Why we fail to foresee approaching problems?

I am struck by the frequency with which unexpected events occur, some more important than others, and which are widely debated on old and new media when they do strike. For example:

 

  • The US stock market increased by over 25% in 2013. If anyone had predicted this in January 2013, it would have been dismissed derisively. Some analyst did predict a rise of 11%. This was considered as foolishly over-optimistic. While there are thousands of people following stock market conditions, the predictions were worse than weather forecasts.
  • There was little, if any, public coverage about a possible Russian takeover of the Crimea in 2014 before it took place. Events in Tunisia, Libya, Egypt and Syria also emerged with little warning.
  • There is extensive discussion and debate over global warming and its possible effects, but very little discourse about previous ice ages and what happened when warming occurred in the past. (Historians point to at least five previous major ice ages. The last one left the contours of the Canadian Shield and the lakes which I enjoy today in the summer).
  • A failure to recognize in Canada and other developed countries the weakening of the public educational system. Grade inflation has taken place in high schools, especially where there is no province wide exam, as is the case in Ontario since the 1960s. A much higher percentage of young people are entering universities and either being unemployed or employed in occupations which don’t need a university education.

 

The last is like the case of the frogs placed in water who do not notice that it is heating up until they expire. Things are happening around us which we either deliberately ignore or fail to recognise what is happening. Donald Rumsfeld illustrated this.  In 2003, he was awarded the Foot in Mouth Award by the Society for Plain English for the following remark:

 “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns, there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”

Canadian Mark Steyn defended Rumsfeld by calling it “in fact a brilliant distillation of quite a complex matter”, and Australian economist John Quiggin wrote, “Although the language may be tortured, the basic point is both valid and important …”

I have had difficulty in sorting out what is included in each category but will try below. The question concerns how an analyst decides the context for decision making about the future. For example, how do you decide when to go to war, how to treat legal and illegal immigrants, whether to sign a trade or environmental agreement?

Known knowns – these are things that we know we know, for example,

 

  • The distribution of intelligence in the population is normal. There are more and less smart people in the population. Schools and universities have to rank students by grades although these may not be reliable indicators.

 

  • The global population was 1.5 bn in 1900, is 7.2 bn now, and will rise towards 9 billion by 2060. The age structure of a country’s population can be estimated fairly accurately.

 

  • Base metals and rare earths will remain in finite supply.

 

  • Migration from country to city will remain high, and migration of people from poor to rich countries will continue both legally and illegally.

 

Known unknowns – things we know will happen but not when, where or how much.

 

  • The supply of natural resources will increase as a result of discoveries and technological change but by how much is not known.

 

  • A major financial crisis will affect commodity prices, stock prices and interest rates, but the extent and timing is unknown.

 

  • Politics and policies in different countries will affect the natural resource sector re exploitation, and the environment, but how and when is not known.

 

  • Earthquakes and tsunamis will occur in different locations, but where, when and their size are unknown.

 

Unknown knowns – things we don’t know we don’t know

 

  • Asset pricing bubbles will arise and then burst

 

  • Political corruption exists in all countries but the degree is unknown

 

  • Income inequality in a society will change over time.

 

  • There will be further revolutions and wars but their timing and location are uncertain (Middle East, Russia, China, N.Korea for example).

 

Some suggest a fourth category, namely Unknown Unknowns – things that we refuse to acknowledge that we know. For example, those who issue warnings re climate change seldom point to previous periods of climate change, although this attitude is changing.

Another example is the refusal by some to admit that prisoners in Abu Ghraib, Iraq, and in Guantanamo, Cuba were subject to torture during their interrogation. Until Wikileaks and the actions of Edward Snowden, there was the false assertion that US agencies were not spying on their own citizens.

This classification shows the difficulty of making decisions in the face of uncertainty, and that uncertainty is made up of different components, some of which are harder to assess than others. The conditions for a game of tick-tack-toe are clear and the outcome predetermined after playing a few times. Drafts and chess have more possible moves, but the board is fixed, as are the moves which each player can make. A computer can be programmed to play chess and has beaten a chess champion.

In the arena of international affairs, such as the west assessing the next moves by Russia in the Ukraine, for Russia the next moves by the west, and for Japan the next moves by China in the South China Sea, there is more uncertainty and the outcome difficult to analyse and predict.

So what are the areas where the water is warming and that should concern us about the future? The following is an idiosyncratic and partial list.

  • In the South China Sea, China faces off against its neighbours, especially Japan, Korea, Indonesia and the Philippines over claims to resources. The presence of the US navy adds to these tensions.
  • In Eastern Europe, the spheres of influence are being tested by Russia in areas involving the Ukraine, Poland, Finland and the Baltic states with implications for NATO member countries which are not sure how to respond.
  • Chinese economic growth has resulted in part from domestic investment projects, including the building of cities for several million inhabitants. Many are ghost towns with few living there. They will deteriorate if not maintained and become a drain on the domestic economy, which in recent years has promoted global economic growth by the demand for imported natural resources and the supply of cheap labour. The wage advantage is being undermined by the substitution of robotics for persons.
  • In Myanmar, with Chinese assistance a new capital is being built at Naypyidaw. It boasts a 20 lane highway with street lights and virtually no traffic, suggesting poor planning and harm for an already poor economy.
  • Institutions in democratic countries are being weakened by domestic forces as politicians compete for taxpayers’ votes by spending taxpayers’ money. This leads to the establishment of entitlements and interest group politics which Adam Smith recognized in the 18th century as harmful to society. The rise of right wing parties, especially in Europe, and pressure groups like the Tea Party are a reflection of this process. Niall Ferguson describes this as the Great Degeneration.

 

I invite others to list their concerns which if not recognized may cause us to become dead frogs.

 

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