One of my favourite ever short essays was Paul Wilmott’s piece on risk management and the limits of mathematics, from 2008. He invites the reader to imagine that they are present at a magic show, and the greatest magician in the world asks them to name a card. “Ace of Hearts”, for example. The magician then fans out a pack of cards and draws one out without looking.

What’s the chance that this card is the Ace of Hearts?

Obviously, my readers are far too intelligent to answer “1 in 52”, I hope. It’s not a random process (and even if it was, you forgot about the jokers). The smart people answer “100%”, because they understand that the magician has complete control over the trick.

But wait!

Wilmott then points out that this is the greatest magician in the world, not a ten-year-old who has watched some YouTube videos. Surely she isn’t just going to draw a named card from a deck and expect the audience to be impressed? The chance that this card will be the Ace of Hearts is close to zero – it will be tonight’s winning lottery ticket, or a tarot card with your face on it, or a photograph of the magician outside your front door holding up the ace of hearts or something.

It’s a great motivating example to start people thinking about real world risk management and scenario analysis. But the thing which stuck with me, from the time I saw Wilmott do this bit at a lecture, is that he claims that a lot of risk management professionals (and a lot of bank regulators) get very stuck on the idea that the “real” answer is 1 in 52 and that other cases don’t need to be considered because they’re cheating.

I’ve never really experienced someone like this because I move in somewhat different circles and only talk to the more outgoing and interesting kind of quant. But I can completely believe it. The shift in perspective from “what’s possible within a system” to “the wider environment in which the system is embedded” is difficult to achieve.

To take a current example, consider the Constitution of the United States of America, and the way in which it constrains the powers of the executive. A while ago, some politics profs coined the phrase “Green Lantern Theory” (it’s some kind of comics reference), to satirise people who were criticising the Obama administration for lack of ambition. The idea was that it was kind of silly and childish to believe that US Presidents could make things happen simply because it was their will; this simply wasn’t how the system worked.

Anyway, I went back to a few of those guys late last year, to inquire whether they were planning on revising the theory in the light of developments.

In fairness, most of them took it with good humour, but a surprising number of people seemed to regard the question itself as unfair, illegitimate and illustrative of the same kind of childish ignorance as the original Green Lantern Theory. Of course a President who is willing to ignore or override the checks and balances can do whatever he (or, in principle, she) wants! That’s not the point!

At this point, people might reasonably remind me of the fabled “post-it note” which is meant to shape the editorial policy of this ‘stack. (A mythical note that’s meant to be stuck to my computer, saying “don’t use the newsletter to pursue feuds and arguments from social media”). And, fair enough. But I think there is a deeper and more important point about politics underlying things here.

Which is that the defence of Green Lanternism are factually right, but that falsifies the original theory. It is always possible to break norms, if you’re really determined to. Everything does, in fact, depend on having people in positions of power who respect the rules of the game. The British “good chap” system is just much more blatantly in your face about it.

Which might account for the longevity of the Westminster system. It is incredibly fragile, but it’s obviously fragile, and in this way achieves a sort of paradoxical antifragility. In a “good chap” system, when a bad chap shows up, all the good chaps know that they have to band together and oppose or get rid of them, because they know that there are no systemic constraints on badchappery. In a system that’s meant to be full of checks and balances, it is much easier for a kind of bystander effect to develop, where everyone waits for the system to protect itself without understanding that the system is just them.

And, of course, what happens when good chaps do nothing? The triumph of bad chaps, that’s what.

(Programming note! If you liked “The Unaccountability Machine” and you got a book token for Christmas, spend it on “The Score” by C Thi Nguyen. I haven’t seen an advance copy or anything, but I met the author at a conference and he’s extremely funny and clever. I will be trying to promote the book to as many business podcasts as possible, because I very much think that this is a case in which the dead hand of academic analytical philosophy may have robbed the world of one of its greatest management consultants)

Any way … this is a bit of a generalised call for help, on a phenomenon which is absolutely ubiquitous, clearly very economically and politically important, but as far as I can tell unstudied. I’m hoping some of you guys know different. I am talking about the phenomenon of “careerism”.

I have a few stock things to say when I’m in a meeting and want to sound clever without accidentally saying something the boss might disagree with. “How do they do this in other countries”? is always a winner, for example. But “of course, this is all actually going to be decided on the basis of career risk” is even better when the opportunity arises - everyone immediately agrees, and you look not only extremely wise but also attractively cynical and even slightly subversive.

It’s one of those things, like “no matter what your performance review said, your bonus will be equal to your boss’s guess of what would get you to leave, minus epsilon”. It’s clearly empirically true, easily provable from axioms of rationality, but somehow it’s outside the rules of the game to mention it too much. Careerism, and in particular the desire to avoid career risk, is hugely important.

But as far as I can tell, it has only been studied (and studied to death) in one particular niche context. Which is the context of active fund managers, who face downside career risk if they underperform the index, which is not symmetric with the upside from outperforming it. A large amount of empirical finance brain cells have been devoted to demonstrating that this happens - fund managers tend to “hug the index”, and generally to make decisions based on their personal risk aversion to the effect of investment performance on their personal income, rather than the risk aversion appropriate for their clients’ portfolios.

My response to that literature (“well, duh”) is probably a bit unfair, but it’s frustrating that this doesn’t seem to have been studied in any other context (particularly contexts of government and civil service decision making, where I would really like to cite some classic work rather than writing 10,000 words myself). Any ideas?

Why don’t I ever address the most important questions of economics and development? By which I mean, trams?

I am on record as an extreme sceptic of the transformational properties of light rail (capsule summary: building transport infrastructure and hoping it will stimulate economic activity is exactly what cargo cults did; transport is nice and good and we should have more of it, but if you are doing regional or development policy, for god’s sake hustle while you wait). But I thought that the think tank article linked above was very interesting as a sort of indicator of the current State Of Think.

And that state is … not so bad? The trams paper has a lot of things in it that, as an old style cybernetic social democrat, I find really very congenial. Lots of localism, municipal ownership and funding, allocation of costs of moving utilities and so on. Many of the personnel of Britain Remade come from a background in Thatcherite thinktanks, and there’s clearly been a journey there toward what I’d regard as a much more interesting view of state capacity and development. I have apologised in private to some of the people in the NIMBY milieu for unkind jokes along the lines of “libertarians for compulsory purchase”, so I guess I might as well make the apology general and public.

When you see something like this happen, there are obviously two possible reactions – “oh great” and “what are they up to”. I made my choice in favour of the first a bit more than a year ago when I threw in my lot with the Niskanen Center and the Abundance movement, which I did on the grounds of my one consistent political principle. That principle being that progressive social democracy really is not so popular or so blessed with friends that it can afford to be standoffish. If someone is going to support expansion of state capacity and the building of public sector assets, then it is not exactly difficult for me to find some pleasant things to say about Adam Smith.

But there is a subsidiary question which has stuck in my mind ever since Steve Teles asked me the question a while back; can you really create “islands” of European-style social democracy in an overall Anglosphere-liberal system? Is there a danger of “lemon socialism”, where the public realm ends up being stuffed full of stuff that the private sector wants, but would prefer not to pay for?

I think on one hand, yes there is a danger, but some bits of social democracy are better than none at all; if life hands you lemon socialism, make lemonade. There are actually lots of interesting examples of counter-system islands, like the Veterans’ Administration within the USA. Or for that matter, the almost completely unregulated market for professional sportspeople in Europe. The viability of these kind of subsystems, and the way that one might design their interactions with the underlying political economy, seems like an interesting puzzle to spend a bit of time on over the next months. Happy new year everyone.

this might be an off-cut from a book or it might not. also be warned it doesn’t have a conclusion, it’s just what ended up on my screen when I started typing this morning about the general theme of economic cybernetics …

There are many different ways of valuing a building. You can base the valuation on the assumption of a sitting tenant paying market rent, or you can try to guess what it would achieve in an immediate sale. You can include speculative value of future development or not; there are at least four approved methods in the surveyors’ handbook, all suited to different assumptions about the near term future of the building – is it being valued for probate, as collateral for a loan, as part of a bankruptcy estate or to be marketed by a speculator?

Even when you have agreed on the methodology, different people will make different assumptions about important facts. What kind of a tenant would this building attract, and how consistently would the rent be received? What are the likely maintenance costs, and when will it need a full refit? In a number of contexts, it’s appropriate to commission more than one person to value the building, and when you do, you tend to get surprisingly different results.

What happens then? The answer shocked me a little when I found out about it, during the course of some litigation I was writing about. Having done all my training as an economist, I presumed that the natural – the obvious, in many ways the only thing to do would be to take the average of the estimates. Assuming that the estimates were independent, this would be bound to be a better estimate of the “true” value than any individual one.

This is absolutely forbidden by the surveyors’ handbook, though. Averaging is not permitted as a way of reconciling different valuations. Their professional system does not treat valuation as a statistical process, basically. If different valuers get different results, then you either have to live with that, or bring them together to reach a consensus. Everyone has to explain their assumptions, show what’s driving the model and get something that they can all agree to be reasonable, even if it was not their first choice.

It interests me greatly, because we now have three ways of creating a valuation – as well as the averaging and consensus methods, there is of course the market price, which economists often quite lazily treat as if it was the average opinion of the market when it isn’t[1] And these are three different ways of creating a mental object.

Prices and values are some of the more important shared hallucinations that we create and use to manage our daily life. The method of their construction is probably important. I feel like the surveyors’ consensus method in some way creates a more robust hallucination, obviously at considerably greater cost in resources and in time. The market price is created as a by-product of another activity, and consequently it can do some strange things.

[1] (it’s the highest amount that gets enough bids; under quite restrictive assumptions and perfect competition, this would tend to be the same number as the average opinion, but it’s not an averaging process and the assumptions often aren’t satisfied).

I had a few Thoughts about that essay about the plight of young white men in the age of DEI, that’s been going round, but I’m not sure they’re actually worth a full post, which is why yesterday’s is late and today’s is too long, sorry for both those things. In summary, they were:

1. The “bias against Promising Young White Men, for Things They Did Not Do, at the hands of Boomers Who Were Much Worse” is a real phenomenon that is really just an arithmetic consequence of stock-flow consistency; if you want to change the composition of a stock quickly, you have to change the flow by a great deal, and that means that there is a transitional generation that gets hammered. I’ve been writing about it, usually facetiously, in the context of financial recruitment for more than five years.

2. But, what are you gonna do? You can’t ask people to wait five decades to make the change on a “funeral by funeral, science improves” basis. There are always going to be transitional generations[1] and it is always going to be expensive to compensate them. And generally, the social attitude to risk bearing is that this isn’t a special kind of risk you get specially made whole for; it’s more similar to the general business and economic risk that everyone has to bear.

3. And come on, it’s not like anyone’s asking these guys to go and fight in a war. Despite having picked some of the absolute peak industries to experience the transition problem in (very high starting point in terms of bias toward Promising Young Men, very low retirement rate of old men, overall environment of contracting labour market), the essay author admits that he and all his mates basically did all right, some of them got substacks, some of them built ticket resale businesses, etc. They might not have got the socially prestigious jobs they dreamed of, but few do! It might be galling to be a Managing Director at Morgan Stanley if you had your heart set on being a Partner at Goldman Sachs but come on, dude.

4. The real victims of the intergenerational inequity were the previous generations of women and minorities, who didn’t have their whole lives ahead of them when the rules changed, but who didn’t get included in the new compensatory system. I wouldn’t mind reading an essay by one of them.

5. And you have to be very careful when writing this sort of thing, because a) it is always going to sound whiny, b) you are very adjacent to some very smelly stuff in terms of aspersions on the people who were hired under the new regime. The editors at Compact seem to have done a pretty good job in this regard, but it still makes painful reading at some points. Basically, I think the “disenchantment of the generation of white men who bore all the costs of previous generations badness” is interesting enough to be worth maybe one magazine essay, and this guy’s written two, so he is over budget.

Anyway, it got me thinking about the question of “meritocracy”, because that’s what everyone jumped to when reading it. And … I think there’s no such thing. There is such a thing as merit, in the sense that some people are much better at their jobs than others, look around if you don’t believe that. But it’s not something which the interview and recruitment processes of professional and managerial jobs are set up to measure, at all. Like the IQ test, these things get all of their predictive capacity from the detection of gross dysfunction; they are no use whatsoever in distinguishing mediocrity from genius.

[NOTE AND PLEA: my techie and computer-writing-guy friends, I love you all so much but this bit isn’t about you, it’s not about 10x engineers, it’s not about writing code. You have your own ways and practices which I don’t know about, one day I will learn about them but this post is about PMC jobs, please don’t write letters!]

Basically there are four career stages with associated recruitment processes:

ENTRY LEVEL: A bunch of kids with resumes. Some of them will be creative thinkers, hard workers, good managers, some will be lemons. You are absolutely kidding yourself if you think you can reliably pick winners based on the information available. All you can do is select out people who aren’t even capable of keeping their massively disqualifying personality problems under control for the length of a selection centre. You are going to be selecting based on a bit of nepotism, a bit of PLULPLU (people like us like people like us), quite a bit of “am I in a good mood, did I have a nice lunch” and mostly random chance. We all know, by now, that your perceptions are going to be quite biased by PLULPLU and so the 50/50 balls will break in favour of the Promising Young Man too often, so there are systems and processes to try to aim off for that. They make the selection process neither better nor worse, but at least it’s fairer.

SLIGHTLY ABOVE ENTRY LEVEL: By now, people have a bit of time in the job and have begun to develop a track record. They have people who can recommend and vouch for them. And so …

… nope, sorry, it’s still basically random. The real lemons have dropped out, but that “track record” is mostly pure luck, and the references they can give are PLULPLU, luck and bias. You still need to aim off for Promising Young Men and you’re still picking at random.

Yes, this is even true in the examples everyone tries to give of “my job is different actually because they don’t care who you are actually as long as you make money actually”. Even “objective” performance metrics are formed in a context. There are a thousand and one stories of traders who made fantastic profits, then moved to a different firm and suddenly lost all their apparent talent because they were in a different context and hadn’t been able to move their information network.

AN ENTIRELY THEORETICAL MOMENT OF PURE CLARITY WHICH HARDLY EVEN EXISTS: Mid career when you really can get a sense of someone’s merit, because they’ve now produced enough good work in enough different contexts that it’s unlikely to be chance. But how many people are actually applying for a new job at this point in their career?

SENIOR HIRES: At this point, the social capital is the merit. In professional and managerial jobs, your value, your talent, your objective performance and your network are all different names for the same thing. The biases inherent in the system have done the damage by this point and there’s no reversing it. So you are probably stuck with your pale and male hires, but please don’t pretend that there’s anything particularly meritocratic to it.

I think the reason we try to pretend that there’s any possibility of meritocracy is that the gatekeep to the professional and managerial class is “being good at exams”, and that we therefore spend our whole lives subconsciously thinking that success is an exam and that promotion is what happens if you get a good mark on it. (This might explain why academia itself has such a bloody awful case of meritocracy-thinking). Even the most talented senior members of the PMC will always get together and go “my word, I wouldn’t get hired today”. And it’s kind-of-sort-of true, not in the sense that necessarily today’s young people are any more talented, but in the sense that having rolled a six to get where you are today, you can recognise that if you rolled the dice again, it probably wouldn’t be a six.

[1] This is the only context in which “intergenerational inequity” makes sense, by the way; if something has changed so that a particular cohort is affected.Things like pensions aren’t really transfers from young to old, because today’s young will one day be old.(The UK’s “triple lock”is for the most part a transfer to the young of today, from the young of thirty years hence.)