The Financial System and the Immune System

In this interview, Nassim Taleb says, as he has often said, that booms and busts are a fact of financial life, what we should do is make the financial system robust against them. He put it like this:

Capitalism will always produce shocks and crashes. I want a society that has a buffer against shocks.

Likewise, I say bacteria are a fact of life. To be healthy we need to make our bodies resistant to them — which means having a well-functioning immune system.

These are not subtle or difficult points. What interests me is the difficulty that experts have appreciating them. To repeat a story I’ve told before on this blog, a few years ago I noticed that the UC Berkeley School of Public Health had a wide-ranging epidemiology course taught by someone I knew. I phoned him. “Will the course cover what makes us more or less susceptible to infection?” I asked. “No,” he said. I wasn’t exactly surprised — I have never seen this topic covered in any epidemiology textbook or even any epidemiology research paper — but still it is an amazing omission. They know we have an immune system, they just don’t think it matters! There’s an elephant in the room, and they’re ignoring it.

The parallel point about the financial system is that there is no study of what makes a financial system robust against shocks. Somehow finance professors, like epidemiology professors, haven’t grasped that something is missing.

Here are two more vast areas of ignorance:

1. Scientists know a lot about how to test ideas. They know almost nothing about how to come up with ideas worth testing. When a good way to generate ideas comes along — such as self-experimentation — they are dismissive. This is truly crippling: In an experimental science, for example, interesting new experimental effects aren’t discovered. Experimental psychology suffers from this problem. Experimental psychologists could self-experiment, but they don’t.

2. Economists know very little about how to generate new businesses — what makes the rate of new-business generation high or low. I came across a 500-page introductory economics textbook that had three empty paragraphs on the topic. Without new businesses to solve the problems created by old businesses (such as pollution), your society is in real trouble. The problems will pile up unsolved. This is what Jane Jacobs saw so clearly in The Economy of Cities and Jared Diamond completely missed in Collapse.

22 thoughts on “The Financial System and the Immune System

  1. I am studying public health (at Emory) and risk factors for infection are discussed constantly within the field. Age (both young and the elderly), HIV positive status, smoking, vaccination, etc. are mentioned constantly and others depending on the infection in question. These are all examples of factors that effect the immune system. Maybe that wasn’t relevant to the specific course you asked about but I would assume public health students at Berkeley hear about it.

    I would agree that this could be discussed more but it is not being ignored.

    “I have never seen this topic covered in any epidemiology textbook or even any epidemiology research paper — but still it is an amazing omission”

    Do you mean you have never seen exposure to bacteria and the immune system in a research paper or that you have never seen a research paper covering how the immune system is affected by external sources of any kind? Because there are many many papers on the latter. Any disease studied in detail will have papers “Risk factors for disease X” some of which will relate to immune function.

    Jeff

  2. Thanks, Jeff. “Risk factors for infection” is broader than what I’m talking about, but you’re right, it may include factors that make the immune system weaker or stronger. (It also includes dozens of things that have nothing to do with immune system strength.) HIV status is too obvious to be helpful; age is too vague (a thousand things change as we get older) to be helpful. Smoking is included just because it is always included. Maybe you see what I mean here — epidemiologists don’t see that immune system strength is a specific question worth asking, they just do their usual “risk factor” analyses which are a blunt tool. It doesn’t make sense to study each infectious disease separately (which is what is done) since the immune system fights off all of them.

    As for the lack of papers, you’ve seen more than I have. Can you tell me one review paper about what factors make the immune system weak or strong? Presumably it would aggregate data from several infectious diseases.

  3. Seth, you’ve repeated often that scientists “know almost nothing about how to come up with ideas worth testing”. I’ve never heard of a scientist at a loss for projects to apply for grants for. Is “worth testing” the meat of your statement? Do most scientists waste their careers on unworthy ideas?

  4. Seth, I have just picked up a book _Deep Nutrition_ by Catherine and Luke Shanahan and I thought of you because it talks extensively about the benefits of fermented food. She refers to fermentation as one of the “four pillars” of wold cuisine.

  5. Nathan, a certain distinguished professor in the Berkeley psychology department gave a talk in which he described testing a certain idea six different ways. Two or three tests would have been enough. I asked, “why so many tests?” “Just because” was the essence of his answer. He had enormous difficulty coming up with new ideas — so he kept testing old ones. Confirming what we already knew. The other strategy is to do rococo variations on what’s already been done.

    CCS, thanks, I didn’t know about that book.

  6. It sounds like you’re saying, then, “psychologists know almost nothing about how to come up with ideas worth testing.” What we need, then, is a clearinghouse: psychologists who have too many worthwhile ideas to test post their extras, and psychologists at a loss read and test them. However, I’ll bet the ones who are competent to test ideas are the same as the ones who have too many ideas, and the rest would better do something else with their lives. But that’s just a guess.

  7. Nathan, no, it’s almost all scientists. I just gave an example to answer your question. The next time you meet a scientist, ask what methods he or she uses to come up with new ideas worth testing. Or look at an introductory statistics book. Count how many pages are about how to come up with new ideas.

  8. I agree with Nathan. But then I’m an experimental psychologist at a university. I really don’t agree with Seth’s perspective on this. My guess is that he’s railing against dogmatism (which is a human affliction) as it affects what scientists are willing to consider (theoretically) and which thus hampers what they consider looking at (experimentally). Also, I’m guessing he (sorry to speak about you in the third person, Seth) had some bad experiences at Berkeley, such as an unmotivated, unproductive, and/or unappreciative set of colleagues who likely were disdainful of his self-experimentation approach that happened to be around him which colored his opinion of experimental psychology, science as it’s currently practiced, and universities. My experiences and thus my view of experimental psychologists, scientists, and universities is about the polar opposite of Seth’s. Seth is a good friend, and we’ve done (and are still doing) some excellent creative work together. It’s been a real pleasure getting to know him personally and intellectually. But there are a few things to which we have different opinions. Fortunately, neither of us is dogmatic or offended by disagreement. It is sad when a scientists becomes offended by dissent as it stifles his/her productivity and creativity. I do know many scientists like that, but I also know even more who are open, curious, creative, fascinating people. As one of my great former psychology professors said in class to us: “Science is a human endeavor.”

  9. “The parallel point about the financial system is that there is no study of what makes a financial system robust against shocks. ”

    Keynesian economics is all about trying to apply monetary theory to smooth out the cycles/shocks/booms/busts, and Keynesian economics has dominated (er “stagnated”) the economic and financial landscape for the past century.

    It’s the utter failure of the paradigm put forth by Keynes that makes me skeptical that a “study” needs to be performed. As I see it, functional, decentralized economies are innately made up of tens of thousands of studies on human behavior all working dynamically together.

    It is hard or impossible to predict what solutions can “save” a busting economy — a diversity within the system thus provides a slew of solutions, many of which probably won’t work, but a few of which likely will. The analogy here is diversity in lifeforms providing numerous solutions to unforeseeable calamities – like a meteor hitting the planet and wiping out the dinosaurs but not the rodents.

    As I see it, the key to keeping complex economies robust is to avoid systemic centralization (which could also be called stagnation), which destroys diverse solutions to complex and dynamic problems. Unfortunately, government is necessarily a force for centralization that gets worked on by successful individuals and businesses to protect their dominant positions from being overthrown. Run this simple model a million times over a few decades and throw in a central bank and you’ve got our current economic, dangerously fragile, situation.

  10. Seth,

    You write fabulously interesting stuff, and this is the first time in your writing that I’ve found a case where I think I’m more informed than you. I will not argue with you that MOST people/scientists have not become aware of creativity-enhancing techniques. However, that’s not to say that they aren’t there.

    There has been substantial work done on Creativity. The most interesting of these items to me are the step-by-step creativity methods.

    TRIZ, by Altshuller is probably the best of these. However, it’s not the only one.

    Murray Davis’s 1971 article: That’s Interesting! in Philosophy of the Social Sciences is in the same space.

    Work on writing/brainstorming like that of van Oech is also moving in the space.

    Now, I can’t say that most scientists are using this kind of approach. But the approach is out there….

  11. I like this kind of cross-discipline thinking. I suspect that using body and mind functioning as one map for exploring how more abstract systems function could be very useful.

    Moshe Feldenkrais, developer of a sophisticated approach to body-mind awareness through subtle movement, had an unusual definition of “health”: The ability to live out your avowed — and unavowed — dreams; and the ability to recover from shock. (Feldenkrais was a Judo master, so knew, for example, how to fall.)

  12. “The parallel point about the financial system is that there is no study of what makes a financial system robust against shocks. ”

    Sure there is!
    This is why we have capital requirements (reserve ratios) for banks, the FDIC, et cetera.
    Its possible that we should have a better insulated system, but you merely proclaim your ignorance by saying that none of this insulation against systemic financial risk (or even any studies about it) exists.

  13. Aaron, count the number of pages in any statistics textbook in your office devoted to how to come up with new ideas. Then divide by the total number of pages. My belief that scientists are poor at coming up with new ideas has nothing to do with my experiences or their personalities, including the personalities of experimental psychologists (which I happen to like, by the way — it is a credit to and comment on the whole profession that Surviving Terminal Cancer was written by an experimental psychologist). It has to do with lack of tools.

  14. James, I’m not saying that insulation doesn’t exist. I’m saying there’s no or almost no academic study of what makes an economy more or less vulnerable to shocks. The FDIC and reserve ratios don’t exist in their current form because of academic research; they exist in their current form because of the Great Depression. (The FDIC was created in 1933.) I would be happy to find out I’m wrong: Could you tell me one person who has emphasized how to build a shock-resistant economy in his or her research?

    It isn’t Keynes. Keynesian theory is about preventing shocks and recovering from them — it is like the study of antisepsis (killing bacteria before you get sick) and antibiotics (killing bacteria after you get sick). Not like the study of the immune system.

  15. Seth: As I understand it, the major use of theories by scientists is precisely to generate worthy hypotheses. (Engineers, by contrast, use them to approximate reality for design purposes.) The best theories suggest hypotheses that have interesting implications whether they prove correct or wrong. Bad theories produce hypotheses that can be shown to be wrong with existing data, or that can’t be tested, or that if tested are uninformative. Scientists who cling to a theory that has no (or even negative) experimental support must be doing it because otherwise they would have nothing to work with.

  16. Oh, and about Collapse: the societies he identified that avoided collapse didn’t do it by growing new businesses. In Japan the Shogunate imposed a moratorium on tree harvesting of any kind until they could devise and impose, top-down, a strict rationing scheme. Certain tribes of the New Guinea highlanders created woodlots and thrived; other tribes that copied them also thrived, those that didn’ t weakened and lost their territory. You might say that NG tribes correspond to companies, but nobody started a tribe to grow woodlots; that happened within established tribes, also top-down. I’m not sure what lesson about businesses we are expected to draw here.

  17. I think it’s inaccurate to say Diamond “completely missed” the idea of new businesses to solve piled-up problems. See Chapter 16, “One-liner objections”, under “Technology will solve our problems”, paragraphs 1 and 3. Whether you agree with him is a different point.

  18. I don’t have a copy of Diamond’s book here in Tokyo. I do remember it, however (the audio version) and nowhere did he say that societies collapse because they stagnate economically — because they fail to develop new ways of doing things that avoid the problems (and resource depletion) of the old ways. But thanks, when I eventually see a copy of his book I’ll look at that.

  19. Seth,

    On creativity….
    There’s some more stuff that you may have seen out on the inter-tubes today.

    While the post is unimpressive, the comments here are very insightful, and link to books.

    Elsewhere (wherever got me to half-sigma) I found comments linking
    this and this.

  20. Nathan, that’s true about theories, I agree, they are one way to generate new predictions. Calling a new prediction a new idea is not exactly wrong but influential new ideas in science haven’t been new predictions of old theories; they have been new phenomena (that need to be explained) or new theories to explain new phenomena. In psychology, the number of new ideas that have been predictions of theories is close to zero. Psychology mainly develops by discovery of new experimental effects.

  21. Seth, aren’t Vaccinations a form of immune-resistance solution you speak of? Were you implying we need a vaccination type solution for all diseases? Are immune systems capable of fighting off Cancer?

    The economy is a larger problem. Ultimately, proper checks and balances ensure a robust economy – but how do we maintain checks and balances for everything not yet known (as with the immune system)? All we can do is create checks and balances for everything we know so far. No one can predict what “evil” future brilliant minds might conceive – unless we could create a closed-system where all variables were known and fixed forever.

  22. Seth: I guess it would be fair to say that means psychology has few good theories. That’s probably because psychology is an overwhelmingly more difficult subject than, e.g., physics. Anybody who doesn’t think so probably isn’t qualified to do either. Any psych department where students get better grades than they would have (or did) in the physics program is probably a fraud. I could go on.

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