Nathan Taylor

Building on the idea that we are cavemen wielding space age technology, our brains have not evolved for calculus.

Dan Gardner, in his excellent book Risk details how Stanislas Dehaene, a neurologist at the College de France, has found animals as varied as rats and dolphins have a basic grasp of numbers. They can differentiate between two and four. They also have:

“Elementary addition and subtraction abilities.”

But as the size of the numbers increase, even from one or two to six or seven, their abilities rapidly fall away.

It turns out that humans aren’t much better. Dehaene writes that, “We are systematically slower to compute, say, four + five than two + three.” Just as it takes animals longer to work out that eight is larger than nine, so it does with us. It takes effort to become numerate.

The difference between us and other animals is our capacity to create systematic representations of reality and to process them. The fact that the modern world is built on numbers – from the accounts department that pay you through to the computer that process information to displays this blog – is all built on the learning and experience of those that have preceded us.

Our brain is not wired to engage with large numbers. There have never been as many humans in the world as there are now, so how could I possibly have the capacity to emotionally relate to the fact that there are almost seven billion people alive? It is emotively meaningless.

Consider the case of the Tassie miners. Their dramatic situation, and their eventual rescue, captured the attention of the nation. The story dominated the news cycle for the two weeks they were trapped nearly a kilometre underground until they emerged, blinking into the sunlight. This was an emotive, gripping story that focused on just two men.

Larger disasters are harder to grasp.  Joseph Stalin captured the essence of this point when he said:

“The death of one man is a tragedy, the deaths of millions is a statistic.”

Starkly true.The same unfortunate emotional reality is described beautifully by Wendell E. Berry:

“To hear of a thousand deaths in war is terrible, and we “know” that it is. But as it registers on our hearts, it is not more terrible than one death fully imagined. The economic hardship of one farm family, if they are our neighbors, affects us more painfully than pages of statistics on the decline of the farm population. I can be heartstruck by grief and a kind of compassion at the sight of one gulley (and by shame if I caused it myself), but, conservationist though I am, I am not nearly so upset by an accounting of the tons of plowland sediment borne by the Mississippi River. Wallace Stevens wrote that “Imagination applied to the whole world is vapid in comparison to imagination applied to a detail” — and that appears to have the force of truth.

It is a horrible fact that we can read in the daily paper, without interrupting our breakfast, numerical reckonings of death and destruction that ought to break our hearts or scare us out of our wits. This brings us to an entirely practical question:  Can we—and, if we can, how can we—make actual in our minds the sometimes urgent things we say we know? This obviously cannot be accomplished by a technological breakthrough, nor can it be accomplished by a big thought. Perhaps it cannot be accomplished at all.”

We live in an infinite world that is resolved into our immediate, tangible, limited reality. All else is theory and speculation.

This is the background information I have on the commedia dell’Arte, most of which is derived from here.

What I like about this particular art form is how it came to represent some pretty basic characters that were archetypal to human society at the time. The fact that for almost two hundred years they characters performed pretty much the same stories is fascinating.

It’s not like humans have changed. The Simpsons is the longest running prime time show in the US, running for 23 seasons while a feature length film, The Simpsons Movie, grossed over $527 million. Despite all that time there has been no real character development, no change in the characters circumstances or anything else. Bart should have graduated from college by now and have his own family, or at least have left high school.

Despite the lack of change or progression, and the fact that each episode is pretty much just like the last one, people still watch Bart and Homer do almost exactly the same things they has always done, just is mildly different settings. The fact that Homer Simpson’s fictional beer, Duff, can be purchased in Richmond, Melbourne far from Springfield indicates how pervasive their stories are.

The commedia dell’arte was simply the Simpsons of its day – only it was played continuously for almost 200 years!

Commedia dell’arte was improvised around the interactions between three basic characters, the elders, lovers and the servants. The basic story line is that the lovers want to be together, but the elders want them to be kept apart. Both parties employ the help of servants to thwart the others ambitions.

What is interesting is how the characters of commedia dell’ arte developed such distinctiveness that uneducated audiences throughout Italy could instantly recognise them.

Zanni was the generic name given to the servants in the commedia dell’art. There behaviour can be guessed in that it resulted in the English word zany. Unfortunately for the zanni, they were at the bottom of the social peaking order, at the beck and call of the other characters.

The stance of the zanni resulted from their physical labour and represented their social status. They had a lowered centre of gravity. They would stand with an arched back, knees bent and apart and feet splayed. The support knee is bent with the other leg extended, toe pointed. The zanni would change feet repeatedly while talking or listening within the same position and without his head bobbing up and down. The elbows are bend and the arms half lifted. The elbows are bent and arms half lifted.

The distinctive poses of the zanni were to be: crouching with elbows on knees and chin in hands; collapsing completely into a puddle; feet being splayed, bent forward at hips with the elbows slightly raised; and finally, to be asleep while standing up.

Bart and Homer Simpson are modern representations of the zanni. Good natured but stupid.

One of the main elders, or vecchio, was Pantalone. He was always an old man who loves money more than anything and, typically, would try to marry off his daughter to a wealthy man and avoid giving her a dowry.  When things do not go his way he quickly slips into emotional extremes, particularly enraged petty tyranny.  He has a long memory and never forgets or forgives the slightest past transgression. While he uses him money to exert power, he rarely parts with it leading him to often promise the zanni funds but never pay them for their efforts.

The stance of Pantalone represents his age and desire to hoard his wealth. His back bends the other way to the zannis, giving him an old man’s stoop, protecting his purse and effectively restricting the motion of his legs.  The feet are together, toes apart, knees well bent and facing apart creating a focus on the crutch.

The distinctive poses of Pantalone were to be stooped over as if his spine just went out and he would support his upper body with a cane. He would also often lean slightly forward with his nose in the air. While his head might dart about like a bird, the rest of his body is lethargic, as if he is moving through water.

In the Simpsons, Pantalone is Mr Burns.

The final category of characters is that of the lovers, the Innamorati. Unlike every other character in the commedia dell’arte, the lovers did not wear distinctive masks but relied on heavy makeup for both sexes, with distinctive beauty spots. While the lovers have high status, they are brought low through the hopelessness of their infatuations.

The stance of the lovers was to suggest that they lacked firm contact with the earth. Their feet were invariably in ballet positions, creating long lines leading to their pelvis or chests. They are full of breath, but then take little pants on top.  Sometimes when situations become too much for them, they deflate totally.  The lovers were also extremely vain. Their vanity means they often look in a hand mirror, only to become upset by any minor imperfection they discover.  Even in extreme situations they will want to ensure that everything about them was perfect.

You might say that Marge Simpson comes closest to the lovers. Like these lovers, she is constantly being dealt a harsh hand that she must endure for the betterment of the family. Unlike the commedia dell’arte lovers, Marge is not matched in her love.

These simple characterisations were enough for generations of Italians, from all walks of life, to engage with and instantly appreciate the comic nature of the performance. The simplicity of the characterisations enabled them to be told and retold for generations.

Despite our material wealth, despite our intellectual progress, at heart we are still the same people who marvelled at the antics of the zanni, the scheming of Pantalone and the naivety of the lovers. For over 503 episodes we have watched some yellow four fingered folk go about their dysfunctional ways.

The identification of the ‘big polluters’ by the Clean Energy Regulator has highlighted some of the stupidity of people’s understanding of economics. Approximately 330 entities have been told they will be liable to pay the tax in 2012-13.  One of them is the City of Brisbane, one of the largest local governments in the world.

The reaction from the Mayor was stupidity personified. The Australian Finanical Review reported him stating:

Mayor Graham Quirk said it was ludicrous Brisbane ratepayers had to fund the carbon tax, given council offset all of its public transport and vehicle fleets and bought 100 per cent green power.

He said the carbon tax was expected to add $65 million to the council’s bottom line over four years and this would be passed on through household rates bills.

“We provide public services, we’re not generating massive corporate profits and the sad reality is we will have to pass this cost on to ratepayers and that’s not fair,” Cr Quirk said.

Actually it is fair.

The original sin of the carbon tax/emissions trading scheme is that it is focused on production rather than consumption. This sin has been compounded by a wilful political campaign that talks about ‘big polluters’. For instance, in this (chosen at random) interview of Bob Brown on the ABC, he states:

“We’re sheltering average households and say the big polluters should pay for the problem they’re creating.”

Clearly, someone has focused group this phrase to within an inch of its life.

Unfortunately he fails to recognise that the big polluters are every single Australian citizen. Our rich and wealthy lifestyle results in us polluting far more than almost anyone else in the world. Ultimately, we will have to change if the impact on the climate is to be minimised.

A very strong argument could be made that identifying a small number of entities is the most efficient way of incentivising change while minimising the administrative burden. But the reality is that, at the end of the day, the price will flow through to domestic consumers.

The alternative is for domestic consumers to source their consumption from international providers – that is what the ‘big polluters’ of Europe have done.

(There are some minor caveats here, but they are irrelevant in the long term and if climate change is not a long term issue than nothing is.)

What we need is a carbon tax focused on consumption. After all, you and I are the only big polluters that really exist.

People are physically unable to quantify incremental changes in stimuli, so rising congestion largely goes unnoticed. This is called Webber’s Law after the German physiologist who discovered the relationship. It applies to our ability to appreciate change in many aspects of our environment, including congestion.

Sitting in the car, driving to work, it is not possible to appreciate how much worse the traffic is today compared to yesterday and how much of it is due to rising population versus other factors. The changes are so small, with such natural variability in traffic conditions, that it becomes impossible to say with certainty that migrants are adding to congestion. Unless you take a long perspective, the trees block the view of the forest.

A common metaphor to describe the problem of generating political momentum to take action about congestion is that of boiling a frog – put it in a pot and slowly raise the temperature.

The common understanding is that because the temperature increases slowly, the frog doesn’t realise the change in its environment and so does nothing about it. Until it’s served to a French man. But this ‘common understanding’ is false. It is based on a series of experiments conducted in 1869 by German physiologist Friedrich Goltz.

But the thing is, he was using frogs that had their brains sucked out. Oddly, these lobotomised frogs couldn’t recognise and react changes in their environment whereas normal frogs don’t actually wait around to be boiled.

The temperature is rising for Perth’s level of congestion.

The question is how will its business and political leaders respond? Or, how will they respond to the policy perspective I released the other week?

Today I had the pleasure of launching the discussion paper Stifling Success: Congestion charges and infrastructure delivery at the CEDA function Transport Mobility: The Great Debate. The event itself was very successful, with commentators James McIntosh and Patrick Walker there. The policy paper garnered considerable interest in Perth. The CEDA media release can be read here.

What was about?  

The policy paper presented a recommendation that Perth should implement a congestion charge to address peak period traffic. It stated:

A city’s transport system is a fundamental determinant of its liveability and productivity. The continued strong growth, both economically and demographically, of Western Australia is creating pressures on Perth’s transport systems resulting in rapid increases in congestion costs. Unless addressed, avoidable congestion costs may restrict WA’s capacity to expand and profit from the current terms of trade stimulus. 

The congestion costs for Perth were estimated (by the Bureau of Transport and Regional Economics) to be $900 million in 2005, rising to $2.1 billion by 2020.

Currently these costs are implicit in the time you have to wait to go somewhere, the uncertainty about the journey time and the difficulties involved in traveling. A congestion charge incentivises people to change their behaviour and has been successfully used elsewhere (see London’s experience).

If the roads are busy, why not build more?

Building more transport infrastructure alone will not alleviate the problem as it simply encourages more users onto the roads. This principle has articulated in what is called Down’s law of traffic congestion that can be summarised by saying, “If you build it they will come.” More formally, Down’s law suggests that building more infrastructure unleashes pent up demand, resulting in little long term reduction in the levels of congestion.

What causes it?

Congestion is a symptom of success, not a disease to be eradicated. The policy perspective described peak hour congestion arising because:

Standard business operating hours provide significant benefits to organising business activity. Having the entire labour market be available at the same time can bring significant productivity benefits, referred to as the economies of agglomeration and are elaborated on by Edward Glaeser (1998). These benefits range from having multiple employers and employees in the same vicinity, lots of goods and services easily available, and the spill-over of ideas between closely located firms. Having concentrated and coordinated business activity also reduces information, travel and communication costs.

Glaeser goes so far as to say that urban centres represent humanities greatest invention. As someone who feels exposed when in an environment with less than a million people plus in the immediate vicinity, I am inclined to agree.

Why bother?

The danger for Perth is that it will ignore creeping increases in congestion until the community turns against migration because they, correctly, identify population increases as a key source of rising congestion. The Department of Immigration and Citizenship estimated that in 2006 each migrant imposed $897 worth of congestion costs to the broader community. By 2026, DIAC estimates each additional migrant will be adding $2022 in congestion costs for the broader community.

This is not speculation. As the paper noted:

A survey undertaken for the Productivity Commission (2011) found 51 per cent of respondents “would not like increased population” compared to only 11 per cent who “would like it”, with the proportions changing to 64 and 9 per cent respectively in Sydney, which endures the most expensive congestion in the country. The overwhelming majority of respondents nominated congestion as the major factor in their attitudes. 

Given the incredible amount of business investment slated for Western Australia, currently at around $280 billion, the State is desperately in need of skilled labour to take advantage of this opportunity. The current forecasts are for significant labour shortages in the very near future.

The narrative heuristic involves the human characteristic of interpreting information through stories. We fail at it in a number of systemic ways. One of the most critical, and one of the easiest to manipulate, is how we unconsciously predict probabilities within the context of a narrative.

Consider the well-known question posed by Daniel Kahneman and Amos Tversky:

As a student, Linda is an outspoken feminist and highly involved in student politics. After Linda graduates, which is more likely?

a) Linda works in a bank; or
b) Linda works in a bank and is active in the feminist movement?

When Daniel Kahneman and Amos Tversky first posed the question, 85% of the subjects ranked b) as being more likely, even though it is statistically less likely.

Many variations of this question studied were studied by Tversky and Kahneman. If the first option is altered to make it more intuitively obvious (i.e., “Linda is a bank teller whether or not she is active in the feminist movement”) the impact of the narrative heuristic is decreased, but a majority (57 per cent) of respondents still commit the error.

Why do so many people get this question wrong? It is because people are driven by the narrative of the description rather than by the logic of the analysis. The narrative subverts the conscious mind, leaving the brain to say, “But surely Linda is more likely to be involved in the feminist movement in her part time?”

When there is a seeming internal logic to events, people innately try and link them. The trait seems to be a relic from the dark nights when we would huddle around fires and hear stories that explained the world. Having nothing else (like the empirical standards of science) to guide themselves by, our forbearer’s were reduced to assessing reality through the internal logic of stories.

This trait can be seen in the success of Hollywood. Incredible amounts of energy and creativity are spent to transform someone’s imagination into electronic dreams that we can all share. Then we huddle together in dark rooms and watch the flickering frames transport us into other worlds.

Economically, these narratives are incredibly important. They determine the way that the vast majority of us determine the risks and probabilities associated with investments of all kinds. Only those who have mastered the arcane arts are immune from being influenced by the power of the narrative.

Stock markets are ruled by Bulls and Bears. The bulls think prices are going up, and they always have a really good reason for it – think of the ‘new economy’ of the dot com era or the ‘enhanced risk management’ story that underpinned the subprime expansion and resulted in the global financial crisis.

To make good judgements involves rising above the narrative and use your rational capacities to assess what is going on. This may mean taking advice from a number of people, or it may mean really researching conditions for yourself rather than relying on catch phrases (the ‘China story’, the ‘Greater Depression’, etc) to determine your decisions.

Reference

Kahneman, D. and Tversky, A. (1982), “On the Study of Statistical Intuitions,” in Judgment Under Uncertainty: Heuristics and Biases, eds. Daniel Kahneman, Paul Slovic, and Amos Tversky, pp. 493-508, Cambridge, England: Cambridge University Press.

What do you call a series of intellectual errors? A cluster of cows is a herd, a collection of crows is a murder, gerbils come in hoards, but intellectual errors? Those in Ian Douglas’ article on water reform are merely an embarrassment.

In the article Putting the plug on dysfunctional water reform, the water trading is cast as the central villain and the cause of all the problems in the Murray Darling Basin. This displays profound ignorance and is the medical equivalent of diagnosing the cure of the disease as its cause.

Water trading has enabled farmers, and the towns and communities built around them, to successfully deal with the worst drought in Australia’s history. While Australia has one of the most variable sources of water in the world, past variability paled into comparison with the severity of the recent drought. The worst droughts in Australia’s recorded history had no more than two years between wet months (those that produce enough rain to generate runoff into our streams and reservoirs).  The recent drought had over fifteen years without a wet month.

Rather than being the cause of the environmental damage wrought by the drought, water trading enabled the individual farmers and also the regions themselves, to successfully navigate terribly adverse circumstances.

Encouraging economic efficiency is not vague concept Douglas describes it as. Water trading enables users, rather than central planners, to make complex decisions about who should use water, where, when, and for what.

Water is traded from farmers with flexible irrigation demands, such as rice growers, to those with inflexible demands, such as horticulturists whose trees take years to reach maturity. Since water entitlements were voluntarily sold, the flow of payments helped to maintain individual farm businesses. For many, water sales were their only source of income for four dry years from 2006-07. Having this source of money meant they survived the drought and, now that water is more readily available, have begun producing again.

Water trading also encouraged farmers to become more efficient. Consider the case of the Goulburn Irrigation District. During the drought dairy farmers could make more money selling their water entitlements to horticulturists than using it themselves. Instead, they were purchased feed, in some cases from failed wheat crops, giving wheat farmers some relief from the drought. Furthermore, they were encouraged to pay attention to the condition of their livestock. As a consequence, many dairy farmers managed to increase milk production as water allocation halved.

Source: Dairy Australia and Goulburn-Murray annual reports

Nowhere else in the world could have done so well. In the words of a global water expert, Professor John Briscoe of Harvard University:

“Australia’s water management policies enabled it to do something that no other country could conceivably have managed – in a large irrigated economy (the Murray Darling Basin) a 70 per cent reduction in water availability had very little aggregate economic impact. This represents an achievement of global significance as human communities across the world respond to a changing climate.”[i]

While successful, the work of reform is not complete. In particular, the need for an explicit environmental water entitlement was made clear by the recent stress test of the drought. Many parts of the Murray Darling Basin were pushed to the brink or worse, with the agriculture and ecosystems in the Lower Lakes region essentially collapsed. The lack of environmental water entitlement reduced the options available to managers of the region.

The original sign of water reform is not water trading. It is a politically induced problem of having over allocated water entitlements to irrigators.  Furthermore, water supplied to irrigators is substantially subsidised, a practice Douglas seems to suggest we should continue. This worsens the environmental damage and the cost of addressing it as irrigators demand much more water than they would at full cost recovery.

Real water reform would address the political and institutional problems causing over allocation of water entitlements. It would not involve returning to the circumstances which caused them in the first place.

Freakonomics has written about the economic dilemma caused by the empirical fact beautiful people are paid more than (lets be kinds) their less attractive brothers and sisters. Their fascinating discussion can be read here.

A recent study found that humans evaluate how attractive someone is in less than thirteen milliseconds. The study involved:

Exposing men and women to a series of pre-rated faces, some gorgeous and other homely, and asked them to rate their appearance. The twist was that the faces flickered on the screen for ony thirteen milliseconds — a flash so fast that the exasperated viewers swore they didn’t see anything. Yet when forced to rate the faces they thought they didn’t see, the judges were uncannily accurate. Without knowing why, they gave good-looking faces significantly higher scores than unattractive ones.

Looks like its worth investing in that plastic surgery after all!

Successful people are those that find what they love to do it and then pursue that thing relentlessly. Once discovered, they will ensure they spend as much time doing that one thing and creating it into an art form. They experience increasing marginal utility when acting in their passion.

I love meeting such people. This week I had the good fortune to share breakfast with one such person. She was an Associate Professor, head Accounting Economics Finance at Melbourne based university.

Being curious as to why someone would become an academic in accountancy, I asked her why she’d pursued that career. Her response was that she loved to teach, her earliest memories were about teaching. “Even as a young child, I would sit all the cats on chairs and teach them about the world. I think I spent my childhood trying to get them to sit still. It was good preparation for dealing with academics!”

What was particularly impressive was how professional success flowed from personal passion. Interestingly, IQ is not a very good performance of job performance according to the Handbook of Intelligence by Richard K Wagner of Florida State University. Surveys of research on IQ and job performance conclude that: “ IQ predicts only about four per cent of variance in job performance.”

According to the authors John D Mayer, Peter Salovey, and David Caruso, IQ contributes only about 20 per cent to life success.

The biggest factor is clarity about your passions. As the good book says, “A man’s gift takes him before Kings.”

Success is not a function of talent or ‘who you know,’ rather it takes just one thing: practice. If you want to be successful in your chosen field of endeavour, all it takes is lots and lots of practice!

Practice enables you to rise above the fallacies of your monkey mind and to make insightful decisions that elude those with less mastery than you.

Malcolm Gladwell calls this the 10,000 Hour Rule. In his latest book, Outliers, he describes this phenomenon as:

“Studies suggest that the key to success in any field has nothing to do with talent. It’s simply practice, 10,000 hours of it — 20 hours a week for 10 years.”

When confronted with problems, less well rehearsed people will be falling back on their monkey minds more frequently. The more practiced individual, who has achieved a certain mastery over their field of expertise, is much less likely to fall into cognitive traps.

In economics we discuss the consequences of this 10,000 Hour Rule as part of the advantages that flow from ‘specialisation’. I am never going to be as proficient in the kitchen as Gordon Ramsay. But he is unlikely to be as knowledgeable about behavioural economics as I am. So we have the basis of a trade. I can do something better than him and he can do something better than me.

Fortunately, our economy is sufficiently complicated that I don’t have to try and trade my behavioural economics knowledge with Gordon Ramsay for a meal. If I were to try it, I suspect that he would only give me a few choice words in return.

The growth in knowledge and expansion of technology ensures that all of us have the opportunity to be highly successful. As long as we practice at what we are good at!

The 10,000 Hour Rule reminds me of the Proverb from the Bible:

“A man’s gift brings him before kings.”

All it takes is practice!