Three Sigma Systems

I was strolling the sidewalks of downtown Santa Cruz one evening this weekend. To all appearances, life along Pacific Avenue, our “main street”, was as pleasant as ever. Then I noticed something interesting. As is the case in many American towns, quite a few commercial buildings are unoccupied, but rather than leave dark gaping holes behind the plate-glass storefronts, owners or some other business savvy people, had placed attractive objects to mask the depressing emptiness. As I peered behind these little white lies, a sense of foreboding welled up in me. As I thought about it, it was not the unoccupied buildings that disturbed me. It was the lies that were being used to deceive me into complacency.

I was reminded of Dr. Washington Dodge’s account of the Titanic’s sinking just a few short days after the tragedy:

“We had retired to our stateroom, and the noise of the collision was not at all alarming. We had just fallen asleep. My wife awakened me and said that something had happened to the ship. We went on deck and everything seemed quiet and orderly. The orchestra was playing a lively tune.

(The crew explained that) “[A]s a matter of extra precaution the women and children should be placed in the lifeboats.”

“They started to lower the lifeboats after a lapse of some minutes. There was little excitement. As the lifeboats were being launched, many of the first-cabin passengers expressed their preference of staying on the ship. The passengers were constantly being assured that there was no danger…” Read more…

“Shewhart recognized the fact that good management consists of making one mistake now and then, and the other one now and then. What was needed, he saw, is rules that can be put into practice by which to try and achieve minimum net economic loss from both mistakes. To this end, he contrived the 3-sgma control limits. They provide, under a wide range of unknowable circumstances, future and past, a rational and economic guide to minimum economic loss from both mistakes.”

W. E. Deming, “Out of the Crisis”, pages 318-319.

Shewhart’s and Deming’s meaning for concept of “economic” runs much deeper than the connotative value in popular usage, and that meaning is central to understanding Shewhart’s control chart theory and Deming’s extrapolation of that theory to the broader universe of action that can be called human enterprise. Read more…

This “moving” graphic of unemployment rate changes in the U.S. over the past two years does a pretty good job of putting jobs, or lack thereof, in perspective.

The darker the shading, the higher the unemployment rate.

The Con

Con artists have a word for the inability of their victims to accept that they’ve been scammed. They call it the “True Believer Syndrome.” That’s sort of where we are, in a state of nagging disbelief about the real problem on Wall Street —The real problem is that it doesn’t matter what regulations are in place if the people running the economy are rip-off artists.

The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn’t going to work, no matter what we do. Sure, mugging old ladies is against the law, but it’s also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

Matt Taibbi, “Wall Street’s Bailout Hustle”, Rolling Stone Magazine, Feb 17, 2010

For the past few years I have been writing blog entries about the “free market” con-game. Almost every article in this blog is relevant. My argument is that those who con us into being “True Believers” in a “natural system” based on individual self-interest, are con-artists who are setting us up to be “ripped off”. Sadly, the ideological nonsense of Free Market “theory”, has been bought into by Americans — hook, line and sinker — so we keep getting “Reloaded” (Taibbi’s Con 7).

Taibbi’s terrific article walks us through the cons perpetrated by the Wall Street financial con artists point-by-point, but anybody who is really listening will realize that it isn’t just Wall Street that needs to be unmasked. From Wall Street to Main Street, the whole edifice of free marketism that eschews what Taibbi calls, “ethical behavior and civic interest”, in favor of profits realized through deception and gaming the “system”, needs to be torn down.

We cannot extricate ourselves from the bloody talons of the predators among us until we recognize that when we accept their ideology of “predator and prey” we condemn ourselves to being preyed upon. We must substitute a values-based vision of our society, in which we as people do not aim to make a profit, but aim to create value that makes a better world for everyone. — in which case, everybody profits.

As old as the hills, here’s Taibbi’s list of con-games being run on us:

CON #1 THE SWOOP AND SQUAT

CON #2 THE DOLLAR STORE

CON #3 THE PIG IN THE POKE

CON #4 THE RUMANIAN BOX

CON #5 THE BIG MITT

CON #6 THE WIRE

CON #7 THE RELOAD

Read ‘em and weep.

For a more sober assessment of the grand con, read “The Doomsday Cycle” by Simon Johnson and Peter Boone, in CentrePiece Winter 2009/10,

I hate being scammed, no matter who is doing it, and the Toyota bashing frenzy of the past week reeks of a scam designed to undermine Toyota’s success and buoy up American car makers who are both unwilling and unable to compete on matters of substance.

Yesterday, the Wall Street Journal reported that U.S. Transportation Secretary Ray LaHood, when testifying before the House appropriations committee, was asked what advice he would give to owners of Toyotas subject to the recall, he replied,

“My advice is, if anybody owns one of these vehicles, stop driving it, take it to the Toyota dealer because they believe they have the fix for it,”

Soon after, LaHood amended his statement to the press by removing the phrase “stop driving it”, but not soon enough to prevent shares in Toyota stock from plummeting.

When it comes to defective engineering and manufacturing, nobody can hold a candle to U.S. auto manufacturers. If you don’t believe me, look up the Chevy Corvair (made Ralph Nader famous) and the Ford Pinto, both of which earned their reputations as death machines. But those headline making events were just the tip of the iceberg. In years passed, whenever I bought a new car manufactured in the U.S., I knew I was in for it. The first few months of ownership always involved battling with the dealership to get things fixed. Do you remember the “Lemon Laws“. It came into being for one reason only. U. S. manufacturers built a lot of lemons and if you could get your car classified as a lemon, the manufacturer would be required to buy it back from you. Of course getting a car classified as a lemon could get your killed.

Ford Pinto Crash Test

US Auto Recalls

Read more…

Yesterday (Feb 1) the NYT ran a news analysis piece called “A Decade Of Enormous Deficits May Alter American Politics And Power” by Jonathan Ernst of Reuters. As I read the piece, I found myself talking back to the points put forth in the article. Below, I try to reproduce my imaginary conversation about the decent of our nation.

WASHINGTON — In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.

The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.

Could it be that our nation has been engaged in a protracted but hidden civil war, that began during the Reagan era? Has a deficit, by other names, been steadily increasing as national wealth has become increasingly concentrated and enterprises that create real value in product and service, have steadily declined? Has the concentration of wealth on “Wall Street” and among corporate hierarchies done nothing more than mask real net losses in the broader “main street” economy? Read more…

Over a year ago I wrote in my blog entry, “Letter to Obama”, and opined that “The great battles before him (Obama) will not be due to the economy or Islamic fundamentalists. They will be the battles to overcome the resistance of reactionaries, ideologues, and even good-willed traditionalists who just don’t get what he’s talking about.”

Obama’s problem today is that he not only understands democracy, our Constitution, and the intentions of our Founding Fathers, but that he actually believes those ideas can work.  Most everyone else has given up on those ideas idea as sheer folly. Democratic process is inherently messy and inefficient, which is why Winston Churchill said, “Democracy is the worst form of government, except for all those other forms…” While Obama is trying to lead us toward engagement, invention, and creative compromise, the rest are are Hell-bent on bullying the system to satisfy their own desires, interests, and ambitions—-even if it kills them (and the rest of us) in the process.

Predator

I’m fast becoming a great fan the bright young writer Malcomb Gladwell, author of “The Tipping Point” and “Outliners”. In the January 18th, 2010 issue of the New Yorker, his article “The Sure Thing”, pulls back the curtain on the myth of entrepreneurship.

People like Dassault and Eastman and Arnault and Turner are all successful entrepreneurs, businessmen whose insights and decisions have transformed the economy, but their entrepreneurial spirit could not have less in common with that of the daring risk-taker of popular imagination. Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are actually doing no such thing?

Gladwell dissects the myth of the bold risk-taking entrepreneur with deftness. The visionary risk-taker is nothing of the sort. He is a shrewd manipulator who astutely seeks out situations in which there is an “asymmetry of information” between the entrepreneur and his mark. When one party to a deal knows more than the other, his bet rapidly approaches the status of a “sure thing”, with much to be gained on the upside and little or no loss on the downside.

Gladwell substitutes the word “predator” for phrases like “bold entrepreneurial risk-taker”. In numerous posts throughout this blog, I refer to these predators as “con-men”. Gladwell’s and my meaning are precisely the same and the only wonder is that the myth of the bold risk-taker has proven so resilient in the face of the millions of marks who get fleeced out of their hard earned money on a daily basis.

Gladwell picks on the icons of entrepreneurship to make his points, and does very well, but the asymmetry of information is not limited to the wheelings and dealings of big players. In our daily life, complexification is the principal means used by predators to induce asymmetry. While each of us makes our way through daily life, conducting myriad transactions, big and small, the corporations we transact business with devote all of their attention to deciphering our limitations, habits, and vunlerabilities, with the aim to win every bet. There is simply not enough time in the day for each of us to study and understand each transaction we make—-at the supermarket, gas pump, bank, and while paying our monthly bills. The asymmetry of information guarantees that each of us will lose every bet we place.—a nickel here and a dime there.

Caveat emptor (buyer beware) may constitute sage advice in our coveted free market economy, but it is a hopeless quest. Even the most wary among us are doomed to be losers. Even if we manage to work out the rules to one game, those rules are constantly changed, leaving us once again treading water in a sea filled with predatory sharks who know more than us.

I strongly suggest reading “The Sure Thing” as soon as you can your hands on the article. Regrettably, you must have a subscription to The New Yorker magazine to read it online. While you’re looking for the article, take a moment to search my blog on the terms “con artist” and “con men” to read about my view of how predatory wizards hide their machinations in plain sight. For example, try my side-post, “Who’s for Dinner?“

This post was composed as a reply to a protracted LinkedIn discussion regarding the nature of systems. I posted on my blog because of its length.

NOTE: To Charles and Michael, and other Participants in the LinkedIn Systems Thinking thread initiated by Spyros Bonatsos. If, after reading this, you remain interested, I suggest reading my sticky post about 3-sigma and a theory of knowledge.

First, despite appearances, I do not think that the exchange between Charles Weatherford and myself was very far a-field from the central topic. In my final exchange with Charles (last night PST), he took issue with my suggestion that Western societies are the embodiment of a cultural system grounded in Social Darwinism. In other words, it is grounded in an ill-formed vision of Darwin’s theory in which Herbert Spencer’s “survival of the fittest” governs human relations.

At the same time, Michael Ervick posted a simple yet profound question. “Do systems learn?”. Michael has posed this question in the past on other forums, and it has always intrigued me, but the effort required to propose an answer kept me from trying. In this post, I am going to try to respond to the questions posed by both Charles and Michael. I want to caution readers that this is not easy ground. Thinking about thinking is as challenging as it gets, but nothing could be more on-topic when exploring “Systems Thinking”. Wish me luck!  (I will happily return to the thread-in-point if the discussants decide to reply on LinkedIn.)

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Read more…

Redistribute wealth in order to create a global middle class and damp out extreme variability of wealth. This will assure that all humans have a vested interest in the system the assures their safety and well-being. In-system variations in personal wealth, religious belief, location, and circumstance, will be insufficient cause for most system participants to upset the apple-cart. Special causes will still be in play—always are. Crime and conflict will still occur, but they will not be a product of the system. These will tend to be special rather than common. In such a system, the vast majority will help to improve the system, constantly.

I wrote this post for my sailing blog but I realized that the message regarding the interaction between doing and knowing portrayed in this post has implications for readers of this blog as well. If you are so inclined, you can tackle the  rather academic paper entitled “Pragmatism and Deming” which sheds light on Dr. W. E. Deming’s view of the interaction between doing and knowing. In any event, do read the short blog entry and watch the movie. Consider how the interactions between man, boat, and sea  played out in this fascinating and tragic story.

I don’t think you will be disappointed.

People give various reasons to explain why they put to sea in small sailing boats, but once underway those reasons are overwhelmed by the immensity of their undertaking. Our will becomes transformed by the demands of our enterprise, often driving us toward unintended destinations. The persistent illusion that we control our destiny is quickly set right—influence? YES, control? NO. At sea we become immersed in the whole of our circumstance and the best we can hope to do is to shape the force of our will to harness the greater forces that envelop us. We are both the creators and the created. The act of voyaging under sail reveals this truth more vividly than any other endeavor.

The movie “Deep Water 2006″ is a powerfully moving testimonial to this fact.

As we begin the year 2010, many of us resolve with sincere intentions to cast off our bad habits. But as we all know, shaking off bad habits is easier said than done. Real change requires that we dredge up from the dark abyss of our habitual minds, a new and self-critical awareness of the patterns and assumptions that have chained us to behaviors that lead us toward ruin. Only then we can start acting in less ruinous ways.

The abyss of our habitual thinking is not only a source of our individual fallibility. It also lies the heart of our fallibility as a nation of people. It’s time to examine some of our assumptions and change what we are doing for the better.

NOTE: This post really got out of hand. I wanted it to be shorter but I ran out of time.

2010 Resolve: Transform our system from one that sets people and nations against one another into one that brings people and nations together.

1: Our Worst Bad Habit

Our nation, the United States of America, was founded by a group of insurgent “terrorists” determined to throw off the religious, economic, and legal conventions imposed upon them by their mother nation.

As seen at that time, from the British point of view.

Our system was born in self-righteous violence and perhaps not surprisingly, we have continued to create and continuously improve a system that reliably and predictably produces ever increasing violence. As the timeline illustrates, in the 233 years since our founding we have been almost continuously involved in war against other nations of people.

At a minimum, we can identify about 55 distinct wars, although by some accounting the number exceeds 200. By any enumeration, our penchant for warring is clear enough, and lest you think that we make mostly wars of necessity in defense of our homeland, consider that among our wars only two, WWII and 911, represent actual attacks on upon our nation (our Revolutionary War being in itself, an insurgency instigated by us and conducted upon British colonial soil). One list  includes 35 instances of outright invasions initiated by the United States. The US Department of the Navy lists 234 instances in which the United States has “projected” its military might abroad from 1776 to 1993, excluding “covert actions”.

This does not mean that all of the wars we have been involved in were necessarily “all bad”. I mean, Hitler and his Nazi’s definitely needed some serious attitude adjustment. It just means that we do a lot of warring.

An examination of our history reveals that, with exception of the Civil War and wars against the American Indigenous peoples, the vast majority of our warring enterprises have been carried out on the soil of other nations in acts intended to acquire territory or to influence the affairs of those nations. These acts were often described as righteous moral callings, in which it was our “Manifest Destiny” to bring to ignorant and oppressed peoples the virtues of our ideas about freedom and democracy. In fact though, it seems there was usually some economic motivation lurking beneath our veneer of moral rectitude (wink, wink).

Approximate Locations of US Military Actions 1776 to Present

In addition to warring on other nations, our system also reliably and predictably produces warring among ourselves. Although our Civil War stands out in bold relief, a less obvious but clearly related war has been ongoing in our nation. This continuous, low-level conflict is one that pits race against race, haves against have-nots, and gender against gender. It seems that our system is a never-ending font of adversarialism in which there is an endless churn of victims and victimizers—an unending war between the righteous and the damned, the powerful and the powerless. One measure of the conflict within is the rate at which we imprison our fellow citizens.

Top 10 Imprisonment Rates (Relative to highest)

What is it that turns so many of our fellow citizens into criminals?

Read more…

Politicians, ad-men,financiers, and other con-artists know that people, like rats, can be induced to act in terms of their basest instincts — avarice, lust, fear, envy, and the like — but this does not mean that human action is determined at that level when said humans employ the basic faculties that distinguish them from rats.

A bird possesses the faculty of flight, this being the essence of its bird-ness. Can a bird be induced to relinquish its faculty for flight by appealing to its basest instincts? YES! But why would anyone deprive the bird of its power of flight, its bird-ness, unless it is their intention to eat the bird?

A useful question: Are you being invited to dinner as a guest or as the main course?

The red balloons have gone to ground. Our DoD is presumably back to the business of Afghanistan. As you can see from my sightings counts (all zeros)  as well as the fact that I was banned from the DARPA reporting site, my methodology, though brilliant, did not result in me us receiving the $40k award. Let’s just remember that we learn as much from our failures as our successes.

I want to thank my many supporters for their efforts. May the force be with you. This will be my final DARPA post. In fact, this may be my final post ever. I will spending the rest of this evening with my good friend, Mr. Jack Daniel.

Happy Holidays!

BTW – A team led by the Massachusetts Institute of Technology spread the wealth far and wide to locate 10 red balloons in undisclosed locations across the country on Saturday and win a $40,000 cash prize from the Pentagon’s think tank.

http://www.msnbc.msn.com/id/34303629/ns/technology_and_science-innovation/from/ET

I went to log into the DARPA site to post my balloon locations and here’s what I got.

ACCESS DENIED is JUSTICE DENIED!

There is something foul in the air and it’s not just red balloons. I have been, according to another DARPA site message, “LOCKED OUT”. Why?

I think we all know that answer to that question. Know what I mean? Nudge, nudge.