuff I saw going on about damp and mold, about who’s ultimately responsible for improving the ventilation in people’s houses. I felt that people were being infantilized and made dependent by the system and that the local Labour politicians had no interest in sorting it out, were content to harvest these people’s votes without improving their lives.
Wow. You were politically formed by mold.
It was the spores of damp, of mold forming on the walls in Wolverhampton.

For the full interview, see:
ANDREW GOLDMAN, interviewer. “TALK; Boris Johnson, Tory With an Attitude.” The New York Times Magazine (Sun., June 3, 2012): 16.
(Note: ellipsis added; bold in original.)

Johnson’s book is:
Johnson, Boris. Johnson’s Life of London: The People Who Made the City That Made the World. New York: Riverhead Books, 2012.

Resilience

(p. 183) In 1832, a young man was fired from his job and lost his bid for election to the state legislature. The next year his new business failed. Three years later he suffered a nervous breakdown. After recovering, he was defeated as speaker in the state legislature. He was defeated in his efforts to win his party’s nomination to Congress in 1843. He was rejected as land officer in 1849. In 1854, he was defeated in the U.S. Senate election and, in 1856, his efforts to win the nomination as his party’s vice president failed. The string of failures continued. He was again defeated in the Senate election in 1858. Finally, in 1860, Abraham Lincoln was elected as the sixteenth president of the United States.

Source:
Audretsch, David. “Review of: Adapt: Why Success Always Starts with Failure.” Journal of Economic Literature 50, no. 1 (March 2012): 183.

Entrepreneurs Thrive in a Culture of “Chutzpah”

“Manhattan District Attorney Cyrus Vance, Jr.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. C13) Before a recent business trip to Israel, someone handed me a copy of “Start-Up Nation: The Story of Israel’s Economic Miracle,” a book by Dan Senor and Saul Singer about Israel’s culture of innovation and entrepreneurialism. I had finished the book on the overnight flight to Tel Aviv. When I returned home a week later, based on what I had seen in Israel, I purchased multiple copies and handed them out to senior staff who work with me.

“Start-Up Nation” recounts and dissects how Israel, in just 60 years, has thrived as an economy, creating an environment where talent and technology have attracted more venture-capital dollars per person than any other country in the world.
In a nutshell, and admittedly oversimplifying, the authors boil Israel’s success down to a few, core themes. First, Israel was born into and exists in an adverse political environment. Surrounded by hostile neighbors, Israelis survived–and thrived–by adapting quickly, making the most out of limited resources and taking on outsize challenges without fear or undue regard for authority. The latter quality might be called chutzpah. Second, Israelis all participate in military service, before university. The skills they learn in the military, and the maturity they gain from military service, make their work force better skilled and more capable of better teamwork at the entry level on up.
If my recent visit provides any evidence of national characteristics, Israelis question authority, openly and all the time. At any given meal, whether it included ordinary citizens, generals, government officials or business executives, deference was in short supply. No quarter is given. But debate and disagreement create a climate of self-awareness. That in turns helps to create a culture of achievement.
So why did I give copies of the book to my senior staff? I believe in a bottom-up organizational culture, where problems are identified, raised and solved by the line employees who make the enterprise run. Our American system–and especially our legal and government cultures–frequently operates with a top-down style, which can discourage creativity and individualism.
The one thing that I am not planning to do is give copies of “Start-Up Nation” to my children until they graduate from college and have left the house. They have questioned my authority enough already.

For the full book discussion, see:
Cyrus Vance. “Twelve Months of Reading: Cyrus Vance.” The Wall Street Journal (Sat., December 17, 2011): C13.
(Note: the broad multi-page article was sub-divided into sections headed by the name of the person who was writing the book advice in that section. Internally the broad article seemed to be entitled “Books of the Year.”)

The first book Vance recommends is:
Senor, Dan, and Saul Singer. Start-up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.

Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail

People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.

(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the “libertarian paternalistic” procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

“Discovering a Viper in the Bed of Their Child”

Source of book image: http://files.list.co.uk/images/2011/09/15/arguably-lst090367.jpg

(p. 8) Anyone who occasionally opens one of our more serious periodicals has learned that the byline of Christopher Hitchens is an opportunity to be delighted or maddened — possibly both — but in any case not to be missed. He is our intellectual omnivore, exhilarating and infuriating, if not in equal parts at least with equal wit. He has been rather famously an aggressive critic of God and his followers, after cutting his sacrilegious teeth on Mother Teresa. He wrote a deadpan argument for trying Henry Kissinger as a war criminal, then was branded an apostate by former friends on the left for vigorously supporting the wars in Afghanistan and Iraq. (He memorably — a lot of what Hitchens has written merits the adverb — shot back that his antiwar critics were “the sort who, discovering a viper in the bed of their child, would place the first call to People for the Ethical Treatment of Animals.”) And he is dying of esophageal cancer, a fact he has faced with exceptional aplomb.

This fifth and, one fears, possibly last collection of his essays is a reminder of all that will be missed when the cancer is finished with him.
. . .
(p. 9) At times the book feels like an ongoing argument with the leftist intellectuals on the other side of the Atlantic, who tend to view America as lacking in history, culture or moral standing.
In an essay on the journalism of Karl Marx, written for the left-leaning Guardian, he puts an elbow in the ribs of his old socialist friends: “If you are looking for an irony of history, you will find it . . . in the fact that he and Engels considered Russia the great bastion of reaction and America the great potential nurse of liberty and equality. This is not the sort of thing they teach you in school (in either country).”
“There is currently much easy talk about the ‘decline’ of my adopted country, both in confidence and in resources,” he writes in his introduction. “I don’t choose to join this denigration.”
Christopher Hitchens: American patriot. We’ve done a lot worse.
If there is a God, and he lacks a sense of irony, he will send Hitchens to the hottest precinct of hell. If God does have a sense of irony, Hitchens will spend eternity in a town that serves no liquor and has no library. Either way, heaven will be a less interesting place.

For the full review, see:
BILL KELLER. “Christopher Hitchens, a Man of His Words.” The New York Times Book Review (Sun., September 11, 2011): 8-9.
(Note: ellipsis between paragraphs was added; ellipsis internal to a Hitchens quote was in the original.)
(Note: the online version of the article is dated September 9, 2011.)

The full reference for Arguably, is:
Hitchens, Christopher. Arguably: Essays. New York: Twelve, 2012.