Wisdom and Irrationality

I spent roughly two years attempting to rework Samuelson’s Le Chatelier Principle for a privately funded think tank interested in looking at ways in which the United States might be harmed through non-lethal warfare tactics, such as people fooling around with food supply data or commodities pricing. This was interesting, considering that hundreds of thousands of traders are screwing around with the prices of both every day in Chicago and New York. The U.S. government was interested in knowing how the Chinese, Iranians and Saudi’s might play around with these instruments in lieu of lethal force. You can see how well that research is going: we never found out. The outcomes turned out to be horrendously complex and the project never got the lift we were looking for.

When it was all over, I spent a season making wine in Northern California where I learned almost as much spending time in the fields and cellars of a small winery. Sometimes asymmetrical anomalies, (like the fires whose smoke influenced the wines in the Anderson Valley in 2008 or the noble rot in Burgundy), are unavoidable and end up in the wine. The results are always interesting. Those vineyards too near the fires were ruined. But the tiny vineyard we worked on near the sea caught just enough to give the Pinot that year the faintest hint of wood smoke and cedar, nicely balanced by the wet sea fog.

Having met a lot of winemakers during that year and in the years since, I realized that greatness in making wine, (in anything, for that matter), often comes from asymmetry, or the irrational. There are literally dozens of nuanced considerations per grape and per wine that go into that “delicious” bottle. Think about those things next time you pop the cork. I mention this because while I was writing this article I took note of all manner of asymmetrical features in modern economic life; that of wage inequity and resource allocation most of all. In all probability, this asymmetry applies to everything in life.

The Mona Lisa is that much more impressive because her nose is crooked. In a nutshell, I identified entropy, asymmetry, and irrationality as the three prevalent and actually organic or systemic effects that people and their leaders need to address so that real, sustainable change can be achieved. By entropy, we are referring to the second law of thermodynamics that simply states that the entropy of an isolated system never decreases because isolated systems always evolve toward thermodynamic equilibrium, a state with maximum entropy. (Ok, maybe that isn’t very simple.)

For the purposes of this essay, we rely on this law to provide a sort of guiding principle. Namely, that economic systems also evolve towards a sort of equilibrium, and that we are currently in the very chaotic part of that process. Think of things this way: we are like particles of pulp in a glass of water. Right now we are being spun around, but eventually we will settle. Asymmetry, as far as we are concerned, involves the natural imbalances in any system without which we would not have all of the perfect imperfection around us. In other words, we allow for these imbalances, and if we rely on the first rule—that of entropy—things will settle in time. You can see both of these forces at work. Overvaluations and asset bubbles are asymmetrical financial phenomena, (even though they are incorrectly seen as the new normal), while the market’s acceptance and purging of these instruments is equilibrium. These two forces largely define an example of entropy or the market’s dynamic. These forces, though they may seem arcane to the reader, are absolutely relevant to understanding the implicit stumbling blocks of the current economic paradigm shift.

By irrationality, I refer to the fact that economist Paul Samuelson was awarded the 1970 Nobel Prize (in memoriam) for his brilliant economic application of a little-known theory called the Le Chatelier Principle. Samuelson discovered some fantastic similarities between thermodynamics and economics, and mapped out several relationships between markets, people, and stability that are used to this day. His work stemmed from the notion that economic agents tend to seek satisfaction irrationally instead of seeking to maximize utility. When applied to both corporations and individuals, this idea is not new. But remember, Samuelson's principle talks about maximizing the behavior of agents, (including the behavior of consumers with regard to utility and the behavior of business firms with regard to profit), as well as the behavior of economic systems in stable equilibrium. Samuelson’s hypothesis explains economic outcomes when one or more constraints are tightened or relaxed.

Samuelson's application of the Le Chatelier Principle is also concerned with the amount of flexibility and rigidity in any given system. For instance, rigid systems, as opposed to open-source (flexible) business processes, naturally lack dynamism. Previously, this sort of rigidity was well-suited to predictable market conditions and practices. Given these parameters, it follows economists’ proposed rigid (and uninteresting) theories. To some degree, the status quo requires systems that could not and would not change. Hence, we saw the largely unoriginal thinking that came from Alan Greenspan for nearly twenty years. In 2014, the marketplace is anything but predictable. Even so, most organizational systems are prohibitive to change and obstructive to innovation. They do not flex. Therefore, they are not useful for maximizing utility.

On an organizational level, the very people whose jobs require complex discovery, interpretation, negotiation, and decision-making are often thwarted by the lack of recognition of this gap between predictability and the state of the markets these days. It should be the prime imperative of innovation and innovators to be acutely concerned with maximizing utility, and how to accomplish it using a more human-centric approach. Innovation in the financial world in particular rests on this notion, especially given that its problems are based in a mindset that cultivates greed and inequity. Irrationality to date has proven a reliable indicator of success. People seek to maximize their agency but do it without regard to the holistic fitness of the system. Nowadays there is a growing mishmash of applications, technologies, dashboards, and platforms, all potentially plotted to create a greater opportunity for maximization of utility than was previously thought possible.

Social computing—and by this I do not mean social networks—will be the driving force for greater levels of granularity in analytics and the overall development of holistic systems we have yet to imagine. This is precisely because they offer so much flexibility and dynamism. This development is subtle and impactful across a wide range of business concerns. Maximizing utility is a function of how well we condition and work with data, and perhaps the goal of businesses in general. But the time has come to transition in the most critical of ways: moving away from boardroom rhetoric and bottom line savagery towards pragmatic insight about the ways in which human irrationality is actually detrimental to creating sustainable economic reality. As we evolve out of the current business paradigm, instead of the standard language of efficiencies, we have a movement towards demonstrable, actionable insight that increases human value and meaning while innovating.



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