Tuesday, June 30, 2009

New Haven – Who Won?

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In view of the Supreme Court decision in the New Haven firefighter case, I’m going to postpone the continued discussion of factual analysis. Instead I’ll discuss the New Haven case while it is still fresh.

The typical news headline in this case is that the white firefighters won. While true, that merely scratches the surface. There are many more winners than just a few firefighters. In fact I would argue that nearly everyone in the U.S., black, white, or any other skin color is a winner and that there are few if any real losers. True, there will be many who complain about loss of what they see as a deserved “helping hand.” However that “helping hand” is counterproductive in the long term.

First on the long list of winners in this case are members of the public who might need help from the fire department. They have more assurance that the commander of any fire-fighting unit will be competent to do his job. The firefighters are likely to be better organized and trained than they would under a less-qualified officer. The person trapped in a house fire or injured in a traffic accident will benefit directly from this improvement. This applies not only to New Haven, but across the country as well.

Second, millions of young people will have greater assurance that their study will pay off as they prepare for the careers of their choice. The New Haven ruling tells government agencies that merit and qualification, not skin color should determine hiring and promotion. It is likely that this non-discrimination will extend to non-government employers as well. This decision is likely to strike a blow against the de facto quota system that has come to exist in this country.

Third, minorities will benefit in at least two ways. First, as hiring and promotion become more merit based there will be less suspicion that the minority employees got their jobs because of skin color. Sadly, many competent people have been tarred with the same brush as those who got their positions as a result of the quota system. Those competent and dedicated employees will be more respected and have more self esteem as the system of preferences dies off.

The second way minorities will benefit is that they will be encouraged to develop their natural talents instead of relying on preferences. I recall the case of a secretary in our department many years ago. She had ability and could have been an excellent employee. Instead she did not apply herself and when threatened with discipline would say in effect, “You can’t fire me, I’m a black woman and you need me for the numbers.” Eventually she left the company, taking her attitude with her. It’s impossible to say for certain how much that attitude had to do with this next but it probably played a factor. Sadly I later saw her picture in the paper, sentenced to jail for dealing drugs.

“But wait,” someone says. “What about the minority firefighters denied promotion? Weren’t they harmed?” I would say that they were not. It is true that they may have had to live on a lower salary than had they been promoted. However salary is not the only or even the most important consideration in job satisfaction. Most people like to feel that they are productive in their employment. Promotions or hiring for preferential reasons militate against that, a person who got his job because of his skin color is unlikely to have the same satisfaction as will someone hired and retained because of his work.

If an employee thinks he can get promoted because of his skin color, he is likely to depend on that skin. However if he is confident that promotions are merit-based, he is likely to work harder and study harder to become more qualified. That will increase his satisfaction with his job and his life. For that reason I maintain that the firefighters who did poorly on the test also will benefit in the long term. They cannot change their skin color but they can change how they work and how they study for the next promotional exam.

It is true that many minorities have suffered discrimination and economic problems in the U.S. and elsewhere. However history shows that those minorities who overcome such problems do so by struggle, hard work, and education. Preferential treatment simply helps them stay in the same situation and thus works against them long term.

As the country follows the New Haven decision, everybody will benefit from the wisdom of the fourteenth amendment. That amendment simply requires that no state “shall deny any person within its jurisdiction the equal protection of the laws.” As I’ve described in my blog about the Gander Test, New Haven attempted to deny white firefighters the same protection the city would have given to minorities. The Supreme Court decided correctly in this case and we will all benefit from that decision.

Thursday, June 25, 2009

Facts? What Facts?

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"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." (Attributed to Mark Twain)

Your neighbor tells you how a certain over-the-counter product greatly improved his health. He had only a couple of mild colds last winter instead of the four or five bad ones he usually gets. Or you read a similar recommendation in somebody’s blog. They claim it’s wonderful and you really should try it. Do you rush right out and buy the stuff? I would wary, for several reasons:

a. The proponents of the product might be seeing just the placebo effect. People tend to get better when they think a medication is helping, even if that medication was in fact just a sugar pill.

b. Some bloggers are being paid to push certain products – and at present they are not required disclose that fact. This can even enhance the placebo effect since the blogger wants it to work so that he can legitimately get paid. He may not be deliberately dishonest, but he can easily fool himself.

c. Your informant may occasionally be deliberately dishonest. That is especially true if he is being paid to advertise that product.

d. People recover from most diseases on their own. The medication may have had nothing to do with the recovery.

e. Random chance plays a big part in things like sickness, as do changes in our bodies. Your neighbor may have just not been exposed to as many colds as usual, or his aging, more experienced body may have already learned to deal with the viruses he happened to meet last winter.

So how do you decide if you should try the medication or not? Or if you should accept some other product recommendation? There is no easy way, but some things can help. The first step is gathering information, that’s kind of obvious. The problem is, what information do you need and how do you know what to trust? The following questions are helpful. They are based on suggestions from the Center for Evaluative Clinical Studies (CECS) of the Dartmouth Medical School:

First, exactly what is the assertion? What does it claim and not claim? It is all too easy to unconsciously extrapolate to other situations where that assertion does not necessarily apply.

Second, would you care if the assertion were true? If you live in Hawaii you probably won’t care much about a product claiming to make a home heating system more efficient.

Third, who stands to benefit? The blogger or other advertiser is likely to be biased in favor of the product, consciously or unconsciously. Likewise the manufacturer or salesperson.

Forth, how good is the evidence? Does it come from multiple, independent studies? How good are those studies?

Now that last question can be difficult for a layperson to answer. Most people lack the background and training to evaluate such studies. However again we can build on CECS suggestions. We should ask ourselves:

What are the key elements of any study? What population? (A study showing a medication safe and effective in adults may not be meaningful to children, for example.) What exposure? What was the outcome in terms of both nature of effect and size of that effect?

Are the data relevant? Did researchers use the right study population and exposure? (Studies exposing rats to many times the equivalent dose human users might take should be considered suspect.) Is the effect large enough to be both statistically significant and meaningful to you?

Are the data valid? Is there a properly chosen comparison group? Were measurements done properly? Might the effect be due to chance?

Finally, are there other studies with similar findings to support the assertion? Are there studies that contradict the assertion?

That’s a lot of questions but they are all useful. If the stakes are low you might not want to pursue answers to all of them. However it is worthwhile to understand each question and know how it applies.

Of course most people don’t know how to evaluate statistical significance. That’s a big subject but I’ll try to make a start on it next time.

Wednesday, June 24, 2009

The Theory Fits Perfectly, So What’s Wrong?

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“Hey! Look at this!” Your coworker shows you a chart of the closing price of a certain stock every day for the last month. Then he shows you a graph of a mathematical equation that follows the ups and downs of that stock price almost perfectly. He continues, “I’ve discovered the equation of how the price of this stock goes up and down. It’s going to go up tomorrow. All we have to do is buy now, then sell tomorrow to make some money.” Would you follow his advice? If you do you will probably set yourself up for disappointment.

“But wait,” you might ask. “How can the stock price fit that equation so well up through today and not predict what it will do tomorrow?” The answer is that there can be more than one theory that fits the data and those theories can be quite different. In fact there are an unlimited number of equations that fit your coworker’s data, and they can’t all be right. Some of those equations show the price increasing tomorrow; some show it decreasing. We could even find an equation that shows the stock price as negative tomorrow while still fitting the existing data!*

The same applies to non-mathematical theories. Chicken farmers are well aware that the sun comes up shortly after the rooster crows. They might theorize that the rooster crowing is what causes the sun to rise, but that is hardly proof of the theory. We cannot accept that a theory is correct just because it fits existing data. That is true for things like the coworker’s equation and for other theories. The theory may be true, it may be true in certain circumstances, or it may be only chance that allowed it to fit the data.

The history of science is littered with the ruins of theories later shown to be only approximations or in some cases completely false. Yet the human mind still tends to regard agreement with data as proof of theoretical correctness. Why? Almost certainly because we try to make sense of the world. To do so, we make theories to explain the facts. Then we believe those theories, sometimes even in the face of new facts that contradict them.

That is not all bad. Having a theory of how the world works allows us to live better lives. For example, if the farmer did not have a theory of how the seasons work, he would not be able to effectively plant and harvest his crops. More sophisticated theories allow us to build everything from homes to supercomputers, even rockets to take us to the moon. Those theories can be very useful – but only to the extent that they reflect reality. The theory that vaccines can prevent disease has helped wipe out smallpox and otherwise greatly improved our health. However the old theory that disease was often caused by too much blood in the body led to physicians draining badly needed blood from sick people. That theory probably killed thousands of people.

Humans and other animals seem programmed to seek theories or mental models to explain the world. That can be useful but it can also go too far, leading us into incorrect and sometimes dangerous actions as we try to control important aspects of our lives. B.F. Skinner showed that pigeons fed at random times will develop strange ways of trying to control the food delivery. Whatever action they happen to be doing when food arrives becomes associated in their minds with the food, so they repeat that action when they get hungry. One bird would turn counter-clockwise; others would swing their heads back and forth in a pendulum motion. The birds did that consistently, long after the event that caused them to associate those actions with food. Their theories about what caused the food to appear simply didn’t fit reality.

Humans too are subject to such misleading theories. What sports fan has not tried repeating something he happened to be doing when things went well for his team? I have to admit having been tempted to do such myself. My team was doing poorly while I listened to the game. I had to go do something else and when I got back the team had done much better. It occurred to me that I should turn off the radio so the team would continue to do well. Come on sports fans out there, admit it. What have you done to try to help your team? Is there any rational reason to believe it would work?

Think is limited to people who don’t understand statistics? Think again. Nassim Nicholas Taleb is probably as statistically sophisticated a person as walks the face of this earth. He worked as a trader and one day the taxi dropped him at a different door than where he usually entered the building. That day his account skyrocketed, one of his best days ever. Next morning, without even thinking about it, he asked the taxi driver to drop him at that same door. Then he noticed that he had unconsciously put on the same stained tie he wore the day before! He knows enough to realize that neither the tie nor the door had anything to do with his success, but his natural tendency was still to repeat irrelevant actions from that successful day.

Following theory without or even in spite of evidence is probably nowhere more prevalent than in politics and government. The big government, controlled economy model remains very popular in the world today. In many circles it is considered na├»ve to even consider anything else. Yet which type of economy has consistently caused problems by over-production and which consistently creates a surplus only of misery? In spite of that abundant evidence, many people still want government to control the economy and make centralized decisions for all of us. (For more on why that does not work well, see my blog on this site, “Who Pays, Who Uses, Who decides?”)

So how can we know that our mental models reflect reality, not just happenstance or some partial data? How can we be certain new data won’t overturn them? Actually we can’t, but with care we can be much more confident and at least weed out the worst of our erroneous theories. Next blog I intend to discuss how to do that.

*For those of mathematical bent and interested in fitting equations to data, we can always fit n + 1 data points with a polynomial of order n. We can fit two data points with a polynomial of the form A + BX. For three points we can use A +BX +CX^2. If our stock price data is for 20 days, a polynomial including values up to X^19 can fit those data perfectly. Then by adding one more term, for X^20, we can fit any next point we want, including negative numbers.

Tuesday, June 23, 2009

The Gamblers' Fallacy

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Randomness. It affects all aspects of life: The chance that a new car turns out to be a lemon. The probability that the next person a salesperson talks to will happen to need what he is selling. Even the chance you have inherited a gene that makes you susceptible to heart disease. I could go on and on of course. Life is uncertain by nature and that’s not going to change in the foreseeable future.

Fortunately we are not entirely helpless in the face of this uncertainty. By informing ourselves we improve our odds on such things as buying cars and sending a salesperson to certain potential customers. While we cannot change our genetic makeup, we can live lifestyles that give us a better chance of healthy, enjoyable lives. However the uncertainty is still there, even if reduced. Fortunately there is a proven method of further reducing that uncertainty, namely the study of probability and statistics. Unfortunately few people understand those subjects at even the most basic level.

For example, suppose you start tossing a coin and it comes up heads the first five times. It is a fair coin, fairly tossed. What is the probability of tails on the next toss? Unless you are educated in statistics, the answer may surprise you – it is 50%, no more and no less. The coin has no memory of what has already happened. No matter how many heads or tails came up before, the next toss of a fair coin always has a 50% probability of heads and 50% of tails.

I know, you may have a hard time believing this. The human mind does not have a natural or intuitive understanding of probability. People need specific education in statistics before they really understand the subject – and even then they often make mistakes. One of those common mistakes is an error that seems built into our minds called the Gamblers’ Fallacy. This is the erroneous belief that some cosmic law forces random events to become non-random in order to compensate for previous results. We tend to think that the coin has a memory and will somehow try to turn up tails if it has previously turned up heads more than expected. Sorry, the universe doesn’t work that way. The coin has no memory, no brain, no way to deliberately compensate for past results. It just lands the way it lands, showing heads or tails independent of anything that happened before.

Still not convinced? Then ask yourself what changed when you got that string of three to five heads with your coin, or when you got three sevens in a row with dice. Is the coin different now than it was a few minutes ago? Are the dice different than they were before? If nothing is different they why do you expect different probabilities? A coin with a 50% chance of landing heads up before you tossed five straight heads will still have that same 50% chance of landing heads up afterwards.

Of course there are some situations in which your action does change the situation. If you have ten red and ten green marbles in a box and pull one out at random, you will have changed the mix in the box. If you draw a red marble, you have a higher chance of a green one next time since the box now has more green than red marbles. In fact should you happen to draw five red marbles and no greens, there will be twice as many green as red marbles left giving you twice the probability of drawing a green as a red on your next try. In this case, drawing the first marbles changed the situation by changing the mix of red and green marbles in the box.

This even has a somewhat practical application. Suppose studies have shown that in a salesperson’s territory 30% of potential customers actually need the product. If he has called on half his potential customers and only 20% of those needed the product, the remaining half of potential customers must include 40% who need what he’s selling. He should be optimistic about calling on the rest. However most salespeople don’t know how many people are likely to need their product. For them, the next customer is just as likely to buy as were the last 20.

The game of blackjack is another example of a changing situation. Under some rules, a clever card counter can adjust his bet according to the modified probabilities for the next deal. The reason is that cards dealt are visible, allowing players to determine what cards are left in the shoe. Years ago a mathematician figured that out and regularly beat the house in Las Vegas. However casino management, not being in the business of giving away money, barred him from playing and changed the rules to ruin his method.

Unfortunately we humans are good at fooling ourselves and the gamblers’ fallacy is one way we do it. In fact, not only do we fool ourselves, there is no shortage of charlatans ready to help us do it. Some are probably honestly misled themselves, while others are deliberately leading us down a path to the loss of our money.

We can even find instructions about something called “regression betting” which claims to tell us how to beat such games as craps. Those instructions are detailed, complicated, and nonsense. They are based on the assumption that you can change the amount you bet to compensate for the changing probabilities based on previous results. That is, they are based on the gamblers’ fallacy that the dice have a memory and will act in a non-random manner to “balance” the overall results. Those instructions may extend the time it takes to lose your money, but they do not change the overall chances of winning or losing. In a game with no house advantage your expectation is still zero. If there is a house advantage your expectation will be negative. The dice have no memory and don’t compensate for anything.

Casino owners love such things as regression betting. They have a saying that if a gambler has a system they will send a taxi for him. They know that such gamblers tend to be so convinced that the system works that they bet more than they would otherwise. The casino makes more money from those people because while their systems don’t, their belief in the system misleads them into thinking that they will win soon. However such systems tend to be cleverly disguised versions of the gamblers’ fallacy, often so cleverly disguised that they fool even the people who concoct them.

“But wait,” you ask. “What about those cases where lottery prizes become so high that they would cover the cost of buying all possible ticket numbers. Isn’t that a situation change deserving of buying a lot of tickets? Doesn’t the expectation become positive then?” This isn’t strictly a gamblers’ fallacy problem but the answer is no, for three reasons:

First, the lottery prize is not a cash prize of the advertised amount. A million dollar prize is really $50,000 per year for 20 years. Meanwhile the lottery owners keep the rest of the money in interest-bearing accounts. If you insist on a cash payout you will get much less than a million bucks.

Second, even if you win there is no guarantee you will be the only winner. When prizes get large, lots of people play so the prize will probably be split between two, three, or even four winners.

Third, should you win you will have to pay taxes on your winnings, and those taxes will probably be in a high tax bracket.

Even when the prize is huge, lotteries provide negative expectation for the price of the ticket.

So whether buying a car, trying to sell a product, or playing the lottery, don’t believe that the odds will ever change. They don’t unless the situation changes.

Next time I intend to discuss some other ways our minds fool us in situations of uncertainty.

Monday, June 22, 2009

Investing or Gambling?

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Some folks at church were teasing Doug about being a stockbroker, implying that he was facilitating gambling. Finally He responded, “Hey, I look at it this way. The brokerage firm makes money, the broker makes money, and two out of three ain’t bad.”

So is it gambling to buy stock? It can be, in either investing or gambling there is the possibility of either a loss or a gain. However the big difference between the stock market and most gambling is that in the stock market there is a possibility of actually creating wealth. That doesn’t happen in a casino, weekly poker game, or a state lottery. Let’s look at three different cases:

1. Zeke plays poker with three friends every week.

2. John buys a lottery ticket every week, and

3. Willie invests in the stock market.

Zeke’s poker game is what is called a zero-sum game. At the end of each poker game, money will have changed hands. There will be winners and losers. However the total amount of money they all have will remain unchanged (except what they spend on refreshments etc.). Wins minus loses total up to zero, hence the term zero-sum game. In terms of expectations, Zeke’s expectation is zero assuming all the poker players are equally skilled.

John’s lottery ticket is something much worse than a zero-sum game. If you add up all the winnings of all the winning tickets, it will be less than the total of what people paid to buy tickets. The rest goes to the state, to the retailers, and to the company that runs the lottery. There is a net transfer of wealth away from the players leaving them poorer in the aggregate. This is actually a negative-sum game since subtracting all the losses (ticket purchases) from all the winnings gives a negative number. The same thing happens in casinos and other venues where the house takes a share. Lotteries and casinos are sucker-bait. The expectation from playing them is negative.

Willie’s situation is more complicated. He becomes part owner of the companies in which he invests. If he invests in a new company, that company will take his money and use it to create products or services they hope people will want to buy. If the company does that well, Willie’s investment will grow and he can reap the rewards of either part of the profits (dividends) or an increase in the value of his stock. If all goes well, Willie gains, the company gains and even the customers gain from the availability of something they want. Willie’s investment has actually created wealth, not just moved it from one pocket to another. In a wise investment, expectation can be positive.

But what if Willie buys stock in an existing company? The company is already in business; can buying its stock create wealth? Actually it can, and in two different ways:

First, an existing company may issue extra stock to get the money for expansion. That can allow it to acquire new facilities and equipment, hire more people and provide its products to more customers. If those customers are happy with the product everybody benefits, except maybe the company’s competitors. Again wealth is created.

Second, what about the initial investors in that existing company? The time may come when they no longer want to own part of the company. They may need the money for retirement, to send the kids to college or some other purpose. They are unlikely to make the initial investment unless they see a way to sell their share of the company when they need to do so. That is what the stock market is for, it provides a convenient way to buy and sell little pieces of big companies. That encourages people to invest and help create wealth. The possibility that Willie would buy stock today helped encourage someone to make an initial investment years ago.

Of course Willie should be careful how he invests his money. In George Samuel Clason’s parable “The Richest Man in Babylon,” Arkad, the protagonist, first trusts his investment to a brickmaker who is going to travel and use it to buy jewels. Of course the brickmaker knows nothing about jewelry and gets cheated. Arkad loses his investment but learns from the experience. Next time he invests with a shieldmaker who uses it to buy bronze for shields. Now he has invested with someone who knows what he’s doing so he makes money. Later when asked about taking advice from brickmakers, Arkad replies that they give good advice – about making bricks.

Our economy today is more complicated than that of Babylon. Instead of brickmakers and shieldmakers we have technology companies, large retailers, automotive companies and on and on and on. Some are good investments and some are not but the basics are the same as what Arkad learned. Invest with someone competent and who can provide a product at a fair price that will satisfy customers and turn a profit.

Of course one result of the complexity of our society is that we can never be certain any particular company will do well. New technology may make their product obsolete, or a competitor may find a more efficient way to produce that product. That is why it is sound policy to diversify investments. One company, or even one sector of companies, may fold because of changing conditions. For example, suppose you had invested in the Pony Express or another company to compete with them. You might have done well for a couple of years but then the telegraph would have made your investment worthless.

The point is that, aside from investing in quality companies it is wise to diversify your investments. Of course most of us don’t have enough money to buy stock in very many companies, nor do we have the time to research those companies. What to do? That is why various types of mutual funds, exchange traded funds, index funds, etc. exist. They pool the money from many investors and buy stock in many different companies. Some will do well, some will not, but there is a good chance that the total will be positive and very little chance that investors will lose all their money.

For most people such funds are the safest way to invest. True, you don’t get the large gains you would if you invested all your money in a company that took off like Microsoft did. However neither do you have as much of a chance of losing your entire investment if the one company you picked goes belly-up. Think about the utility to you of a big gain compared to the utility you will lose if you take a big loss.

I’ll even toss in here my personal recommendation for the average investor. I think most people should buy index funds. They are very diversified and have low overhead. Regular mutual funds charge a management fee for the expertise of the people picking the stocks to invest in. I’m not convinced that those experts are really worth the amount they charge. By the time investors pay their salaries and overhead, the trading expenses etc. they eat up a large part of the gains. Index funds have little such expense; they just buy the stock listed on one of the major indexes. I recommend an index with a lot of companies in it to get better diversity.

This is a big subject and of course I’ve not covered it all here, nor will I. However in the next blog I do intend to discuss a trap that catches lots of gamblers and investors. I’ll do that tomorrow if all goes well.

Friday, June 19, 2009

Who Pays, Who Uses, Who Decides?

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Yesterday I introduced the concept of utility, what something is worth to a particular person or company. Utility represents the importance of money, time etc. and can be relatively independent of such things as calculations of expectation. Let’s take it a bit farther today.

Suppose you’re the owner of a small business in need of new equipment. The equipment will cost about $100,000. Your gross income is about two million dollars per year. Of that, 1.8 million is committed to rent, supplies, and payroll. That equipment will cost half of what’s left. In addition you have to live with the equipment for years to come. How much attention will you pay to getting good equipment at the best price you can?

Now let’s change the scene a bit. Instead of a small business owner you’re a purchasing agent in a large company. On your desk at the moment are twenty requisitions for purchases that will cost between ten thousand and a million dollars each. Among those is a requisition for the same equipment needed by the small business above. How much time and effort will you spend getting the best price and making sure the equipment is the best you can get for the money?

Almost certainly the small business owner will pay a lot more attention to this purchase than will the agent in the large company. In the small business $100,000 represents half of the available monetary utility. To the purchasing agent it is a miniscule fraction of what he spends every year. Furthermore, the agent won’t have to live with that equipment. In fact he probably won’t even know how well it works once it’s installed. For the purchasing agent, the actual use of the equipment probably has no utility whatever. However for the business owner the use of the equipment has a high utility, in fact the very existence of his business may depend on it.

Does this mean that large companies are doomed to pay inflated prices for inferior equipment? Not at all. Those large companies that move decisions to the lowest level feasible can get the advantages of good decisions made by people motivated by high utility of the outcome. The wise company will shift most of the purchasing decision to the manager of the department where it is to be used. A purchasing agent can help by using his industry contacts and knowledge to get the best price, but the department that actually uses the equipment should have the biggest say in the matter.

The above illustrates some of the different stakeholders involved in almost any decision. For simplicity let’s concentrate on purchasing decisions, though this applies to decisions ranging from where to go on vacation to if we should invade Afghanistan.

First, there is whoever is going to use the purchase. This person or department derives utility from how well the purchase does its job and therefore has a high interest in getting something that works well.

Second, there is the person or company paying the bill. That person or group of people will have an interest in keeping the cost down.

Third, there is whoever is making the decision. Decision-making power alone, however, does not motivate to either keep costs down or to acquire something that works well. In fact if the decision-maker is neither paying the bill nor using the purchase he may well not care very much about either cost or effectiveness.

We can make a table of this as follows:

Decision-maker pays for purchase and uses equipment - Will be motivated to save money and get good equipment.

Decision-maker uses equipment but does not pay for purchase -Will be motivated to get good equipment but not to save money.

Decision-maker pays for purchase but does not use equipment - Will be motivated to save money but not to get good equipment.

Decision-maker neither pays for purchase nor uses equipment - Will not be motivated to either save money or get good equipment.

Clearly the person or group that both uses and pays for the equipment has the greatest motivation to both keep down costs and buy something that will work well. In fact, if it comes to a trade-off between cost and performance, they are also in the best position to evaluate that trade-off

It should come as no surprise that the best decisions are made when decision-makers, users, and payers are all the same person or small group of people. And of course the worst decisions are likely to be made when the decision-makers neither use nor pay for the purchase. Care in decision-making tends to be a direct result of how much utility the decision-maker has at stake. That is an important reason that decisions should usually be made at the lowest organizational level feasible, and made by someone with a vested interest in both cost and performance.

The astute reader will have already thought of an important area in which decision-makers neither use nor pay for what they spend money on - government. That is one reason government can be so inefficient. Its employees who make spending decisions seldom have much investment in the money they spend; after all it’s not their money. Neither do they derive much utility from the use of what they buy with that money. The government employee who buys anything from a gross of paper to an army tank is not spending his own money and is unlikely to use either the tank or the paper. His utility comes not from the money he spends or the purchase he makes, but from the raise or promotion he gets for following procedures. If he has an opportunity to get a better product or a lower price, he may do so, but only if he can do it within the rules imposed on him.

“But how about local governments?” you ask. “Surely their employees have more motivation to spend wisely. After all, their neighbors see the results and don’t want their local taxes wasted.” That was the case years ago, when local governments spent mostly local tax money. It is not the case today. Local governments get much of their financing from state and even federal funds. They tend to see it as free money, money that costs them nothing in terms of utility. In fact I remember a county commissioner telling me that he thought it was his duty to get as much federal money spent in the county as he could, regardless of how efficiently it was spent. That man was reputed to be a fiscally conservative republican!

We have a similar problem with government regulation. Some regulation is necessary of course, but it is easy for regulators to go overboard. They do not spend their own money to hire enforcement officers, and the burden of following those regulations falls on someone else, not them. They are able to impose loss of utility on others at no loss to themselves.

As long as decision-makers in government and business have little interest in saving money or getting a good return for what they spend, we will have waste. The only way to get better decisions is for the decision-makers to have a stake in both the cost and the outcome of their decisions. They must put their own utility at on the line.

Thursday, June 18, 2009

What’s it to Ya’?

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Let’s return to Bill, our would-be investor from yesterday? We figured out that his expectation was a gain of two bucks a share if he buys stock in that mining company. However in that greatly simplified example, he will not gain two dollars a share. Either he will lose $10 per share or he will gain $20 per share. Should he buy the stock and if so, how much? Obviously that depends on his situation. In fact it depends on both his financial status and his emotional make-up. Beyond the calculation of expectation he should ask himself two questions:

First, “Can I afford to lose that money if the stock goes down?”

Second, “How much will I worry about losing money?”

Now if his last name is Gates (assuming of course that he is the Bill Gates), he could buy thousands of shares and not lose sleep over it. If he loses, it will hardly dent his resources. However most of us don’t have such deep pockets and the loss of a few thousand dollars would take a major bite out of our budgets. That is one reason such investments may be wise or unwise, depending on the person. While such things as gains or losses can be calculated in isolation, that simple math doesn’t tell the whole story. The effect those gains or losses is very personal. This brings us to another technical term, “Utility.”

In the technical definition, utility is what something means to a particular person or company. For Bill Gates, the utility of $30,000, or even $300,000 is minimal, probably not even measurable. If he loses that much it will not affect the food he eats, the clothes he wears, or his lifestyle. Of course that also means that a gain of that much likewise has minimal utility to him. It would make no difference in his life. Not so for most of us. A loss of $30,000 would force us to modify our way of living while a gain of that much would allow a change of lifestyle. A gain or loss of $300,000 would have an even greater effect. That money has a much greater utility to us than it would to Bill Gates, even though the dollar amount is the same.

Utility, how much a gain or loss really means, depends on the individual at least much as it depends on what is actually gained or lost.

The other side of the utility coin is the emotional part. We tend to remain aware that we could lose, and that can be worrisome. A friend once said to J.P. Morgan, “Worry about my stocks is keeping me awake nights. What should I do?”

Morgan’s reply was simple and profound. “Sell down to the sleeping point.”

That was good advice, and Morgan didn’t even need to know how much his friend had invested. He just knew that it was more than that particular person was comfortable with.

How able are we to tolerate risk and uncertainty? This varies from person to person. Some of us are able to sleep soundly while a major part of our resources are at risk. Others are greatly bothered by much lower risks. Many stockbrokers have tests to help them evaluate how risk-adverse a client is. However we don’t necessarily need “official” confirmation of our own tolerance. If an investment or other action makes us uncomfortable and disturbs our sleep, we are beyond our risk tolerance level. If feasible, we should reduce our exposure to whatever is bothering us. The utility to us of what we’re doing does not justify the emotional price we are paying.

Another important aspect of this is that utility of a gain tends to be less than the utility of an equivalent loss. Part of this is the psychological effect I mentioned before that emotionally we feel a loss more than a gain. However there is also a very real non-psychological effect.

Suppose you have retirement savings of $500,000. You invest some of it and it pays off, big-time. You gain $250,000. You’re delighted, you now have $750,000 and that gain represents one third of your savings. You may retire a bit earlier than you planned or decide on a different retirement lifestyle.

Now suppose that several investments went terribly wrong. Instead of gaining you lose that $250,000 leaving you with only $250,000 for retirement. Now what you lost represents 100% of what you have left! You will have to make a big change in your expectations, maybe delay your retirement and not be able to do what you planned after you finally do retire. The utility of that loss is greater than the utility of the equivalent gain. The amount you can reasonably improve your lifestyle with an extra $250,000 is less than the amount of cutting back you will have to do if you lose that much. In addition, it is psychologically more difficult to adjust to a lower standard of living that to move up the economic scale.

Utility is one more thing we should think about when deciding on anything risky. We may or may not do some mathematical calculations, but we should think about it. We can think of how likely a loss is and what it will mean to us if we do lose (or gain). With a sound understanding of that, we are more likely to make good decisions.

Of course there are ways to help reduce risk while still getting many of the benefits from the “Nothing ventured, nothing gained” approach. I plan to discuss some soon. However there is another aspect of utility I want to talk about first so I’ll do that next.

Wednesday, June 17, 2009

What Do You Expect?

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Bill is considering investing in a mining company whose stock is selling at $80 per share. After careful research he determines that there is a 60% chance the stock price will drop and only a 40% chance it will go up. He decides to buy it anyway. Should we lock him up where he cannot hurt himself?

If you said, “we don’t have enough information to answer the question,” go to the head of the class. In fact it may make perfect sense to make such an investment if:

a. The investor can afford the loss, and

b. The likely loss is small but the possible gain is large.

Suppose for example that the stock has a 60% probability of dropping by $10 per share and a 40% probability of rising by $20 per share. Bill may find it worth taking the risk of a $10 loss in order to have a chance at a $20 gain.

This brings us to a concept described by the technical term, “expectation.” Expectation includes probabilities of gain or loss and the likely result in each case. To calculate expectation we simply take the probability of each possible outcome and multiply it by the result of that outcome. Then we add up all those values to get the total expectation. In the case of Bill’s stock purchase, we have a 60% probability of losing $10 per share and a 40% probability of gaining $20 per share. Total expectation is then:

0.6 X (-$10/share) + 0.4 X (+ $20/share) = -$6/share + $8/share = +$2/share
(Note the minus signs in there.)

Bill’s expectation is a gain of two bucks a share. If he can afford the loss, he may decide that the risk is worth taking.

This adds more science to the question of when we should take a risk and when we should avoid the hazard. We’re seldom 100% confident of the outcome of any decision. However by considering both the likelihood of each outcome and the effects of that outcome we can give ourselves a better chance to get what we want. If you’re considering a new job you might think about how likely it is to work out the way you want it to. Then you can think about what you will gain if it does work out and what you will lose if it doesn’t.

If you’re mathematically inclined you might even put some numbers on those probabilities and outcomes. If not, you can make better decisions by just thinking about the different possibilities. How likely is each outcome and how desirable is it? You can do the same with many decisions such as buying a new home or car, where to go on your vacation etc.

Now returning to our mining stock example, that was oversimplified of course. Stock prices can change by almost any amount, not just $10 or $20. It might lose $2.13, gain $5.84, or lose or gain most any other amount. If Bill does a good analysis he will consider the probabilities of all possible changes in the price of that stock. Such an analysis is quite mathematical and beyond the scope of this blog, so I’ll let it rest there.

However the multiple possible outcome issue does have similarities with other types of decisions. Most have lots of possibilities to consider. The new job may not work out exactly as you expected, but it may still provide enough satisfaction and income to make it worth the change. Or the job may be bad enough to make you wish you had not made the change but still might provide enough income to support your family. You just need to be careful enough to consider the possibilities.

Such decisions may be about your work life, investing money, or supporting a government bailout plan for the economy. In almost all cases there are many possible outcomes, some good, some bad, some great and some terrible. For major decisions it can be valuable to actually calculate the expectations. Even if we don’t do the math, just thinking about it will help us make better decisions. That will help in our personal lives, our family lives, our work lives and our effectiveness as citizens.

“But wait!” you say. “It can’t be that cut and dried. Get out the calculator and determine which way to decide? I don’t think so.”

You’re right. There is another important aspect of this which I’ll discuss next time, one that depends heavily on individual situations, personalities, and temperaments. However the above is enough for today.

Tuesday, June 16, 2009

To Risk or Not to Risk

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“Do no harm.” As discussed yesterday that is the first rule of rescue. However that rule does need some moderation, the most obvious exception being if the risk of inaction is extreme. For example if a car is on fire, it makes sense to do whatever is feasible to get the occupants out. In that case, the risk of spinal injury is preferable to the certainty of a painful death. By doing nothing potential rescuers would do no harm, but they wouldn’t do any good either. The problem of course is how to decide when to take a risky action and when doing nothing is appropriate.

That question faces us in many of life’s situations. Should we take a new job, perhaps in a different location? Invest in the stock market? Marry? Have children? All have risks and the “Do no harm” motto would imply that we should avoid the risk. The job might not work out, leaving us worse off than before. Our investments might lose money. A marriage may end in early death or disability of a spouse or in divorce. Children might turn out to be expensive delinquents.

However all those risks have their positive sides as well. We face a situation of “Nothing ventured, nothing gained. The new job might be rewarding, both financially and in terms of satisfaction. The investment might pay off handsomely. Marriage and children might increase our happiness.

That gives us two incompatible mottos, “Do no harm,” and “Nothing ventured, nothing gained.” Each has its uses but how do we reconcile them? Clearly there are risks to avoid and risks worth taking. How do we decide? One way is to consider what are technically known as “alpha” and “beta” risk (also known as type 1 and type 2 risk).

Alpha (type 1) risk is what we usually think of as risk. It is the risk that something we do will cause a problem. We pull the accident victim from her car at the risk of causing paralysis. When we make an investment, alpha risk is the risk that we will lose some or all of the money invested. “Do no harm” pays a lot of attention to alpha risks.

Beta (type 2) risk is a bit subtler. It is the risk that we will forego some good by not taking action. If we do not pull the accident victim from her car we may not save her from the fire. It is the risk that if we do not invest, we will forego the profit we might have had. If we don’t take the new job, marry or have children we forego the benefits they might have brought us. “Nothing ventured, nothing gained” considers the beta risks.

Now a blog is not the place for a mathematical treatise on the probabilities involved in alpha and beta risks. However it is a good way to communicate the concepts of these risks. We’ve already mentioned some examples but a couple of other situations may be instructive.

Consider a search and rescue team about to head into the wilderness to look for a lost hiker. Until they find him they won’t know if or how seriously he is injured. They don’t know what medical equipment they will need. Now they could consider only the alpha risk that if they find him they won’t have the needed gear. They could go equipped to deal with bleeding, back injury, fractured limbs etc. By carrying all that stuff they have a low alpha risk of not being able to provide proper care once they find their subject. The problem: that equipment will add weight to their packs and slow them down.

On the other hand, that team may look at the beta risk. If they do not move fast they will not be able to find the subject quickly. By carrying only what they need for their own safety they can move faster. They might even find that the subject is not injured and needs only someone to show him the way back. By going lighter they lower their beta risk of not finding the subject quickly. That however comes at the expense of a higher alpha risk of not being able to treat a seriously injured subject. Most rescue teams lean toward reducing beta risk, carrying some basic first aid gear, but not enough to slow them significantly. By so doing they accept the alpha risk that they will find the subject and not have the right gear to treat his injuries.

An example of something more likely to affect large numbers of people is that of a company that has developed a treatment for some disease. The alpha risk to the public is the risk that releasing that treatment will cause harm to patients. The beta risk of not releasing it is the risk that patients who might have benefited will not be helped.

Of course there are also risks to the company. If they release the treatment and it has previously unknown bad effects, the company will have to pay reparations for the harm done. Those reparations might even bankrupt the company. Bad medical treatments tend to get lots of publicity as well. Even if the company survives, that publicity will cause financial damage. The company’s beta risk, on the other hand, is limited to the risk of loss of income if the treatment were released and worked well.

“But wait,” you ask. “Why not just test the medication until they know if it is safe?” That would be nice, but such testing takes time. What about the patients who might have benefited during that time? If the medication treats some minor malady, such as the common cold, that would not be much of a problem. But what if the treatment is for cancer, AIDS or some other potentially deadly disease? How many people might die during the testing process? By not releasing the treatment, that company has accepted the beta risk that people who might have been cured will die.

In our society we tend mostly to pay attention to alpha risk. If you lose money in the stock market you will feel terrible about it. In fact psychological studies have shown that the bad feelings from loss exceed the good feelings that might have come from a gain. In the medical field, companies get sued for treatments gone wrong. However nobody ever got sued for failure to release a medication that might have cured someone. In fact, the treatment not released is invisible to the public and we never know who it might have helped.

Fortunately, most of us do not have to decide on such things as release of medical treatments. Our decisions are usually less momentous, at least for the country as a whole. However they are important to our own lives. Investment is one example, but we also face alpha and beta risks in other cases. A new job, especially in a different location? Marriage? Children? Those decisions come with alpha and beta risks.

This life is risky and we can never be 100% sure most decisions will work out. However by thinking carefully about what we stand to gain or lose and how likely those gains or losses are, we can improve our decisions and live better lives. In my next blog I intend to expand on this somewhat, adding more tricks from the decision-making consultant’s toolbox.

Monday, June 15, 2009

Don't Just Do Something, Stand There!

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“Get me out of here! Get me out of here!” The young woman was trapped in her smashed car, screaming from panic and the pain of a broken leg. Two burley bystanders forced the door open and extricated her. The panic subsided and she no longer felt the pain of her broken leg. That “improvement” was terrible. Her lower spinal cord was damaged by the twisting required to get her out of the smashed car and she would never use her legs again. Her “benefactors” were fortunate that a Good Samaritan law protected them from lawsuits. However they had to live with the knowledge that a fellow human was paralyzed because of their actions. Had they waited two minutes, a fire truck would have arrived with equipment and trained people. The woman would have been rescued correctly and would have retained the use of her legs.

In many human affairs the most difficult task is to do nothing. Watching a fellow human scream in pain or fear. Standing by as a child suffers the consequences of his actions. Refusing to use the force of government to provide a quick fix to economic problems. All such inactions expose us to the charge of being heartless do-nothings. The temptation, often nearly irresistible, is to do something, even if it's wrong. It is a temptation we must learn to resist. As a search and rescue volunteer I've learned that the first rule of rescue is “Do no harm.” That rule is not limited to search and rescue but also applies to medicine and many other human activities, including parenting and government.

In parenting, it's easy to feel sorry for our children. Suppose a son's ball breaks a neighbor's window. It is tempting to think that we are showing love to the child by paying for the repair instead of demanding that the son pay. After all, it may take the son weeks or even months to earn the required amount of money, while that money may be only a fraction of a parent's income. But what has that child learned from the experience? “No need to be careful, Mommy or Daddy will take care of me. I'm not responsible for the fact that I disobeyed and played ball near that window.” If not corrected, that attitude can grow with the child to such thoughts as “I'm not responsible for losing my job, that mean boss just doesn't understand that I'm not a morning person and can't be expected to be at work on time.” The child may end up crippled in attitude and emotions, quite as effectively as the woman in the car wreck was crippled by her misguided rescuers.

In medicine, physicians regularly face patients who demand antibiotics for viral infections. If the doctor refuses, the patient, or patient's parent, is likely to complain to everybody he knows and take his business elsewhere. The easy way out is to just prescribe those antibiotics, even though they have no effect on a virus. However by so doing the doctor becomes complicit in the creation of resistant strains of bacteria.

The temptation to take inappropriate action is perhaps nowhere stronger than in government and politics. Any national leader who stands by in the face of what appears to be a serious problem will almost certainly be called a do-nothing and is not likely to be re-elected. If he takes action people may hail him as a decisive leader, counterproductive though that action may turn out to be. In fact it is often easier for a leader to take credit for the supposed benefit of an ineffective program than it would be to explain why it was better to take no action at all.

This is especially true of economic problems, though it was not always so. In times past we lacked the quick transmission of news that we have today. Lacking such instant information, voters did not instantly know about national economic issues and hence were much less likely to pressure government officials to solve them. For example in 1907 the country faced a recession which included a run on the Knickerbocker Trust Company. That bank was forced to close, then banks throughout the country reacted to the “panic” by restriction of payments. That imposed a serious inconvenience on depositors and borrowers. However the government did not intervene and the whole recession only lasted 13 months, with the severe phase lasting only half that long. Knickerbocker Trust re-opened in March of 1908.

Contrast that to the “Great Depression” which which started with many similarities to the recession of 1907. Franklin Roosevelt and his administration responded with all the power of the federal government. That one lasted over ten years and ended only with the start of World War II. Though Roosevelt claimed credit for getting the country out of that depression, many economists (including at least one Nobel winner) are convinced that government action prolonged and worsened the problem. That action moved responsibility from individuals and families to a growing government. It also diverted resources from individuals and companies to the government for the benefit of those in need. While the intent was good, the results were at least questionable.

Today we face a similar situation. We have serious economic problems, created in part by government pressure on banks to provide mortgages to people who didn't qualify for them, and in part by business people and others who made dumb decisions. As a “solution” the federal government is directing tremendous resources to various programs to bail out the foolish and the unfortunate. Those resources are not being created by magic, government cannot do that. Instead government is diverting citizen income and borrowing against future generations in an attempt to solve this problem. I for one am convinced that those measures will prolong and worsen the problem. In fact this recession has already lasted longer than the one of 1907 which resolved itself without government intervention.

Indeed, there are similarities between the current government action and the precipitous acts of bystanders “rescuing” an accident victim. We've had action without adequate analysis as for example when the president managed to get a bailout proposal passed before our representatives even had time to read it. Many, even some in his own party, are now realizing that the program is not working. That should be no surprise; action without adequate thinking almost always causes problems instead of solving them.

Sadly, the president is now urging more government action without taking time to evaluate all aspects of the program. He is claiming that health care reform is urgent and must be done immediately. That sounds again like a rush to judgment, almost a panic mode of decision-making. Yet he has not explained just why it is so urgent now. Why cannot we take a few more months with the current situation to make sure we do things right?

Can our economy survive the assault of our well-intentioned government? I hope so. We do have great resources in this country, especially our entrepreneurial people if they are unleashed. Adam Smith's comparison may be apt. He likened the economy to a body that recovers “in spite, not only of the disease, but of the absurd prescriptions of the doctor.” Remember that Smith lived in the 1700's when a typical doctor's prescription included bleeding the patient. I rather suspect that many of our government remedies today are the economic equivalent of taking a pint or two of valuable blood from a sick person.

As citizens we need to ask for restraint and thought, not precipitous action.

Friday, June 12, 2009

A Keen Eye for the Obvious

Back when I was a young’n in New Mexico, it was a mild insult to tell someone, “You have a keen eye for the obvious.” That phrase was usually used when somebody stated something everybody already knew or should have known. OK, I’m going to plead guilty to having a keen eye for the obvious. Sadly, I must also state that most of our national leaders seem quite blind to the obvious, making it necessary that we remind them of a very apparent problem they are studiously ignoring. I’m speaking of our national energy policy or lack thereof, and the possible consequences of that lack.

Energy is something we absolutely must address in the US. It is an economic problem when we import so much of our oil. However it is even more important as a national security issue. Much of our energy comes from parts of the world ruled by tyrants who do not like us, and where governments are not very stable. Just one of those tyrants could throw the entire western world into an economic tailspin and possibly at the same time weaken our national defenses.

Can you imagine what would happen if, for example, Iran were to go to war with its neighbors and cause them to stop or curtail oil shipments? All it would take is closing the Strait of Hormuz to make a major dent in world oil supplies. Energy prices would go through the roof and our economy would tank.

Worse, if we needed that oil for national defense we might have to curtail our response to a military attack. How would we defend against some rogue state like North Korea if we didn’t have enough fuel for our tanks, warships, and military aircraft?

It might not even take a national ruler to cause such problems. If the Islamic fanatics get the right weapons they could disrupt our oil lifeline.

All this is pretty obvious when you think about it. Yet many in congress and the administration seem not to have thought about it. Our “energy policy” in this country seems to be based on what we will not do rather than on what we will do. We will not drill for more oil. We will not build new refineries. We will not put windmills where Senator Kennedy can see them from his vacation home. We will not build nuclear plants. About the only sources of new energy allowed are a few things like solar cells. Those help somewhat, but it will be a long time before they come anywhere near meeting our energy demand.

Of course conservation is also mentioned and is important. However we aren’t going to conserve our way out of our dependence on foreign oil, at least unless we all stop traveling and turn our thermostats down to about 50 in the winter. Those who think conservation will solve the problem should look at what it realistically might save. Then they should check that against our energy needs, both now and in a hopefully growing future economy.

In fact there is almost certainly no single solution to our dependence on foreign energy. Conservation must play a part but so must new energy sources like wind, solar, geothermal, and tar sands. We must also expand domestic production from current sources by opening up more areas to drilling and by allowing more refineries and nuclear plants. There is something there to offend almost every special interest, but we must not let those special interests determine our policy. We will all have to conserve. Kennedy may be able to see a windmill from his vacation home. The nuclear Nervous Nellies will have to accept some modern nuclear power plants. We will have to allow offshore and other drilling.

All this will take time so we should start now. President Clinton objected to some increased drilling because he claimed it would take ten years to pay off. Well, the drilling was prohibited and ten years later we were in an energy crisis. Had drilling been allowed ten years earlier, that crisis would have been at least somewhat ameliorated.

I’m reminded of a statement attributed to Napoleon. He wanted to plant trees along a certain street to beautify it and provide shade. An aide objected, “But sir, it will take 20 years to get the benefit of those trees.”

Napoleon is said to have responded, “In that case, plant them immediately!”

Like Napoleons’ trees, our energy programs will take time to pay off. That is all the more reason to start now – we need the results as soon as we can get them. Now is the time to initiate a multi-pronged attack on this problem. It is near criminal for the president and congress to ignore it. We can understand the reasons of course. Real solutions to the energy problem will step on a lot of toes. However the risk of being cut off from our foreign energy sources demands an all-out response.

Sadly, few in congress or the administration have the guts to stand up to the special interests blocking our improved energy production. I fear we will pay for this when some mid-eastern tyrant causes more trouble. The only solution is for the citizens to hold the politicians’ feet to the fire on this subject.

Thursday, June 11, 2009

Knowing the Enemy

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Terrorism, especially that committed by Islamic fanatics, continues to be a threat to the world. For that reason instead of presenting my own thoughts today I’m presenting a book review. Though I recommend everybody read the book, I believe this review contains good information that everybody should know about this problem.

Knowing the Enemy, Jihadist Ideology and the War on Terror by Mary Habeck. Yale University Press, New Haven & London, 2006. 177 pp plus notes, glossary and index.

Mary Habeck is an associate professor, School of Advanced International Studies, Johns Hopkins University. I thought that I knew and more or less understood the motivations behind the attacks on embassies in Africa, the USS Cole, the 9-11 attacks etc. However this book showed me that my previous understanding only scratched the surface.

Habeck is careful to distinguish between most of Islam and the small group of fanatics who carry out the terrorist activities. She shows that people like Osama bin Laden draw on out-of-mainstream understandings of Islam to create a version of the religion that sees violence against any who reject it as a positive good. Their ultimate objective is Shari'a rule of the entire world, beginning with Islamic lands. And their definition of an Islamic land is any land ever ruled by or paying tribute to an Islamic ruler. That includes Spain, the Balkans, even Russia.

In the minds of those fanatics the very existence of any system of government other than the caliphate is an assault on Islam. That is because it tempts people to not join the "true" religion and government. Therefore they hate every country on earth, even countries most would regard as Islamic. In their view true Islam requires a land ruled by the caliph strictly by Shari'a, God's rule. To them any other form of government is idolatry since it puts man's will before that of God. They regard democratic self-rule as a serious evil.

The ultimate objective of the jihadis is a worldwide caliphate in which Shari'a is the law of the land. That is their definition of freedom and nothing else will do. They believe that democracy, kings, and all other non-Islamic forms of government will eventually be replaced as people see how wonderful life is under the caliphate. They regard any western presence in Islamic land as an assault. Bin Laden even considered the US aid to Somalia in the early 1990's as an attack because it put representatives of an infidel government on Islamic land. This may be difficult for the western mind to understand, but understand it we must if we are to protect ourselves from the fanatics.

We must also understand that this viewpoint antedates the establishment of Israel and the oil states. It cannot be blamed on Israel, though that country is today regarded as the start of western colonization in Islamic lands.

There is a lot of what I would term groupthink and wishful thinking among the jihadis. For example, bin Laden believed that the 9-11 attacks would cause Muslims world-wide to rise up and join the "true" Islam and that the US would fold and leave Arabic and other Islamic lands. When his predictions did not materialize he had to change his tune but that has not changed the minds of the fanatics. They just ignore the fact that his predictions did not come true. They are not what we would consider reasonable people and will not be deterred by reason or even by battlefield losses.

The Islamist mindset is briefly summarized as, "Because history is dominated by the struggle between good and evil, jihadis assert that all Muslims are called by God to participate in the fight physically if possible, or at least by word or financially acting as God's sword on earth to deal with the evildoers and their wicked way of life." This becomes a duty even if such a fight makes no actual progress toward the caliphate. In their view, if a jihadi dies while killing or attempting to kill the enemy, he gets a reward beyond comprehension in this world.

With the jihadis having the described mindset, it is easy to see why they are such a danger. We cannot reason with them, nor can we gain by negotiations (except for brief periods while they re-arm). Any treaty they make they consider useful only to advance their cause. Furthermore, they believe they can break treaties pretty much whenever it suits their purpose to do so.

Habeck briefly suggests some things we can do to effectively fight the jihadis, though she is clear that a complete plan is beyond the scope of her book. She believes (and I agree) that we must deny them a land to rule as we did in Afghanistan. We must intercept their finances to deny them the more potent weapons they crave. And we must counter their preaching and recruitment by showing what a marginal part of Islam they are.

I strongly recommend this book.

Wednesday, June 10, 2009

Hiring a Justice

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Hiring decisions can be difficult or relatively simple, depending on the nature of the job. It can be easy to hire someone to pick up litter in a park; almost anyone can do that. Even if the person hired does a poor job no long-term damage is done and it’s easy to replace him. However as the job gets more complex, the difficulty of finding the right person increases, as does the potential damage he can do. A corporate chief executive officer can ruin a company in a hurry. There are not many people available who can and will do the job right. For that reason companies looking to hire a CEO usually take a long time and carefully evaluate potential candidates.

The hiring of a justice of the Supreme Court is more important than hiring a corporate CEO, maybe even more important than hiring a president of these United States. Justices receive lifetime appointments and are essentially accountable to nobody. A vote of five justices decides a case, making it the law of the land. There is no appeal. That makes each justice effectively one fifth of a dictatorship. It is a position of extreme trust and with the ability to do a lot of damage. This is not a position for which we can take a chance and replace the person in a few years if we don’t like the outcome. Selection of justices has to be done right, and done right the first time.

That means we should not just make sure there is no evidence against a potential justice. We must make certain that the person is qualified. This is not a criminal trial in which the appointee is innocent until proven guilty. Instead all candidates should be considered unqualified until shown beyond reasonable doubt to be qualified. The burden of proof is on the candidate and his or her supporters. I repeat here the five requirements I regard as mandatory for such justices:

1. Absolute integrity.
2. Commitment to the constitution and constitutional law.
3. Ability to subordinate personal belief and preference to the constitution and the law.
4. Intellectual ability to weigh issues and to decide wisely based on evidence, fact, and logic.
5. Sound knowledge of the law and the constitution.
I’ll be up front about the fact that I do not believe Judge Sotomayor is qualified to be on the Supreme Court. In fact I think there is evidence she does not meet two of the above requirements. She does seem to have great intellectual ability and a sound knowledge of the law so she probably meets requirements 4 and 5. I have no knowledge of her integrity so will hope that suitable investigation has been done on that score. However her commitment to the constitution and her ability to subordinate personal preference to that constitution appear to be lacking. Sadly, she seems willing to apply her stated racist views to court decisions.

The most cited case of this was Ricci v. DeStefano. This New Haven, Conn case involved firefighters denied promotions they had qualified for simply because not enough minorities qualified. I discussed that case in my last blog so I won’t repeat it here. I will, however, reiterate that Sotomayor’s acceptance of what amounts to a racial quota shows a disregard for the equal protection clause in the 14th amendment to the constitution. She failed to defend the constitution in that case.

Sotomayor is also a member of the National Council of La Raza, a Hispanic organization that strongly supports “affirmative action.” What affirmative action has come to mean in practice is that one group is passed over for employment or promotion in order to fill the quota of minorities. A friend of mine is a manager in a large company. He tells me that their human resources department regularly refuses to let him hire the person he regards as most qualified. The reason? Simply because that person happens to be a white male. His company has been cowed into taking those measures because both government officials and many independent civil rights organizations regard affirmative action as requiring de facto quotas. That is a clear violation of our constitution.

The most important job of the Supreme Court is protection of the constitution. Any justice who allows his or her own preferences or beliefs to supercede the constitution is a danger to the country. We need justices who can make decisions they hate and disagree with but which are what the law and constitution require. Oliver Wendell Holmes was such a justice and has left a legacy to be worth emulation. Will Sotomayor do that? Sadly, her record indicates otherwise.

We should all contact our senators and urge them to carefully evaluate Judge Sotomayor’s beliefs and judicial qualifications, especially her commitment to the constitution. If she fails the test of commitment to the constitution, she should be rejected.

Tuesday, June 9, 2009

The Gander Test

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There is often controversy over just what is and is not racial or sexual discrimination. Is it discrimination to give preference to someone in hiring or promotion? How about admission to a university? These questions have created lots of controversy and I’m afraid that too often our laws and court decisions have only confused the issue. However there is a clear test that can cut through the fog. It’s what I call the Gander Test.

Sauce for the goose is sauce for the gander. That old saying provides the basis for the Gander Test, a sure-fire means of determining if a decision or action is discriminatory. The test is simple, quick and as far as I can tell, 100% accurate if applied honestly. It consists of simply interchanging “goose” and “gander” roles in our thinking and discussion. If we think something might be discriminatory, we switch roles of the affected parties. If it is discrimination after the switch then it was certainly discrimination before the switch.

For example, suppose you are a manager who needs to hire someone. You have two acceptable candidates for the job, one a white man, one a woman or minority. You decide to hire the white man but someone asks if that was because of your bias. Or maybe you decide on the other person and someone asks if you were overcompensating just to get racial balance or meet a quota. How can you be sure you decided fairly? All you have to do is look at what you would have done had the qualifications been switched. What if each had attended the school the other in fact attended, worked where the other in fact worked, had the references the other in fact has, etc? Would your decision change if the qualifications were reversed? If not, your decision was almost certainly based on bias.

This can also apply to the case of the New Haven firefighter promotion test (Ricci v. DeStefano), so prominent in the discussion of Judge Sotomayor. Nobody was promoted because not enough minorities qualified for promotion. What if the situation had been reversed? What if, on a similar test in some fire department, 80% of Blacks qualified for promotion but only 40% of Whites? What if the city said, “we are going to nullify the results because not enough white people qualified.” Nearly everyone would object and call it racism. Jesse Jackson and Al Sharpton would organize demonstrations and protests. Editorials across the country would condemn the action. Almost certainly the courts would throw it out. Switching positions of goose and gander (Whites and Blacks in this case) allows us to see the discrimination clearly.

What’s that you say? Surely such a thing couldn’t happen, we would never expect Blacks to do better on any employment test than do whites. Think again. If the test involves running with a football or getting a basketball in a hoop, whites are seriously under-represented. Both the National Football League and the National Basketball Association have a much smaller percentage of white players than would be expected from the percentage of whites in the general population. What should we do about it? Should we force professional sports to use race-balancing measures when they decide which college players they are going to hire? Nearly everyone would object and call that racial discrimination. Jesse Jackson and Al Sharpton would organize protests, justifiable protests I might add.

What if a candidate for high office were to say, “I would hope that a wise white male with the richness of his experiences would more often than not reach a better conclusion than a Latina woman who hasn’t lived that life”? Again everybody would recognize this as bias. In fact many did recognize bias in Judge Sotomayor’s equivalent statement, “I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life.” Again the Gander Test shows the clear bias in the original statement. Even President Obama who appointed and continues to support Sotomayor recognized the problem, calling it a poor choice of words. (Though the fact that she made essentially the same statement many times over a period of at least 15 years would lead us to the conclusion that it represents her real belief, not something she said by mistake.)

But wait, you say. Is there no constitutional way to help those minorities who don’t have the same education and opportunities as the rest of us? There is as long as the efforts to help are based on disadvantage and not on skin color. What if a state identifies poor schools and institutes a program to improve them, or to allow students from those schools to attend private or charter schools. That would pass the Gander Test. If the bad schools are mostly black (as so many are) we just imagine if it would be constitutional to allow special efforts to improve education of white children in bad schools. The answer is yes it is. The program is aimed at the disadvantages of the children, not at their skin color. In fact a case might be made that equal protection under the law requires that states provide equivalent educational opportunities to children in poor and rich neighborhoods.

The 14th amendment to the constitution requires equal protection under the law for everybody, regardless of race. Giving white people special protection or other advantage violates that clause. So does giving special protection to Blacks, Hispanics, or green people if they were to exist. It is the duty of our judges and elected officials to support that equal protection. It is also the duty of the citizens to encourage their “hired hands” to support such equal protection. We should all contact our senators and ask them to consider this when they vote on the confirmation of Judge Sotomayor or any other prospective judge.

Monday, June 8, 2009

Judge Sotomayor and the Firefighters

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Imagine yourself in the following situation:

Your favorite sports team just won a hard-fought and important game. Their months of practice and hard physical training practice paid off. The win puts your team in good position to win the championship so the players and fans are about to start celebrating. But wait what is this? The referee is signaling for attention. He asks for a microphone and announces, “The score shows that the team with the green jerseys won. However we believe that there should be more winning teams with white jerseys so we are nullifying the results and officially this game was never played. It will not count toward the championship.”

Or if you’re not a sports fan, imagine you’ve just completed a degree that qualifies you for the career of your dreams. Maybe it’s nursing, engineering, teaching or whatever you think would be an enjoyable and rewarding career. You got high grades and have been offered several positions. You take one of those jobs and go to the human resources department to do the paperwork for new employees. The HR manager takes one look at you and says, “Oh dear! We can’t have this! You have blonde hair and we’ve just decided that at least half of our new employees must have brown, black or red hair. We are canceling your employment contract. You call the other companies who offered you employment and find that they have similarly changed their requirements.

In either case I’m sure you would be incensed that people would change the rules after the game is over. In fact in some countries any referee who made such an announcement after a soccer game would put his life in danger. Yet many of our judges make equivalent announcements in employment situations. Sonia Sotomayor, nominated for the Supreme Court is one of those judges. In the case of Ricci v. DeStefano, she and other judges allowed the rules to be changed after the game was over. This had the sole objective of disallowing a win by a group they did not want to win.

New Haven, Conn. had arranged for a test to determine which firefighters would be promoted to captain or lieutenant. That test was carefully designed to be job-related, exactly what we would want is it not? All firefighters eligible for promotion had the opportunity to study and learn the needed material, then take the test and compete for one of eight lieutenant or seven captain positions. After months of study, the pressure of the test, and the anxiety of waiting, the results were finally announced – and promptly nullified. The rules had been changed after the game was over.

Why were the results nullified? There was no question of fairness, all test takers had the same opportunity to study (including one dyslexic who had to work extra hard but qualified for promotion in spite of his difficulty). Nor was there any question of applicability, nobody questioned if the test was in fact job-related. No, the nullification was because some people did not like the outcome. Not enough minorities qualified for promotion so all the hard studying of all test takers was for naught. After it was over the city decided that the game was never played because they didn’t like the results. That was racial discrimination, pure and simple.

I find it unconscionable that a city would do such a thing and that any judge would allow it to stand. Yet Judge Sotomayor and other judges did allow it, in spite of a clear constitutional provision that equal protection under the law shall not be denied. How can they claim that it is equal protection when people of one skin color are protected from failure while those of a different color are forced into failure?

In my mind, this type of decision should prevent any judge from being promoted, especially to the Supreme Court. One of the most important functions of that court is protection of the constitution. When a judge allows such a flagrant constitutional violation, that judge should never even be considered for promotion.

The constitutional provision should be enough for the courts to overturn New Haven’s discriminatory ruling. However there are good reasons why the city should never have made such a decision, even had it been constitutional.

First is the issue of fairness to employees and the resulting adverse effects on performance. Firefighters, like most employees, perform better and have higher morale if they believe they are being treated fairly. If that is not the case, they will have low morale and little motivation to improve their skills and to go out of the way to do an outstanding job. Why spend all that time in hard, boring study if your employer is just going to ignore your improved skills? Why risk your life to save someone in a house or car fire if your employer is going to promote someone on the basis of an irrelevant characteristic such as skin color?

Second, from the point of view of a citizen, what kind of firefighters and fire department officers do we want? Suppose you are having a heart attack, or trapped in a house fire or a wrecked car with gasoline leaking. A fire truck approaches. Do you care about the skin color of the firefighters aboard? I wouldn’t. I don’t care if they are black, brown, white or green with purple polka dots. Nor would it matter to me how many are male and how many are female. It would matter a great deal that they be competent and dedicated to their job. Any employment or promotion considerations beyond that are discrimination and risk my life.

Allowing racial discrimination in public employment not only violates the 14th amendment to the constitution, it is also unfair to those employees and puts citizens at risk. Any imbalance should be addressed at the education level, not by discriminating against qualified people of any race. Judges who approve discrimination should never be promoted and could do the country a favor by resigning.

Thursday, June 4, 2009

Summer Camping, Hiking, etc.

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OK, today I'm going to shift gears and discuss a topic quite different from previous blogs.

This summer millions of Americans will be ill-housed, ill-fed and ill-clad. They'll be out camping. As one who enjoys camping, hiking, climbing mountains and similar pursuits, I look forward to that type of activity. However as a search and rescue volunteer I can also expect some late-night calls when some campers and hikers get in trouble. Some will be lost, some injured but all the subjects of such missions will be need some sort of help. In most cases we are able to provide that help, but we never get there as soon as the subjects would like.

Might you be among those needing search and rescue help this summer? Of course you hope not, but it happens. If you are heading into the backcountry you will be wise to prepare. Don't be like the two women who took a day hike in the Columbia River Gorge one Saturday. They didn't tell anyone where they were going or when they expected to return. Monday morning co-workers reported them missing but authorities had no idea where to begin searching. Finally Monday evening someone spotted their car at a trailhead. Because it was nearly dark, the real search didn't start until Tuesday morning. They were finally found Thursday!

Nor were those women the only people to make such a mistake. Just this last Memorial Day a couple went on a day hike within a few miles of where those women got lost. They somehow got on the wrong side of the creek and could not get back for two days. Fortunately, other hikers happened to pass within earshot of them and called for a rescue. Had that not happened there is no way of knowing when or even if that couple would have been rescued.

Of course the ideal is always to avoid trouble (see below). However the unexpected can happen so preparation is important. Had those women lost and stranded people had an in-town contact, it is probable they would have been rescued within a day of getting in trouble. Hikers should always have such an in-town contact who knows:

1. Where they are going,
2. When they expect to return, and
3. Whom to call if they do not return on time (usually the sheriff's department in the U.S., except in national parks where it is the Park Service).

If you get lost or injured, nobody is going to go looking for you until you are reported overdue. Even then, searches are much more effective if rescuers know where to start looking. The more information an in-town contact can provide, the sooner we are likely to help you. If we have your destination and planned route, that can make it relatively easy. If we only know the trailhead, rescue will take much longer because there is so much more territory to search.

So please, when you go hiking or camping, have an in-town contact. And when you return be sure to let that person know you're back so he or she doesn't activate a “bastard” search, a search for a person who isn't really in trouble.

Now, how about other preventative measures? As mentioned, it is much better not to get lost in the first place. A full treatment of that is beyond the scope of a blog but I can provide a couple of hints:

First, how do you not get lost? The answer is simple: you avoid getting lost by knowing where you are. No that is not a joke, it is very serious advice. Know where you are all the time. Know how to get back, all the time. Most people who get lost just weren't paying attention to where they were and how to return. Pay attention, starting at the trailhead and continuing throughout your hike. Notice which way your route runs, what is around you, and all the recognizable things you see, hear, or even smell. Try to make a mental map of the territory.

Beyond that, there are lots of ways to navigate safely. They are described in various places, including my own book, Bringing Yourself Back Alive (available from my web site, www.hfl-llc.com). Have a map and compass, maybe even a GPS but most importantly know how to use them. No equipment is any better than your ability to use it or the actual use you make of it. I can think of several occasions when we've rescued people who had a GPS but either didn't know how to use it or just didn't use it properly.

Next, be prepared for conditions you might find in the outdoors. While there is little in the backcountry as dangerous as crossing a busy street at rush hour, the dangers there are different than what we face in the city. Most people know how to cross that street but few know how to navigate in a whiteout or how to avoid the danger of unstable terrain. Unless you are staying on well-marked, well-maintained trails you should get competent instruction before risking yourself in an unfamiliar situation.

My final and most important advice here is to always use your most important equipment – your brain. Be thinking and paying attention to your surroundings and to other safety issues. As a bonus, paying attention will help you enjoy the outdoors more.

So enjoy the outdoors, but do so safely. Be careful to know how to get back and how to deal with the unfamiliar dangers you may meet there.

Wednesday, June 3, 2009


At the risk of boring my readers (if I have any), today I'll re-emphasize and add a bit to the “Charisma” article from yesterday. This time I'll talk particularly about groupthink. Some of this will be repetition but, at least in my opinion, the problem of charisma and group think is big enough to justify repitition.

The causes of groupthink are many and diverse. The results, unfortunately, are more uniform - and nearly all bad. Groupthink is decision-making poison. It excludes consideration of useful information and analysis required for making good decisions. This can lead to disaster. For example one study showed that in 80% of helicopter accidents, someone aboard saw a problem but thought it wasn't his place to say anything about it!*

Two events from the Kennedy administration in the U.S. provide an excellent study of both the causes of groupthink and how to avoid it.** The Bay of Pigs invasion was largely the result of groupthink and turned into one of the worst foreign policy disasters in U.S. history. On the other hand, the Cuban missile crisis was treated much better, with specific attention to avoidance of groupthink. As a result, the missile crisis was settled with no shots fired.

Groupthink appeared in the run-up to the Bay of Pigs invasion in the following manners:

1. The president was so charismatic that his staff wanted to follow him. Staff members did not feel free to express opinions perceived as contrary to what Kennedy wanted. Of course they weren't always sure exactly what he wanted so at times they were really supporting their own best guesses about what he wanted.

2. Outside experts were excluded, ostensibly to protect secrecy (which was already compromised). No independent viewpoints sought or allowed. Intelligence contradicting the beliefs on which the decisions were based was available, but that information never made it to the decision-makers.

3. Limited purviews: Schlesinger, for example, felt that as an academic he would be presumptuous to bring up his concerns.

4. Illusion of invulnerability. The feeling was, "We are smart and we are automatically moral. Therefore we will succeed."

5. Illusion of unanimity. "Let's all support the president!" Staff members regarded it as important to be unanimous, to the point that they supressed their thoughts to achieve that unanimity.

6. Self-appointed mindguards. For example, Robert Kennedy told Schlesinger that everyone should get behind the president.

All that together added up to an apparently unanimous decision to carry out an action that failed miserably. And contrary to the working assumption, there was no way to blame it on renegade Cuban exiles, the whole world knew that the U.S. was behind the invasion.

It is impossible to know what would have happened had the administration sought and paid attention to other information or analysis, but it is highly probable that decision-makers would have seen the potential problems and called off the invasion.
The Bay of Pigs provided a painful lesson, but thankfully Kennedy and his staff members learned that lesson well. When the Cuban missile crisis arose, they took deliberate action to avoid groupthink.

Among the ways they did this were:

1. Kennedy deliberately absented himself from many meetings in order to avoid exerting undue influence over discussions.

2. Committee members themselves resisted pressure for unanimity and freely expressed their disagreements. Rules of protocol were suspended to allow frank and free-wheeling discussion.

3. Group member roles were defined to include being skeptical "generalists," charged with examining the problem as a whole. Purviews were not limited.

4. Subgroups examined the issues and were later cross-examined by other groups.

5. No opinion was regarded as gospel, either a group or an individual opinion. Nor was any opinion automatically dismissed.

6. Decision makers deliberately sought and considered all pertinent information, even information that went contrary to their preferred course of action.

7. The entire attitude was one of vigilant appraisal rather than groupthink.
The decision was still difficult and the outcome uncertain. In fact, Kennedy said that the people whose ideas were rejected were the lucky ones because they would be able to say, "I told you so." Thankfully that was not the case, the action taken (a blockade) solved the problem.

We can all learn from both the mistakes in the Bay of Pigs decision and the much better way the Kennedy administration handled the missile crisis. Groupthink seems to be a human tendency but we can fight it and win that fight. It is worth the effort, getting all reasonable information and using it will make for better decisions which in turn will make for better lives. We can ask ourselves if we are just following the crowd or if we have really properly considered major decisions in our lives.

*Charley Shimanski, "Risks in Mountain Rescue Operations: Part 3", _Advanced Rescue Technology_, April/May 2003, p47

**These two events and how the decisions were made are well described in Irving Janis's book, _Victims of Groupthink_.