Left Flank

David Brooks, talking on the PBS Online Newshour faults Alan Greenspan for his perspective.

Well, first of all, I admired him for saying that. We often are in a political culture where nobody admits a mistake, and he admitted a mistake. And the question is, why? What did he get wrong about the economy?

And I think what he got wrong is -- Paul Solman had a guy named Nassim Taleb on the show not long ago who got it right, who picked Fannie Mae, who talked about the banking collapse.

And the difference between the two worldviews is Greenspan relied on quantitative models of risk analysis, where Taleb is the product of behavioral economics, which talks about the psychology of perception and the perception of risks, and the biases we make in assuming the future will be basically like the past, and the way we look for evidence that confirms our prejudices.

And if you looked at the risk analysis through the frailty of human perception, as Taleb did, you can say this risk was out of control. People did not understand what was happening.

And all these bogus economic models that the quantifying people believed in just were bogus. And I think that's the two mental frameworks that allowed some people to understand what was going to happen and so many, so many experts not get it.

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What Eric Schoenberg and Gary Marcus are arguing, that psychology is a useful guide for economic policy, but that ultimately skepticism about ideal economic presuppositions are beneficial, dovetails nicely with Nassim Taleb's black swans and Arnold Kling's caution. It's also just another way of understanding how the stock market jitters and the congressional bailout drama relate to what laypeople are experiencing.

As an explanation of the first vote US House rejecting the Paulson bailout plan, it's reassuring to hear Schoenberg to discuss the experimental economics game, concept of the ultimatum game. And then, from that point, move forward armed with more than ideological talking points to solutions.

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Now that the Wall Street crisis has sat on the front pages for awhile, it's about time for scientific theories, not just political strategies, about how Wall Street humiliated itself. Science writers John Horgan and George Johnson bring chaos theory to the discussion.

One writer mentioned - and criticized - prominently in this diavlog is Nassim Taleb. Taleb argues about avoiding «The Fourth Quadrant», where statistics becomes a illegitimate route to certainty.

So the good news is that we can identify where the danger zone is located, which I call «the fourth quadrant», and show it on a map with more or less clear boundaries. A map is a useful thing because you know where you are safe and where your knowledge is questionable. So I drew for the Edge readers a tableau showing the boundaries where statistics works well and where it is questionable or unreliable. Now once you identify where the danger zone is, where your knowledge is no longer valid, you can easily make some policy rules: how to conduct yourself in that fourth quadrant; what to avoid.

So the principal value of the map is that it allows for policy making. Indeed, I am moving on: my new project is about methods on how to domesticate the unknown, exploit randomness, figure out how to live in a world we don't understand very well. While most human thought (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, my new mission is to build methods to turn lack of information, lack of understanding, and lack of «knowledge» into decisions—how, as we will see, not to be a «turkey».

I warn readers, that the essay concerns statistics, not politics, or even economics as presented in lay terms. I'll admit I've had to listen to the diavlog twice and read graphs repeatedly, since I'm not a math buff. But, I sense that these arguments are valuable for policy and lay understanding as opposed to the orthodox models based on gambling now current. Or, instead of putting your money on «black», you can keep it on «red».

And, for «people» people, Saul Hansell has a related attack in the same voice, but with more human agency. Hansell criticizes «...Wall Street executives had lots of incentives to make sure their risk systems didn't see much risk.»

Whether you blame the universe or people for the current predicament, it's time to deepen the search for solutions.

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