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24 March 2009 | Draft

Cognitive Ballistics vs. Derivative Correlation in Memetic Warfare

Suicide bombing as a weapon of mass distraction?

- / -


Produced on the occasion of the G20 Summit (London, April 2009)


Introduction
"Cognitive ballistics"
Strategies of higher order
"Cognitive correlation"
Correlation dependency
Designing "silver bullet" confidence tricks
Conclusion
-- Conspiracy | G20 Summit | Non-linearity
-- Encompassing complexity | Memetic warfare

Introduction

Given the success with which the western-inspired financial bubble of "globalization" was so disastrously exploded, this is an exploration of the possibility that ensuring the strategic focus on suicide bombing as the epitome of terrorism has been the mistaken pursuit of a decoy. Such a possibility would be consistent with the recognized lack of imagination, and the quality of groupthink, associated with the pursuit of weapons of mass destruction.

The focus here is on the destruction of the financial system as an example of memetic warfare in a global knowledge society. It builds on the understanding of structural violence as developed by Johan Galtung (Violence, Peace, and Peace Research, Journal of Peace Research, 1969) who distinguishes between physical violence and structural violence. Physical violence is for the amateur, using weapons in order to dominate. For Galtung, structural violence is the tool of the professional employing exploitation and social injustice to achieve domination. In this sense the question is whether the collapse of the financial system was brought about by professionals who had tricked those complicit in the globalization process into acting like amateurs in its defence.

"Cognitive ballistics"

As defined in Wikipedia, ballistics is the science of mechanics that deals with the flight, behavior, and effects of projectiles, especially bullets, gravity bombs, rockets, or the like; the science or art of designing and accelerating projectiles so as to achieve a desired performance.

The past decade has seen a cognitive focus on linear thinking through which it has been assumed that the higher dimensionality of globality could be encompassed. This argument is developed elsewhere (Engaging with Globality -- through cognitive lines, circlets, crowns or holes, 2009), specifically in that part dealing with "points" and "lines" (Engaging with Globality through Cognitive Realignment: making points and aligning a target, 2009).

A prime feature of such linear thinking has been binary logic which has emphasized the focus on various forms of polarization, notably in relation to global governance and the clash of civilizations. This logic is evident in the succinct statement through which the Coalition of the Willing was assembled in response to 9/11: "You are either with us, or against us". This approach has been contrasted with more complex approaches (Towards Polyhedral Global Governance: complexifying oversimplistic strategic metaphors, 2008; Coherent Value Frameworks: pillar-ization, polarization and polyhedral frames of reference, 2008).

However binary logic may be understood as the underlying cognitive framework through which the physical response to terrorism was organized -- specifically through physical bombardment using conventional weapons. Simultaneously every variety of measure was taken to develop binary security filters and gateways, effectively: You are either an unacceptable risk, or you are not. The application of these measures has caused untold disruption and unpleasantness wherever they have been applied -- disruption that it has been recognized was part of the strategic objective of al-Qaida.

Ballistics may be understood as binary in nature, especially in the sense that some form of projectile is directed forcefully against a target with the expectation of damaging it, if not destroying it. The extent to which "cognitive ballistics" exists may be seen in the manner in which aspects of physical ballistics are used metaphorically in conventional strategic responses to opponents, whether it be "bullet points", "ammunition" or "targets" as discussed elsewhere (Enhancing Sustainable Development Strategies through Avoidance of Military Metaphors, 1998; Missiles, Missives, Missions and Memetic Warfare, 2001). It is of course evident in the efforts to "target" those in Islamic cultures with propaganda.

It is appropriate to note the model developed by Scott D. Brown and Andrew Heathcote (The Simplest Complete Model of Choice Response Time: linear ballistic accumulation, Cognitive Psychology, 57, 3, November 2008) whose simplicity supposedly allows complete analytic solutions for choices between any number of alternatives in a field beset by the tradeoff between complexity and completeness.

More intriguing is the sense in which the "projectiles" of ballistics, and their "projection", are to be found implicit in most forms of strategic undertaking -- typically articulated through "projects" (and "bullet points"). This "project logic" might then be understood as "cognitive ballistics" potentially constrained by the mechanics of the process -- as with ballistics (Metaphoric Entrapment in Time: avoiding the trap of Project Logic, 2000; Knowledge Gardening through Music: patterns of coherence for future African management as an alternative to Project Logic, 2000).

It is with such thinking that it is has been assumed that battles of "hearts and minds" may be won. This contrasts with other potential forms of engagement that might well be far more credible and viable to the "targets" (Poetic Engagement with Afghanistan, Caucasus and Iran: an unexplored strategic opportunity? 2009).

Binary logic may be understood as fundamental to the economic models so disastrously brought into question by the collapse of the financial system. Their binary nature is only too evident in accounting systems focused on profit and loss -- despite a degree of sensitivity to double and triple "bottom lines". The extent of the bailouts required by the largest corporations and financial institutions is indicative of the limitations of this mode of thinking in a supposedly "global" context. Hence the merit of exploring alternatives (Spherical Accounting: using geometry to embody developmental integrity, 2004).

The argument for a richer and more complex understanding has notably been developed by Richard Bronk (The Romantic Economist: imagination in Economics, Cambridge University Press, 2009). With respect to the mindset of the G20 Summit (London, April 2009) endeavouring to respond to the collapse of the financial system, the relevance of that argument has been summarized by the author (Coleridge at the G20, The Guardian, 21 March 2009). Bronk argues:

From a global point of view, we have seen the enormous dangers of economic monoculture. Just as relying on only one seed strain leaves agriculture at risk of catastrophic crop failure when new diseases emerge, the global internalisation in recent years of the monistic world view implied by the Washington consensus and neoclassical economics has left world economies exposed to simultaneous infection by the destabilising and unforeseen effects of financial innovation. The world economy was more stable in the post-second world war period when different economies agreed rules for economic interaction but retained radically diverse economic cultures.

The Romantics understood another peril of using only one set of models or metaphors: because the theories and models we use structure our vision and analysis, relying on only one is like depending on a single lantern to see in the dark, or using one set of cognitive spectacles to make sense of everything about the world. If different countries instead try out different imaginative approaches and internalise different models, there is more chance that some of them will see new problems emerging in time to warn the rest of us.

There is every probability that the G20 Summit will be a quest for a "silver bullet" -- exemplifying "cognitive ballistics" at its worst -- in the hope that this will magically destroy the demonic process of continuing economic collapse.

The argument here is that the strategic art of underminng the globalization agenda -- as notably promoted by capitalism and neo-liberal thinking -- is to encourage the illusory quest for a "silver bullet".

Strategies of higher order

As a consequence of the acclaimed intelligence failure relating to the "weapons of mass destruction" in Iraq, Josh Kerbel (Thinking Straight: cognitive bias in the US Debate about China -- Rethinking Thinking, CIA Center for the Study of Intelligence, Studies in Intelligence, 48, 3, 2004) notes:

Of the axioms, dictums, and mantras echoing through the US foreign policy and intelligence debates in the wake of controversy over estimates of Iraqi weapons of mass destruction, none reverberates more than: be wary of mind-set and bias and constantly reexamine assumptions. The fact is, however, that genuine wariness and thorough reexaminations have been rare and attention has tended to focus on the more easily recognizable non-cognitive biases, the "low-hanging fruit," that eclipse much more ingrained cognitive biases and the flawed assumptions they engender.

The question in relation to the manner by which the collapse of the financial system was engendered is whether the focus of attention has been on the "low-hanging fruit" such that higher order strategies were able to operate "under the radar". Is this also liable to be the case in envisaging remedies at the G20 Summit?

Kerbel's focus on "thinking straight" with regard to China is of much more general significance, notably with regard to the financial system. He argues that there is:

... an unrecognized, deeply ingrained, and enduring cognitive bias that results in the misapplication of a linear behavioral template to China, which, like all nation-states, in reality behaves "nonlinearly."

But Kerbel is subsequently obliged to conclude (Lost for Words: the Intelligence Community's struggle to find its voice, US Army War College Quarterly, Parameters, Summer 2008):

For the intelligence community, the linear mechanical metaphor remains the dominant linguistic and consequently mental model; it is the default setting.

Whilst the "amateur" strategists are distracted by their use of project logic in their endeavour to shore up the financial system -- and restore its economic priorities of "business as usual" -- it is appropriate to consider what the "professionals" might be doing. One possibility is indicated by the neocon strategy of governance as presented by Ron Suskind (Without a Doubt, The New York Times, In The Magazine, 17 October 2004) following an exchange he had with an aide in the decision-making circle of President Bush:

The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. "That's not the way the world really works anymore,'' he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do."

Many people are now studying the aftermath of the financial disaster. It remains unclear who were "history's actors" engaged in creating their "own reality".

In the case of "Afghanistan", strategically it is appropriate to consider how a bunch of semi-literate tribes people should be able to resist the full might of the most powerful countries of the world, unconstrained by resources, or the inhumanity of the weapons deployed to achieve their ends (white phosphorous, etc). The success of their resistance is nevertheless a fact despite a succession of misleadingly overconfident statements to the effect that their defeat is imminent -- and with little acknowledgement as to why this proved not to be the case. The fact that these statements were made by "professionals", acclaimed as being of the highest competence, necessarily gives pause for thought.

Suppose however that "Afghanistan" was simply a decoy in a larger strategic plan. For if a force is capable of resisting in that manner it is useful to suppose that they may be sustained by a logic that is superior to those of the forces applied against them over decades in what may history may label as one of the greatest military disasters of any asymmetric war.

The decoy would be designed to ensure that those pursuing an economic globalization agenda (within which "Afghanistan" was to be subsumed for its own good) would confidently deploy their overwhelming forces at a lower order of dimensionality -- as "cognitive ballistics" -- than the strategy undermining that globalization agenda. Being of higher dimensionality, the latter would be virtually undetectable within the framework of "project logic". A concrete trace of this "invisibility" is the acknowledgement by the regulatory agency for the banking system in the UK, the Financial Services Authority, that it had failed to adopt a system-wide approach to identify and deal with macro-prudential risks, limiting its focus to supervision of individual firms in isolation (Turner Review, March 2009).

It would seem to be apparent that an open conspiracy of academics, management schools, financial journalists, economists, etc reinforced that mindset -- "a culture that was allowed to develop" according to the UK Chancellor of the Exchequer. In order to escape the attention of this mindset, the strategic art of higher dimensionality would have been to encourage the development of that culture by every subtle means possible. This would not have been too difficult given that its lower dimensionality was easier to comprehend, discuss and achieve consensus around within the Washington Consensus -- as reinforced by the various international financial institutions and the eminent economic authorities associated with them.

Some striking examples of what is typically not done to transcend cognitive traps, and will not be done in the elaboration and presentation of the "global plan" on the occasion of the G20 Summit, are identified in "Magna Carta": Configuring interlocking pathways for circular argumentation (2009) in moving Beyond "Mickey-Mouse" governance of crises? (2009).

"Cognitive correlation"

There has been much enthusiasm in recent decades in the sciences for correlations and correspondences that may point the way towards an all-encompassing Theory of Everything. This follows from centuries of enthusiasm for correspondences associated with various forms of symbolism -- with a somewhat similar ambition. The language used by the sciences in developing their correlative thinking has borrowed much from the symbolist thinking that preceded their endeavours (Theories of Correspondences -- and potential equivalences between them in correlative thinking, 2007). In both cases, the complexity addressed is of a higher order than that addressed by those engaged in "cognitive ballistics".

That said, the question is how "al-Qaida" might have deployed its intellectual resources whilst the Coalition of the Willing was focusing its binary logic on "Iraq", "Afghanistan", and the security issues of "terrorism".

The very possibility might be challenged on the basis of the assumed intellectual inadequacy of the Islamic culture within which such as the Taliban emerged. This is to forget the historical origins of scientific and mathematical thinking -- derived through classical Greece from Arabia and Mesopotamia (southern Iraq) -- known as the cradle of civilization. It is to forget the manner in which such insights are partially reflected in the unusually complex patterning of Islamic architecture (Keith Critchlow, Islamic Patterns: an analytical and cosmological approach, 1999). These continue to be a fascination to the mathematicians exploring number theory and symmetry (Marcus du Sautoy, Symmetry: a journey into the patterns of nature, 2008). It is also to forget the extent to which the complexities of poetic resonances are fundamental to Islamic cultures -- even amongst the illiterate -- in ways unsuspected in the West, as described elsewhere (Poetic Engagement with Afghanistan, Caucasus and Iran: an unexplored strategic opportunity? 2009).

The question then is what kind of strategic weapon might be deployed to trigger the collapse of a financial system deriving its strength from globality -- remembering that the patterning within the mosques of Islam is of a far higher order of complexity than any effort to provide a coherent mapping of such globality.

So, whilst the West is focused within its ballistic logic on explosive devices that do indeed have a "spherical" characteristic to their blast patterns -- namely thermobaric weapons -- the question is whether a cognitive analogue was designed to undermine the global financial system.

The clue to this possibility is offered by the Gaussian copula function.

Correlation dependency

It has been widely recognized that the financial trading practices which gave rise to the toxic assets associated with the subprime crisis resulted from financial packages of a high order of complexity. It has also been recognized that their complexity was such that few could understand them adequately. Even financiers of high standing admitted that the complexity of such financial derivatives was beyond their understanding. In effect what was traded through the financial system were bundled packages of assets which it was not possible to relate to tangible assets. Hence references to their "illusory" nature and valuation.

An understanding of "correlation", and its challenges. is fundamental to the development of these packages and this mode of trading (John Hull, Mirela Predescu, and Alan White, The Valuation of Correlation-Dependent Credit Derivatives Using a Structural Model, 2006). It is to be found in notions of correlation trading, statistical finance, econophysics, asset correlations, correlation swaps, and the financial discipline of quantitative analysis.

Here it is perhaps useful to distinguish the degrees of comprehension of the complexity in question:

  • minimal comprehension: the financial traders dependent on the output of such analysis
  • operational comprehension: the quantitative analysts (quants) capable of generating the output from financial data using the methods
  • technical comprehension: those capable of adapting the methodology to develop financial packages
  • innovative development: those capable of developing such methodologies and comprehending their logic

These different degrees of comprehension have constituted a chain of dependency on those who developed the underlying formula.

It is within this context that the innovative formula of David X. Li with regard to the Gaussian copula function is of interest. It is admirably described by Felix Salmon (Recipe for Disaster: the formula that killed Wall Street, Wired, 17.03, March 2009) -- or on the title page of the issue as The Secret Formula that Destroyed Wall Street. As Li had indicated in 2005 "Very few people understand the essence of the model" (Mark Whitehouse, Slices of Risk, The Wall Street Journal, 12 September 2005)..

Li's original paper (On Default Correlation: A Copula Function Approach, Journal of Fixed Income 9, 2000, pp. 43-54) was the first appearance of the Gaussian copula models for the pricing of collateralized debt obligations (CDO's). This quickly became a tool for financial institutions to correlate associations between multiple securities -- allowing CDOs to be accurately priced for a wide range of investments that were previously too complex to price, such as mortgages. In this respect they were at the core of the subprime crisis.

In the aftermath of the global financial crisis of 2008-2009 the model has been seen as fundamentally flawed, notably as recognized by Nassim Nicholas Taleb (The Black Swan: the impact of the highly improbable, 2007): "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation,". He argues that " Anything that relies on correlation is charlatanism".

However, as Felix Salmon points out, the great merit for those who inadequately understood it -- from a lower dimensionality -- was that the formula:

... made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.... And it became so deeply entrenched -- and was making people so much money -- that warnings about its limitations were largely ignored....

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number -- one clean, simple, all-sufficient figure that sums up everything.

In effect Li offered a "silver bullet" to sustain the globalization process. As Salmon reports, citing others:

The corporate CDO world relied almost exclusively on this copula-based correlation model.... Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus.

As Salmon notes:

Yet few of [the investors] understood the investments they held, many of which have proven to be junk. Supposedly sound companies were exposed as pyramid schemes....

In hindsight, ignoring... warnings looks foolhardy. But at the time, it was easy. Banks dismissed them partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.... But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 per cent of the time. The other 1 per cent of the time they blew up.

Designing "silver bullet" confidence tricks

In the run up to the G20 Summit (April 2009) the question is what strategic learnings are to be obtained from the above process -- given that the Summit will be in search of its own "silver bullet" and averse to the complexity at which its efforts may be undermined.

Clearly a group of sufficient intelligence -- presumably accessible to, or inspired by, al-Qaida -- might well have been able to ensure the design of what would appear to be a "silver bullet" for the financial markets. As the commentary shows, it only needs to work most of the time and people of lesser competence will believe that it works all the time. Presumably there will be plenty of models on offer for the Summit to consider that one or other will be relevant some of the time as a "silver bullet".

Given that most who were directly concerned had only one factor in mind -- money and increasing their own wealth -- they were completely handicapped in their ability to bring any critical thinking to bear on the issue. This is despite their intelligence and levels of relative technical competence. The situation in the context of G20 is somewhat analogous in that the politicians are typically operating with only one factor in mind -- power and their retention of it.

It is useful to note how the process of groupthink was driven by its own momentum -- as with the unquestionable conviction regarding possession of weapons of mass destruction by Iraq. To the extent that al-Qaida was involved in the financial meltdown, it only needed to act as a catalyst. The chemical metaphor of a super-saturated solution comes to mind -- where the financial markets were effectively saturated with greed (on their own admission). There was an uncontrollable collective desire to believe in the power of the "super bullet" to engender greater wealth.

Irrespective of the forms of intelligence that might have enabled al-Qaida to ensure the design of the Gaussian copula formula as a credible "super bullet", what is also forgotten in relation to Islamic cultures is the long familiarity with the psychology of the gullible in the market place. Many confidence tricks depend for their effect on a configuration of complicit participants who appropriately reinforce and challenge the otherwise dubious line by which the "mark" is finally hooked. The art of ensuring the operation of this configuration might be considered to be "correlation" at its most effective -- and its most sensitive to human psychology. Encouraging adoption and use of the Gaussian copula formula could then be understood as a confidence trick promoted by con artists of the highest order -- ironically leading to a fundamental loss of confidence which has jeopardized the operation of the financial system to the point of collapse. There is some irony to the fact that it all happened under the watchful gaze of the so-called "neocons" and with their benediction.

A further learning is surely to be derived from the so-called Peter Principle as formulated by Laurence J. Peter and Raymond Hull (The Peter Principle, 1968), namely that: In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence. This suggests careful reflection on the hierarchies of financial institutions, regulatory agencies, and political oversight committees -- both with respect to the collapse of the financial system and to efforts to reconstitute it, notably at the G20 Summit.

Conclusion

Conspiracy?: The possibility of a form of "conspiracy" arising from failure to comprehend complexity can usefully be seen in the light of the comment of the Bush aide quoted above:

We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.

However it may be that other parties were similarly inspired, suggesting that the following could be considered:

  • Al-Qaida: Did al-Qaida need to bring about the collapse of the financial system -- or simply to act as a catalyst to trigger that process? In a sense all that was needed was to design a process that ensured, ironically, that the globalization enthusiasts took their "eye off the ball" -- using their own greed, and the consequent tunnel vision, to drive what has proven to be a very elegant strategic process.
  • Neocons: Promoting the focus on "terrorism" could have been a strategic ploy (a creation of their "own reality"), using 9/11 as a weapon of mass distraction, in order to enable other agendas, notably whatever repressive and invasive measures could be attached to security legislation (Destructive Weapons of Mass Distraction vs Distractive Weapons of Mass Destruction, 2003). It remains to be seen how their agenda is facilitated or undermined by the collapse of the financial system.
  • China: There is some irony to the fact that the discoverer of the Gaussian copula function, David Li, was born and educated in China and has returned there -- where he remains incommunicado according to Felix Salmon (2009). It should not be forgotten that in the strategic "great game" the western reliance on chess is countered by the powerful strategic insights of the game of go -- as demonstrated in the case of Vietnam by Scott Boorman (The Protracted Game; a wei ch'i approach to Mao's revolutionary strategy, 1971). It is to this that Kerbel's above-mentioned study is sensitive.
  • "Gaia": It is easy to forget that the global psychosocial system is a system intimately interwoven with that of nature and the environment. As a system it regulates itself cybernetically with a complex pattern of feedback loops yet to be understood (John Ralston Saul, The Unconscious Civilization, 1995). The global financial system, and the associated economic system, could be understood as having reached a condition of meta-stability -- the 1% not envisioned by the model -- and that Gaia therefore "adjusted herself". Here Gaia might be understood as acting as the "governor of last resort". Systemic ignorance is not a valid plea before Gaia's cybernetic law ! Gaia is more comprehensively effective as a regulatory agency than the US Securities and Exchange Commission or the UK Financial Services Authority !

Each of these possibilities involves the "infiltration" of a cognitive virus -- a memetic virus -- into the central processor of the financial system, but at a higher order of complexity rendering it virtually undetectable. Whether it is to be framed as a "virus" or as a "corrective process", clearly depends on the preferred comprehension of the global framework.

Given the resources devoted to intelligence collection through electronic surveillance, as with ECHELON, it would appear to be clear that the logic driving its methodology can only be understood in terms of "cognitive ballistics" of inadequate dimensionality -- given the cause that it serves -- effectively detecting "decoys" as threats. There would appear to be no question of a more complex approach as speculatively explored elsewhere (From ECHELON to NOLEHCE: enabling a strategic conversion to a faith-based global brain, 2007). It is unclear that this challenge will be a concern of the new initiative of US National Security Agency known as AQUAINT ("Advanced QUestion Answering for INTelligence") as described by James Bamford (The Spy Factory -- the New Thought Police: the NSA wants to know how and what you think, 2009).

G20 Summit: It is unclear whether the G20 Summit process is capable of taking account of the many warnings that have been circulated regarding its pursuit of a "silver bullet". Desperate efforts to achieve consensus there on a single remedy may be later seen as merely the cultivation of groupthink in order to avoid exploring the complexity required by the global system. Hence the value of the above-mentioned commentary by Bronk (2009):

The Romantics understood another peril of using only one set of models or metaphors: because the theories and models we use structure our vision and analysis, relying on only one is like depending on a single lantern to see in the dark, or using one set of cognitive spectacles to make sense of everything about the world. .

Bronk's point can be emphasized in the light of the strategic proclivity for the "vision" metaphor and the "blindness" to which it is vulnerable (Strategic Challenge of Polysensorial Knowledge: bringing the "elephant" into "focus", 2008). As discussed elsewhere (Framing the Global Future by Ignoring Alternatives: unfreezing categories as a vital necessity, 2009), there are early indicators that alternatives of any kind will not even be envisaged, having effectively been designed off the G20 table.

Curiously in the above-mentioned Turner Review of the UK Financial Services Authority it is stated that:

The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets.  Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective.

The recent dynamics of the financial system have been driven by financial economics as applied by "quants" (quantitative analysts) -- now highly discredited for their own gullibility. Curiously there is as yet no question (in the light of arguments such as those of Bronk) for recognition of a complementary form of expertise -- perhaps to be termed "quals" ("qualitative synthesists"). This corresponds in some measure to arguments for "globalization with a human face" -- but not as this was originally presented (Globalization Needs a Human Face (International Herald Tribune, 28 January 1999).

An editorial of the Financial Times (Maths and markets, 21 March 2009) criticizes the blame attached by Lord Turner to the "misplaced reliance on sophisticated models" in lulling banks into a false sense of security. It argues that:

Contrary to Lord Turner's assertion, the banks' sums were not sophisticated enough. They over-simplified, and assumed away the limitations and caveats of their models. They did this to convey an illusion of accuracy and precision, and so convince the market that they had everything under control....

Essentially, financial institutions told their 'quants' to build mathematical models that fitted market prices - and never mind if those prices were way out of line, on any fundamental analysis. As a result, mispricing was supported by a spurious veneer of scientific respectability. And the industry was caught in a 'positive feedback loop' from which no one dared walk away.

For the future we need more - and better - maths to underpin individual banks and the enhanced regulatory regime that will oversee them. Some of the expertise required is already out there, in universities, waiting to be put to use.

Non-linearity: Whether sensitive to the earlier arguments of Scott Boorman or not, the above-mentioned commentary of Kerbel (2007) focused on China, concludes (in 2004) with arguments that merit more general consideration, notably with respect to the issues of the G20:

If the debates such as the one taking place over China are ever to reasonably reflect reality, they must first incorporate the nonlinear complements of the linear characteristics on which such debates have tended to focus. In other words, analysts, policymakers, and commentators must appreciate the distinct behavioral characteristics of nonlinear systems as well as their analytical and policymaking implications.

Specifically (with the injunction Stop Trying to Think Straight) Kerbel notes:

  • Nonlinear systems are synergistic, not additive; the big picture must be kept in mind and urges to simplify controlled.
  • Nonlinear systems have uncertain cause-and-effect relationships; side effects and unintended consequences must be considered inevitable.
  • The behavior of nonlinear systems cannot be repeated; arguments by analogy will never apply precisely.
  • Movements in nonlinear systems are the result of disproportionate inputs and outputs; ripeness (timing), reinforcement, and resistance must all be weighed.

Kerbel lists a set of "Tools to counter linear bias and mind-set in the intelligence community". It would be encouraging if such thinking -- beyond "cognitive ballistics" -- was in some way reflected in the debates of the G20. But Kerbel's study dates from 2004. He has subsequently provided (as Studies Coordinator in the Lessons Learned Center, Office of the Director of National Intelligence) an insightful review of the art and science of the intelligence community (Lost for Words: the Intelligence Community's struggle to find its voice, US Army War College Quarterly: Parameters, Summer 2008).

However this has been published too late to take account of the learnings to be derived from the financial meltdown of 2008-2009, of how dependency on a single model enabled it, and of how this emerged "under the radar" of the intelligence community -- despite many published warnings. For the intelligence community this disaster has proved to be immensely more damaging to national security than 9/11, Iraq's putative weapons of mass destruction, or the "terrorist threats" by which it has been obsessed.

Encompassing complexity: There would appear to be a real challenge of collective learning (Societal Learning and the Erosion of Collective Memory, 1980), especially when any learnings from one crisis fail to correct the mindset which will obscure the recognition of the next (Systemic Crises as Keys to Systemic Remedies: a metaphorical Rosetta Stone for future strategy? 2008; Climate Change and the Elephant in the Living Room, 2008).

Ironically the core danger of the G20 Summit approach is to be found in the actual wording of the stress placed in the Turner Review on the "importance of regulation and supervision being based on a system-wide 'macro-prudential' approach rather than focussing solely on specific firms". The precaution from a systemic perspective however is the need to recognize that the larger, contextual "system" to which attention is required subsumes the "financial system" which is merely one of its elements. In any focus on the financial system, the G20 approach would then effectively be focusing on "specific firms" -- the systemic error now recognized by the Turner Review.

Any such asystemic tunnel vision should now be challenged by exploring the arguments regarding the analysis of the crisis of the "financial system" for indications of their relevance, in systemic terms, to other sectors erroneously treated as "specific firms". Examples include systems such as natural resources, population, energy, food. education, population, water -- as first interrelated within the systems dynamics explorations of the Limits to Growth report to the Club of Rome.

Failure to do so will ensure that unforeseen crises will always be able to emerge "under the radar" of consciousness (John Ralston Saul, The Unconscious Civilization, 1995) -- as disruptively as foreseen by Nassim Nicholas Taleb (The Black Swan: the impact of the highly improbable, 2007). Of great interest is the manner in which disciplines and institutions, having organized reality in conformity with their models and procedures respectively, are highly constrained in their ability to consider even the possibility of events that do not conform to those patterns. Contrasting examples are provided by:

The more general question is the dimensionality of the thinking through which global strategy is currently developed and the vulnerability of any strategy to unforeseen processes of higher dimensionality -- whether triggered by al-Qaida, by the dynamics of the global system, or by other parties (Metaphorical Geometry in Quest of Globality -- in response to global governance challenges, 2009).

Memetic warfare: The above considerations suggest that the persistent focus of governance on "issues" can be usefully seen as a set of inadvertent (even deliberate) exercises in misplaced concreteness. Such "concrete issues" being merely pawns, however tactically significant, in a global strategic game of memetic warfare.

In that sense, issues like "development", "terrorism", "global warming", "drugs", "crime" and corruption -- the purported focus of the UN Specialized Agencies -- are surrogates for more generic, underlying conceptual challenges. These "issues" may provide a means through which the generic challenges may in some measure be understood. However the generic characteristics, implicit in any battle for "hearts and minds", are unfortunately evident as symptoms in the endless cycles of denial, spin, self-aggransisemtn, doom-mongering, hope-mongering, demonisation, groupthink, tunnel vision, cover-up and the like -- which serve to obscure any integrative understanding of such patterns and to inhibit its emergence.

The focus on "issues" is indeed a case of "smoke and mirrors".


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