Naive Intervention – Part 1: From Antifragile to Models Behaving Badly

‘Naive Intervention’ is a term used by Nassim Taleb (The Black Swan) in his recent book ‘Antifragile – Things that Gain from Disorder.’ Taleb explains that in business and economy progress comes from natural dynamics and not from naive intervention. He uses the term to describe management and political action that is based on theory rather than experience. Another book that asserts things I have said in the last ten years is ‘Models Behaving Badly – Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life.’ by Emanuel Derman whom I also quote widely here. This three-post series discusses why any approach that ignores real-world dynamics and complexity will eventually cause catastrophical failures. These books show that I am not alone with my opinions and proposals and that much of the BPM community is wearing blinders.

ACM has become an accepted way of guiding unstructured processes.

My conviction on these subjects are responsible for my work in the process management arena and particularly Adaptive Case Management. I have stepped away from discussing ACM as a software product because despite all the arguments to the opposite by Business Process Management ‘experts’, the functionality has become accepted as both standalone solution or as add-on feature of BPMS. What the BPM community has not yet understood is the concept of Goal Orientation. As a key element of ACM, I propose that it delivers embedded business governance that guides rather than controls.

Why is much of BPM still a form of Naive Intervention? The role of information technology is to improve the way a business can be managed. As an executive I look for tools that will not only control or reduce costs (MBA bean counting) but helps my business and therefore my employees to deliver customer value. While that requires a planning cycle to set goals, it is obvious that strategic planning methodologies as proposed by business consultants do not deliver. Only people who care deliver value. Economists and pseudo-scientific consultants overestimate the role of theoretical university knowledge in economy and business. They degrade the role of experience and intuition, which alone can help to deal with natural complexity. Interventionists won’t allow that goals can be reached and improvements can happen without (planning, command and control) intervention taking place. While ‘measure to manage’ makes sense to know where you are now and you are going, it is not the measurement that predicts or controls what will happen. CEO to accounting: ‘Our costs are too high.’

Steve Jobs was certainly not rational but simply followed his intuition. ‘Experts’ and Steve Ballmer laughed about his distrust of market research. It clearly shows that past or big data DO NOT predict the future. Why must the ‘right’ business decision or any other one for that matter be a rational and sensible exercise in logic and reason based on flawed data produced by illusionary models?

Not all science suffers from naive intervention.

What physicists do differently to economists is that they learn from nature. They observe and measure and then a hypotheses is turned into a theory and then a model. It works when it predicts. In economics and business naive interventionists build a model and then turn it into a religion. There is neither proof nor validation and at best there is anecdotal evidence. But economy is a social science and not physics. Social systems are dealt with through biology. Theories of economy must follow the same natural dynamics of complexity that drive all biological systems. A biologist like E.O. Wilson can teach us more about economy than any theoretical economist can. Wilson said that Karl Marx was right about Communism. Marx just applied it to the wrong species. It does work fine for ants!

The similarities of theoretical physics and economy lie only in their mathematical syntax but not in the semantics. In physics we can have if-then relations as theorems but there are no definite causal relationships in the complexity of economy or business. Economists present model illusions as the laws of economy and executives take rational methodologies as the principles of business. Mathematical or planning rigor does not turn fiction into fact. Intellectuals forget that any number they derive from economy or business by means of a mathematical model is not accurate or relevant but a snapshot abstraction that misrepresents the reality of the world. They most certainly won’t predict the future. At best they are self-fulfilling prophecies as long as people believe in them.

Why do we go wrong? We simply do not like uncertainty as it produces fear. Evolution does not need or provide narratives, but our human rationality wants explanations and predictions to reduce uncertainty. We create causal narratives despite the everyday evidence to the opposite: You don’t teach a child to walk by explaining the physics. The taste of food cannot be explained by chemical formulas. Cooking recipes (process flows) do not guarantee good taste! Despite all our models no one can tell you which way the stock market will go the next day. John Maynard Keynes: “Markets can stay irrational longer than you can stay solvent.” Keynes on the other hand believed strongly in naive political intervention through base lending rates and government spending. The question is how the ‘man at the controls’ would know which way to turn them.

‘In theory there is no difference between theory and practice, in practice there is.’ (Albert Einstein)

The difference lies in experiencing emotional aha-moments versus following a causal model theory. For knowledge gained without that personal experience it is easy to develop illusions about the causality of events taking place. Large systems make such emotional experiences impossible. BPM is a classical example as are the explanations why the stock market went a certain way. We have proof today that human decisions are purely emotional, while the Efficient Market Hypothesis (EMH) assumes that we decide rationally and while individuals err, the statistical average will be right. Nassim Taleb describes that the most successful traders had absolutely no idea about economics or the currencies they traded. They were not mathematically calculating or estimating the future as if-then-else chains but simply acting on guts. Given that EMH must be seen as the main cause of our current financial crisis, the so called Adaptive Market Hypothesis adds behavioral economics to EMH, by applying the principles of evolution to financial interactions. I doubt however that it will be better than human intuition.

As agents in the economy, our decisions weigh our desires to avoid pain and experience pleasure. That pleasure may have an altruistic motive or we might use reasoning to emotionally chose deferred pleasure or avoiding pain. That emotional component comes from personal experience and not from contemplating statistics. Dry science offers no such learning and if at all produces more uncertainty and thus fear. I can however learn from someone else’s emotional experience through emphatic narrative. We see other people and emphatically copy their behavior. We see us in their shoes. This is why true leaders lead by example and not through enforcement. Clearly our perception may be wrong or we may be misled, sometimes even intentionally. Look at political campaigns or the incredible promises of Ponzi scheme investment funds and you know what I mean. We are after all human and statistics won’t improve on that. Our gut tells us to stay away from things we cannot grasp.

There is no need for the RIGHT action, not even ANY action!

We are told by politicians, economists and business consultants that success or improvement needs rational directed action. What utter nonsense! Acts of commission are considered necessary and sometimes heroic, while acts of omission are considered dumb, lazy, ignorant and even signs of cowardice. You can succeed or be guilty by both action or inaction. That was already a core theme in my 2003 novel ‘Deity’. Interventionists forget that one can win just as much and with less risk by ‘not losing.’ Learning what NOT TO DO keeps us alive more than any book on ‘Ten steps to a safer (happier, prosperous) life.’ The greatest contribution to knowledge is to REMOVE what is wrong. A team is improved by removing the wrong people and it works a lot better than adding more better ones (see issues with size).

Weak leaders promote the concept of an ideal outcome that is however a fallacy of wrongly applying probability theory and expected value to complex adaptive systems and natural evolution. Communists and socialists use the emotion of envy to produce a narrative that claims that it is not ethical for one individual to have more. In social systems progress is however achieved by some doing intuitively better than others. Promoting equality is thus purely a matter of equal opportunity and not enforcing equal outcome! We know that communism failed because averaging outcome kills the natural dynamics needed for evolution to work. Survival of the fittest does however not mean the strongest and biggest, but the most adaptable to a changing environment.

But I am clearly not promoting to always do nothing, because we need to try something new to progress. However, following in others footsteps or executing model theories won’t take you anywhere new or interesting. To justify their existence, governments and executives promote the need to act and because they do not lead by example they write laws and prescribe work in a causal model illusion towards the (average) ideal.

Mathematical (Big Data) models will never beat our intuition.

So why in the world are naive, intellectual rationalists stuck on using communist-like intervention in a free market economy and capitalist business environment! It is the pretense of being in control. Using the same mathematical model for everyone equalizes the outcome while dramatically increasing the risk should the model assumptions be flawed. Our current problems are thus not caused by capitalist greed but by naive intervention into free markets.

True democracy and free markets cannot be ideal theoretical models, but they must be empirical approaches that allow natural dynamics. They do not average out failures and successes. They ought to produce the opportunity for substantial upsides while accepting some downside. Systems are not made safer by making the entities bigger and apparently more stable as these large entities become unmanageable and their dependencies uncontrollable. Any entity becomes a single point of system failure. Political intervention to save insolvent banks is only transferring the risk to the political system and thus the populace.

Why has the banking system not changed after the crisis? Clearly because the rotten apples were kept in the basket by government intervention. The continue to rot and spread rot as they did before. Why? Because of the complexity of financial links, politicians are now in a squeeze to act because they allowed both these large banks and their large transactions to pay for the huge debts required for their previous naive (political) interventions. The system is now inherently fragile as the model is utterly illusionary and thus false! Idealistic theories such as Communism or Efficient Market Hypothesis have limited upsides and only produce the negative potential of massive downsides through the ensuing complexity of more and more short-sighted interventions.

Our current form of neo-liberal capitalism is no longer a FREE market. Just look at the amount of rules and laws! Compliance has become a major problem further killing business dynamics. The USA and European Union are no longer democratic societies. Both are technocracies hyper-controlled by naive interventionists who have no clue about natural systems. Their downfall (and ours) are the size of entities that only SEEM to be more robust. That is so for countries, cities, political organizations, and global corporations, who are in fact all very fragile. The reason that these entities seem more robust is because they are made to look this way. Buying or selling a business contains perfect opportunities defining goodwill and write-offs that make the books look right. Global enterprises are not rated on the stock market by quality, value or even profit but by revenue, growth and how bold their deals are. Boards oust conservative CEOs who do not  push up the share price. CEOs are considered lacking in skill if they do not meet analyst expectations who have no clue what the business is doing. Does no one see how ridiculous all this is? Enforcing smaller entities and smaller transactions is the only way towards more natural dynamics in economy with less global risk. While the solution to this problem is in theory simple, in practice any kind of governance structure won’t reduce the amount of governance. Any problem will be approached by asking for more governance, a.k.a. ‘Naive Intervention’ creating more tension against the dynamcs of complexity. The only consequence is a crash that will dissolve these governance structures. Likewise, a business run by bean counters and interventionists on BPM processes won’t survive.

And that is not a model illusion but a simple lesson of history!

In Part 2, I will discuss that decision making under uncertainty is relevant for survival rather than efficiency.

About Max J. Pucher

I am the founder and Chief Technology Officer of Papyrus Software, a medium size software company offering solutions in communications and process management around the globe. I am also the owner and CEO of MJP Racing, a motorsports company focused on Rallycross or RX, a form of circuit racing on mixed surfaces that has been around for 40 years. I hold 8 national and international championship titles in RX. My team participates in the World Championship along Petter Solberg, Sebastian Loeb and Ken Block.

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Naive Intervention Part 2: It is a Matter of Survival, not Efficiency! ›

Posted in Adaptive Case Management, BPM, Business Strategy, Complexity, Economy