“You don’t have to be an expert to have a healthy respect
for human nature. In fact, laymen often are better at evaluating reliability
than are the experts. The expert who looks for “the light at the end of the
tunnel” can all too easily end up with tunnel-vision. The layman whose attention
is less narrowly focused may be better at taking in the whole panorama.”
“Human beings are the instruments of scientific progress.
Technical results are often difficult to understand, but the peculiarities of
the instruments—fallible human beings—are both fascinating and understandable
by all. In what follows, concern with human nature takes precedence over the details
of technology.”
–Garrett Hardin, Filters Against Folly
……….
“Moreover, markets are motored by technology. Money is moved
around the world by massive computer power that reduces every form of capital
to the same thing – bytes, or 1s and 0s. This leveling of differences is
essential to facilitate the flow of money around the world, but it does not
come without a cost. The treatment of everything as the same thing conceals the
very real differences that lie behind the numbers. Technology creates the
illusion that capital is stable and continuous when it is in fact highly
unstable and susceptible to abrupt discontinuities. The failure to understand
the dynamic nature of capital heightens the risks involved every time an
investor takes cash and exchanges it for a stock or bond or tangible asset.
Its stewardship by human beings is what renders capital
unstable. Even the most rational human being is highly irrational and driven by
emotion. Human beings suffer from a fascinating dichotomy – they live their
physical lives sequentially but are endowed with minds that are not bound by
time. We live our lives in order but we can think them out-of-order. The
ability of the human mind to remember and to imagine introduces an enormously
influential element of unpredictability and emotion into human action. An
investor’s greatest challenge is to reconcile this dichotomy, which is an
ineluctable part of the human condition. And while an investor can try to rely
on models that by their very nature simplify reality, he must acknowledge and
include in his calculations the incalculable.
Credit is therefore the ultimate human construct. It relies
on the past to predict the future. It enlists both memory and imagination. And
it is subject to discontinuities that can lay ruin to the best laid plans.
Central bank creation of limitless amounts of credit out of thin air is the
ultimate human act. But it must be understood for what it is: not something
that reduces risk, but an act that radically heightens systemic risk.”
–Michael Lewitt, The Credit Strategist (October 1, 2012)