One-Armed Puzzle Solvers vs. Multi-Armed Detectives
By Vikram Mansharamani,
Author of Boombustology: Spotting Financial Bubbles Before They Burst
Among the many insightful comments made by U.S. presidents over the years, perhaps the most pertinent with respect to the study of financial booms and busts was made by President Harry Truman: "Someone give me a one-armed economist!" The statement, made in response to the constant "on the one hand…on the other hand" analysis presented to him by his advisors, captured the discomfort most decision makers have with ambiguity and uncertainty.
For better or worse, the world in which we now find ourselves is plagued with ambiguity and uncertainty. Globalization has created economic interconnectedness and international geopolitical linkages that are now an undeniable reality of our sociopolitical-economic existence. Recent events in Tunisia, Libya, Egypt and even the unfortunate Japanese natural disaster confirm this interpretation. The world is more complex, more uncertain, more dynamic, and more volatile than ever before, and although our situation has transformed, our approach to addressing problems has not. We continue to rely heavily on analysis originating from singular perspectives (economics, politics, psychology, science, etc.). Unfortunately, this approach is ill-suited to today's issues.
There is an inherent and profound difference between problems for which an answer exists and can be found versus problems for which no obvious answer exists. The former case has been labeled as a "puzzle" or "secret" while the latter case is considered a "mystery." Puzzles are black and white. Mysteries are shades of grey.
Climate change, geopolitical upheaval and interdependence, sustainable economic development, and resource preservation are all issues that are characterized by ambiguity and uncertainty. Understanding them requires probabilistic thinking and scenario-planning. We need to understand that these issues are more like "mysteries" than like "puzzles." There is not a correct answer to the question of sustainable economic development. Nor is there a single solution to addressing climate change or resource scarcity. The best we can hope for with mysteries is to constructively frame the problem in a manner that helps us understand its evolution and probabilistically estimate various scenarios. Addressing a mystery is an attempt to understand ambiguities.
Given that puzzles and mysteries are fundamentally different, it should come as no surprise that they necessitate radically different approaches. Note the relative importance of information and information gathering in each problem.
In the case of a puzzle, the problem is simple: a lack of specific information drives the need for more and more information. More information may contain the answer, so the best approach to addressing a puzzle is to get more information.
Mysteries, on the other hand, are less clear. Information is plentiful, and additional data is unlikely to enhance understanding. In addressing mysteries, more information is likely to make the problem more difficult to understand. There is no answer per se in the form of specific data. Rather, insight exists in how the data comes together. We need integrated analysis that looks across differing sources of data and evaluates existing information through multiple lenses to uncover a probabilistic answer of how best to understand the situation.
Given insights that help elucidate mysteries exist within the mountains of already-available information and data, the key to understanding mysteries lies in filtering and data analysis. The use of any one filter is necessarily going to be biased -- a reality that necessitates the need for multiple lenses. More information will only exacerbate these biases, whereas multiple perspectives will help filter and extract insight from information.
Consider financial booms and busts. Financial booms and busts are mysteries; they are, particularly from an a priori perspective, probabilistic events for which multidisciplinary analysis is essential. Addressing financial booms and busts as a puzzle may not only prove to be without value, it may in fact have negative impacts and lead to gross misunderstandings.
Thinking of booms and busts as puzzles will lead to a greater emphasis on singular perspectives. It leads to an emphasis on depth of data versus breadth of information. It leads to deeper and more thorough understanding of particular information, but it misses the point that information is not the essential element. There are plenty of "dots" but the connections between them are lacking.
As noted by Malcolm Gladwell, "a puzzle grows simpler with the addition of each new piece of information" while "mysteries require judgment and the assessment of uncertainty." Conceiving of financial booms and busts as a mystery necessitates the application of different lenses to develop a probabilistic interpretation of the facts to better understand the mystery.
Economists, political scientists, psychologists, and even hard scientists have much to learn from each other. Adopting a singular perspective -- while useful for puzzle work -- will not help with mystery work. What we need today are analysts who employ a multidisciplinary perspective to connect the dots. It is no longer adequate to study the bark without acknowledging the tree. Even better, we should remember we're in a forest. While the one-armed analyst sought by Truman might make for easier decisions, a five-armed analyst is likely to guide leaders toward better decisions.
Vikram Mansharamani is the author of Boombustology: Spotting Financial Bubbles Before They Burst, recently published by John Wiley & Sons. The book presents a multi-disciplinary method for identifying unsustainable booms in financial markets.
© 2011 Vikram Mansharamani, author of Boombustology: Spotting Financial Bubbles Before They Burst. Reprinted by permission of the publicist.
Vikram Mansharamani, author of Boombustology: Spotting Financial Bubbles Before They Burst is an experienced global equity investor and lecturer at Yale University, where he teaches a seminar called "Financial Booms and Busts." Mansharamani has a PhD and MS from the MIT Sloan School of Management, an MS in political science from the MIT Security Studies Program, and a BA from Yale University. He currently lives in Brookline, Massachusetts.