Last Sunday (12/7/08) Nicholas Taleb and Pablo Triana wrote an interesting column for the Financial Times (http://www.ft.com/cms/s/0/4f86d422-c48f-11dd-8124-000077b07658.html ). They used the Kitty Genovese murder in New York City in 1964 as a metaphor for the behavior of people in the current financial crisis. The attack on Ms. Genovese was particularly brutal; her assailant came back three times over the course of a half an hour and her screams and pleas for help had to have been heard by nearly 40 of her neighbors. Messrs. Taleb and Triana document the development of a psychological theory  that resulted from the event called the “bystander effect” which makes the claim that the larger the number of  observing bystanders the greater the apathy in responding to the plight of a victim.

 

The authors go on to exhort us all to object to the continued use of quantitative analytical models that have clearly failed to analyze much of any thing. They point out that business school curriculum has not changed in the face of the failure of these approaches and those that continue to teach them are not challenged. They make a case for urgent and strident actions to dispute the continued prevalence of the delusion system of sophisticated and complex financial products.

 

As someone who has been in the risk management business for fifteen years and who has repeatedly come up against the wall of mathematical certainty their argument is both appealing and validating. The sense of being right in the end however is somewhat tempered by the suffering that we are all experiencing and likely to experience for some time to come. Nevertheless, it’s nice to read thought pieces by experts of the reputation of Taleb and Triana that repudiate the single-minded reliance on mathematical models and their false underlying assumptions.

 

But there is something troubling about their use of one of New York’s most infamous murders as an analogy. They suggest that the bystanders, in this case the risk managers and regulators suffered from apathy. I would suggest that apathy is not a state of just not caring; it is actually active decision making that just feels like not caring because it is devoid of human compassion. We seem to have convinced ourselves that our financial world is somehow disconnected from our ethical responsibilities. We are learning that nothing could be farther from the truth.

 

The authors also suggest that the victims in our economic crisis are “the helpless retirees, taxpayers funding losses and perhaps capitalism and free society”. I would suggest that the helpless retirees were just like I was when looking at my 401K statement; I wanted it to increase in value as rapidly as possible and I was not concerned or focused on how it happened. As a taxpayer I may have become increasingly uncomfortable about two wars that didn’t seem to demand any sacrifice and credit cards that kept miraculously being showered on me, but again, not enough to change my behavior until the more recent past. As for capitalism, somehow we have allowed the definition of this economic system to shift from being an environment where the entrepreneurial spirit could thrive to a defensive casino where the game was about keeping what you had and getting more. As to our free society we choose to look the other way and be a little disturbed that a legal challenge has reached the Supreme Court that addresses the issue of whether or not the President has the right to hold a citizen in jail without charge

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Somehow, I’m not seeing a lot of victims here. Certainly there are those who have lost a good deal but perhaps we would be better off looking at our participation in the problem rather than seeing ourselves as being betrayed by those who gladly took advantage of our sloppy attitudes.

 

But there is a more fundamental reason not to see ourselves as wounded by others. Victims make lousy change agents. “Scratch a victim and you’ll find a bully” my mother always used to say. There is a broad streak of self-righteousness in those who would cast themselves on the loosing end of the greed paradigm. Certainly there are those who never had the means to participate in the credit orgy who have been and continue to be the victims of a system that only values a certain segment of the population. But as to the rest of us, give me someone who understands that they have behaved badly and vows to change; I’ll saddle up with them any day.