I said this to my brother-in-law (Dave) at the weekend – and then went on to clarify. Other than the two articles in the new Wired magazine that I’ve commented on already, the other very interesting read was one quite compelling explanation for the current financial crisis and it is indeed to do with a man called Dave. 

David X Li is a Chinese mathematician who emigrated to Canada and while working for Barclay’s Capital in 2004 invented a new formula for managing risk – which ultimately led to the growth of the subprime mortgage market. The Wired article gives an excellent analogy (you can read here) to explain the thinking behind the formula but the bottom line is that although, on face value, it is a persuasive concept it didn’t work and now we are all paying the price.

The big problem here however is that the formula wasn’t just tested out by one or two traders – it was adopted by every single trader. As the article states more accurately, “David X Li can’t be blamed. He just invented the model. We should blame the bankers who misinterpreted it”

To me this is one of the biggest and most explosive examples of ‘Groupthink’ in history. The speed with which the world now operates and the complexity and immediacy of the computer and communications systems we are surrounded by, means this was a scenario just waiting to happen. There is also something here about American business culture in particular that I have personally experienced, having worked for US run organisations for a fair chunk of my career. That ‘can do’ attitude that has built many a successful business can also backfire spectacularly when it is at the expense of ‘critical thought’ and valid opposing viewpoints.

These same issues can apply on an even larger scale and make concepts such as ‘collective intelligence’ and the ‘wisdom of crowds’ – that are often fuelled by social media mechanisms but not always governed by clear thinking – as potentially quite dangerous. On this occasion, the US pioneering on the bleeding edge of technologies has provided a massive wake-up call!

“Nobody knows the age of the human race, but everybody agrees that it is old enough to know better.”
– Anonymous

I liked the above quote, spotted on my iGoogle page over the weekend. Current events certainly illustrate that no matter how smart and sophisticated we think we are, we seem destined to repeat the mistakes of the past. Remember Gordon Brown’s classic sound bite from his time as Chancellor “No more boom and bust”? Hmmm – foolish words in retrospect as he presides over what is looking like the biggest boom and bust in history. But foolish words also if he really thought that the human population had suddenly forsaken greed and everyone could be trusted to manage their own financial affairs without getting themselves into hideous, unsustainable debt.

When I was looking back to 2020 BC last week it was interesting to remind myself of some of the Egyptian history and legacy. There were 31 Egyptian dynasties stretching over 3000 years – the year 2020 was at the start of the ‘Middle Kingdom’ that lasted for 400 years and the Great Pyramid of Giza had already been in existence for over 500 years. Egyptian society was very structured with food and wealth collected centrally and then redistributed in payment for work. Men and women had equal rights and all levels of society had the right to appeal against rulings they thought unjust. Look around the world today – particularly at countries in turmoil – and invariably that last statement cannot be applied and is often the root cause of the problems.

The Greek and Roman civilisations are credited with the development of democracy but it wasn’t to re-emerge and rise again until the 17th Century. However, linked to the primitive democracies of the ancient world is also the concept of ‘mob rule’. Athenian Democracy is perhaps the most documented of ancient democratic movements but was twice interrupted by what the Greeks termed Ochlocracy – which was essentially government by a mass of people through the intimidation of constitutional authorities.  You may also remember in the film Gladiator, the emperor Commodus orders 180 days of gladiatorial games to keep ‘the mob’ happy and distracted from rising social unrest.
The term ‘mob’ originally derives from the Latin phrase mobile vulgus meaning ‘the easily moveable crowd’. In many cases, a mob, however massive, may not be representative of the often silent majority – particularly in large societies that are based on representative democracy.

Is history repeating itself once again? Our global crisis appears to be inciting ‘mob rule’ on a global scale. Firstly we have ‘the mob’ baying for the blood of the bankers the world over and our elected politicians who are, by and large, complicit in this debacle echoing ‘the mob’ and feeding its anger still further as if to distract from their own culpability. And then you have the appeasement – Politicians using money that they don’t have to keep the mob happy and reduce the possibility of social unrest on their watch whilst building up a bill that will still have to paid on someone else’s.

The term ‘social media’ has been coined to describe the rise of blogging (macro and micro) and networking sites such as myspace and facebook. However, there is often comment about how representative these environments actually are. True, there are many millions of blogs out there but how many are actually active and how many of the active ones are the mouthpieces of vocal minorities not bound by the journalistic conventions of the mainstream media? Does the ‘mass voice’ of the Twitterverse lead to a dumbing down of political agendas as cited here? Can the classic line from Gladiator – “Rome is the mob” be applied to the contemporary world – “Twitter is the mob”?