General Knowledge – Brain and Bond Conference

Vienna 3,4 September

This has been the most unusual conference. Presentations by Anthropologists, Philosophers, Biologists, Psychologists, Neuro Biologists and Riskviews. We presented the Plural Rationalities and ERM story. Here are some ERM related ideas that we took away from the event…

1. Cooperation vs. autonomy is usually the trade-off. How humans choose how to decide where to come out on that trade-off depends upon the amount of co-dependency is needed for survival. And that depends upon the treats to survival.

If the threats are severe and intense, we need to choose a highly cooperative mode.

If the threats are highly complex, then we need a highly organized mode.

If the threats are highly unpredictable then we need a highly adaptive mode.

If the threats are benign, then we can opt for a low cooperation mode.

Those four modes of cooperation align with the four organizing ideas of Plural Rationalities.  Conservators, Managers, Pragmatists and Maximizers.  The ideas of some fanatics that their particular brand of organizing, whether it be the Individualism of the Maximizers or the Bureaucracy of the Managers or the Sustainability of the Conservators is just not correct in all environments.  (Pragmatists are among other things never fanatics.  That is one of their defining characteristics.)

Humans have evolved to be much more adaptive than different animals.  That is our advantage.

Relaxation of stress (a benign environment) is when diversity can expand.  [Though it is quite possible that much of the diversity that developed during the most recent benign period was wasted on dysfunctional adaptations to selling and reselling mortgages.]  It really is the Individualistic/ Maximizer phases when mankind is able to create the new things that power the future success during future threats.

How does that apply to Risk Management?  It tells you that when times are good and Risk Management is not as important or taken as seriously, Risk Management needs to be creating new tools.  The firms that survive the next crisis will be the firms that had those new tools working and had the insight to use them at the right time.

2.  Game theory tells that in groups of cooperators and defectors, the defectors will usually replace the cooperators.  But the resulting all defector group will be less robust than the all cooperator group had originally been.  This is an insight from biology that applies to firms as well.  The firms that are taken over by the defectors (pure self interest) will eventually be diminished because those defectors need the cooperators.

That tells the risk manager that they need to figure out how to control the risk from the defectors and help to create a system where they will not be allowed to take over.  This is an argument for the CEO as CRO.

3.  People have four ways to decide to divide resources:  Sharing, Ranking, Equality or Market.  Sharing and Ranking are the primitive ways.  Equality and Market both require the use of symbols to work, while Sharing and Ranking do not.  Resources are divided in a firm using mostly the first two more primitive methods.  Advanced management systems, like ERM, seek to use Equality and Market methods that require risk measurement systems.

4.  People in many cultures and languages can identify the basic choices of organizing of Plural Rationalities from simple groupings of circles.  (Not sure exactly how this is helpful, that may require someone who is more spatially oriented than Riskviews to understand.)

Which image represents a hierarchical social organization and which and egalitarian?  These pictures seem to evoke those ideas in several different groups that were tested.

5.  Kids express the thinking of the four plural rationalities groups when candy is distributed in a merit based system:

  • I deserve what I got.
  • We should all get some
  • Can he do that? (Directed towards the authority)
  • I never get any

6.  Each Plural Rationalities groupings would have their own virtues:

  • Courage = Risk Taking
  • Justice
  • Fairness
  • Forbearance

7.  Are there really any people who use expected value as a decision making criteria?  Economics says that it is THE most important criteria.  But do business leaders play lip service to the concept because they have been taught that it is what Homo Economicus does?  Oh, I forgot, Economics grad students must use it.  Otherwise they cannot get a PhD.

8.  People with Authority tend to believe that the system is fair and that their own dominance and extra rewards are fair.

9.  Information about cooperation (i.e. the opposite of anonymity) tends to change the level of cooperation completely.  Think about putting a decal of an eye on the corner of every computer screen.

10.  Game theory shows that people will abuse shared resource and that eventually all will abuse shared resource if there are no consequences.  (Of course in Game Theory, all are Homo Economicus.)  Adding a punishment for abusing shared resource, but only if that punishment is public.

11. “the reason that the invisible hand often seems invisible is that it is often not there.” Joseph Stiglitz

12.  Primates do not organize into Plural Rationalities species.  Good to know if you were thinking of selling insurance to apes.  Primates may tolerate injustice in private but protest loudly if there is a witness.

13.  In the “Ultimatum Game” the rational expectations prediction is of a minimal offer and universal acceptance.  What in fact happens is that the offers average over 40% and offers below 20% are usually rejected.  Offers generally increase when there is increased perception that the offer is public.  Self interest is greater in private.  Fairness in public.

14.  In some primate groups there is no active sharing, but theft of small amounts of food is tolerated 90% of the time.

http://rossier.usc.edu/faculty/mary_helen_immordinoyang.html

15.  Emotion is a vitally important part of risk decision making.  That is why attempts to create totally quantitative systems for risk decision making have so much trouble gaining acceptance.  People from different cultures evidence a different reaction pattern to emotional situations.  Possible explanation is that in cultures that are more highly communal, the emotional reaction is slowed while the brain processes the expectation of how the others in the group will react.  Application to risk management  – think about the issue of interaction of the emotional reactions of people to a risk or loss situation as well as well as the timing of those reactions.  In some situations, the person with the strongest and most intense reaction might set the tone and agenda for the discussion of responses.  That person may well be the one with the least regard for the reactions of others.

16. Human population growth has followed three major waves that followed major technological advancements, first with the advent of tools, then with agriculture and more recently with machines.  If the future follows the past in this regard, it is time for a new transformative technological advance.

17.  Individualism as a major group in society correlates highly with low incidence of infectious diseases.  (See comment 1)  Collectivism to a low incidence of disease.

18.  An Ethical investment program may tend to select firms that are more egalitarian dominated because the egalitarian ideals best meet the ethical criteria.  However, the egalitarian approach to risk is not necessarily best suited to superior performance in most environments.  To get better performance out of ethical investing, the investment managers need to look for firms that have the ability to adapt their risk approach to the environment without losing their adherence to the ethical criteria.  A difficult task.

19.  The Plural Rationalities risk ideas are so tightly linked to the Grid & Group relationship criteria as well as the other attitudes that are linked to those groups because those ideas all form a set of beliefs that are internally consistent and that all work together to make sense of all of the positions.

20.  Is Democracy inherently a Clumsy decision making system?  A true democrat believes in the system even when they do not win.  So they are agreeing that a different theory than their preferred theory might well be good, or at least ok, for the organization from time to time.

21.  Bounded Rationality is the concept that people are unable to make perfectly rational decisions due to limits to actual knowledge or time available to make the decisions.  In addition, there is a second order effect of the concept of bounded rationality.  Decisions that include considerations of the decisions and actions of other humans can assume that they are able to be fully rational or that they operate under bounded rationality.  Highly rational people will sometimes try to suggest that the “best” solution to a problem involves everyone else making more rational decisions.  An alternate approach would be to acknowledge the degree of bounded rationality that exists within the actual system and to reflect that reality into the solution. The former approach is a projection of ones self onto others, while the later is an attempt at realistic assessment of others.

22.  As a corollary to 21, it is important to recognize the way that bounded rationality exists in one’s own decision making.  In financial modeling, this manifests itself in the embedded assumptions and in the choice of model.  All models are perfect examples of bounded rationality.  They are always simplifications of reality and the process of deciding upon the simplifications is the process of applying one’s biases and decision making criteria to the nearly infinite number of practical and impractical possibilities for model construction.

23.  Many human behaviors evidence mirroring – that is one person will be copying the expressions or gestures or acts of another.   This is important to remember when using a model that does not include any recognition of that idea.  The other main type of human reactions are complementary behaviors.  These are reactions that are different but the result of the actions of the first person.  Most financial models assume that one can act based upon an analysis of other people’s actions and those other people will go on doing what they did before.  Instead, we need to be looking to see what would happen if others either mirror ow choose complimentary actions after we choose a different path as a result of our model.

24.  The Relational Models approach suggests four approaches, Communal Sharing, Authority Ranking, Equality Matching, Market Pricing.  It was suggested that these are different from Plural Rationalities, but Riskviews thinks not.  Clearly, Market Pricing matches up to Individualism, Equality Matching to Egalitarianism, and Authority Ranking matches to Egalitarianism.  So the only question is about whether there is a difference between Communal Sharing and Fatalism or not.  The most common description of both seem to be totally at odds.  But there are several things that the two ideas have in common.  Under both Communal Sharing and Fatalism, there is a lack of rigidity about the means or outcome of dividing resources.  Fatalists are described as not caring because of apathy, whilst Communal sharing is described as being motivated by extremes of caring.  But those seeming opposites may be closer than one might think.   The descriptions of the two ideas might just be focusing upon different aspects of the situation.  In a Communal Sharing situation, the person is indifferent to their share of the communal group resources because of a high degree of linkage to the communal group.  This might be seen as a lack of distinction between the individual and the communal group, seeing oneself as so integral to the group that the idea of an individual share does not really exist.  The Fatalist is indifferent to their share of the resources because they have no belief in a sharing process that has a predictable outcome.  The Fatalists are near total isolates in the Plural Rationalities definitions.  So it appears that the two are not the same in their motivation, but they may be the same in terms of their expectations or lack thereof.

All this seems to be quite a jumble of unrelated ideas.  They are a tiny extract of the presentations from the two day conference. It was amazing to see so many people from so many different areas coming together to actually listen intently to each other and seek to make sense of it all, to gain from this discussion some General Knowledge.

If the ideas are abstract, whose agreement or disagreement we perceive, our knowledge is universal. For what is known of such general ideas, will be true of every particular thing, in whom that essence, i.e. that abstract idea is to be found: and what is once known of such ideas, will be perpetually, and for ever true. So that as to all general knowledge, we must search and find it only in our own minds, and ‘tis only the examining of our own ideas, that furnishes us with that.  John Locke

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One Comment on “General Knowledge – Brain and Bond Conference”

  1. jpberliet Says:

    Thank you for sharing. I will have to read this several times to link the points presented to opportunities to enhance the practice of risk management. In any case, these insights point to how short sighted and limiting it can be to rely on one best approach to any situation: circumstances, the views and motivations of other stakeholders, the distribution of power among influencers and decision makers have consequences and matter. The theory that makes sense of all this still needs to be elaborated. useful first step.


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