What do artificial, human designed pacemakers, the Federal Reserve, and Medicare have in common? Let's find out ...
Exhibit B: Federal Reserve ... produces blow ups (turn on the TV), despite the illusion of control, and it generates a dangerous "hidden inflation tax" that goes unnoticed because of the problem of silent evidence (watch this video and this one).
Undoubtedly, Medicare and the Federal Reserve represent centralized social engineering systems that could learn a bit from the multifractal complexity and system robustness of healthy human hearts: reimbursement and interest rate setting should parallel healthy heart rate maintenance and enhancements processes.
And we all blow up ... at the same time.
What could physiology teach us about preventing blowups? A lot.
But first, we must remember our late friend, Richard Feynman:
Notice (in the image above) Feynman's analysis of NASA; the key to success: "Built from the bottom up." Top-down construction via design on high is the quickest, most effective way to build a self-deceptive bureaucracy. On the other hand, bottom-up construction maximizes stochastic tinkering within organizations, allowing agents to stumble upon new ideas and concepts along the way. Top-down design employs theories, rhetoric, and ecologically sterile perspectives (often coupled with misuses of statistics, to top things off). A Bloomberg.com article (read here; thanks to Dave Lull) states Nassim Taleb may title his next book, Tinkering. The article suggests that Nassim's aim for this book is to provide insight on how to search and act in a world that we do not understand. Stochastic tinkering within a barbell framework represents one promising way to "factor for the invisible" by maximizing exposure to the envelope of serendipity while limiting and insuring against downside risks as much as possible - constructing a hedged portfolio of hyperconservative (vanilla, mild uncertainty) and hyperagressive (exotic, wild uncertainty) options. As I mentioned before, stochastic tinkering upon a platform that will not fall out from underneath you unexpectedly allows you to leverage your hyperagressive options as much as possible (for example, pursue a scalable startup company that catches fire: take the next Google from the basement to the world). Discovering the unseen, the invisible, and the unknown requires stumbling upon new information and insights and then "connecting the dots" to recognize the implications of this novel finding.
As the refreshing thinker Navanit Arakeri (click here) has hypothesized (click here), Levy walk strategies - prolonged searching marked by intermittent, intense local acting (up until the point of diminishing returns) - could be entropy maximizing under fixed path-length constraints, which could maximize exposure to positive Black Swans. Remember, though, that "doing nothing" is also an act and an option (click here). Balancing these action options in the spirit of stochastic tinkering is critical to addressing the problem of "what to do when you don't know and are constrained by resources." Art DeVany picked up on an interesting research study of human movement patterns (click here to read). As this study shows, we move like predators; we are hunters - and some of us hunt diseases in patients. Our movement patterns represent self-affine Levy walks, so I suspect that stochastic tinkering embodies our evolved searching methods. Stochastic tinkering is a Levy walk strategy that involves trying different things and pursuing new paths (remember, Richard Feynman said, "To keep trying new solutions is the way to do everything"), self-experimentation (read Seth's blog; it is wonderful), and suspending judgment - epoche - in order to remain open to the positive Black Swans that emerge from the envelope of serendipity (the wheel, for instance). Often, tinkering persists for prolonged periods without much progress, and then, boom, all of the sudden, you connect the dots, are struck by insight, and move to action within a newly revealed, previously undetected texture of our world. This type of tinkering helps insure against tunneling - the source of blowups - by minimizing human-imposed, platonic reductions of the complex, recursive, and unknown dynamics of our world. At its core, stochastic tinkering embraces unknowledge, and this theory-free search process has fractured human history repeatedly in ways that have advanced our lives and our world exponentially (stochastic tinkering has an unmatched track record: see the discovery of the laser, the internet, and the personal computer for recent high impact fractures).
So, if stochastic tinkering is a bottom-up, diversified (polycentric) modus operandi for searching and acting in a world that we do not understand, how could top-down, centralized (monocentric) social engineering via design on high cause blowups?
Well, centralization causes us to blow up at the same time because centralized systems tunnel into narrow domains and construct narrow portfolios that lack diversity. Massive diversification is the best way to hedge against blowups. Prices and rates set in open/free markets reflect highly diversified inputs, while centralized price and rate setting mechanisms suffer from tunneling. Diversification respects the humble limits of being human.
What could physiology teach us about preventing blowups? A lot.
But first, we must remember our late friend, Richard Feynman:
Notice (in the image above) Feynman's analysis of NASA; the key to success: "Built from the bottom up." Top-down construction via design on high is the quickest, most effective way to build a self-deceptive bureaucracy. On the other hand, bottom-up construction maximizes stochastic tinkering within organizations, allowing agents to stumble upon new ideas and concepts along the way. Top-down design employs theories, rhetoric, and ecologically sterile perspectives (often coupled with misuses of statistics, to top things off). A Bloomberg.com article (read here; thanks to Dave Lull) states Nassim Taleb may title his next book, Tinkering. The article suggests that Nassim's aim for this book is to provide insight on how to search and act in a world that we do not understand. Stochastic tinkering within a barbell framework represents one promising way to "factor for the invisible" by maximizing exposure to the envelope of serendipity while limiting and insuring against downside risks as much as possible - constructing a hedged portfolio of hyperconservative (vanilla, mild uncertainty) and hyperagressive (exotic, wild uncertainty) options. As I mentioned before, stochastic tinkering upon a platform that will not fall out from underneath you unexpectedly allows you to leverage your hyperagressive options as much as possible (for example, pursue a scalable startup company that catches fire: take the next Google from the basement to the world). Discovering the unseen, the invisible, and the unknown requires stumbling upon new information and insights and then "connecting the dots" to recognize the implications of this novel finding.
As the refreshing thinker Navanit Arakeri (click here) has hypothesized (click here), Levy walk strategies - prolonged searching marked by intermittent, intense local acting (up until the point of diminishing returns) - could be entropy maximizing under fixed path-length constraints, which could maximize exposure to positive Black Swans. Remember, though, that "doing nothing" is also an act and an option (click here). Balancing these action options in the spirit of stochastic tinkering is critical to addressing the problem of "what to do when you don't know and are constrained by resources." Art DeVany picked up on an interesting research study of human movement patterns (click here to read). As this study shows, we move like predators; we are hunters - and some of us hunt diseases in patients. Our movement patterns represent self-affine Levy walks, so I suspect that stochastic tinkering embodies our evolved searching methods. Stochastic tinkering is a Levy walk strategy that involves trying different things and pursuing new paths (remember, Richard Feynman said, "To keep trying new solutions is the way to do everything"), self-experimentation (read Seth's blog; it is wonderful), and suspending judgment - epoche - in order to remain open to the positive Black Swans that emerge from the envelope of serendipity (the wheel, for instance). Often, tinkering persists for prolonged periods without much progress, and then, boom, all of the sudden, you connect the dots, are struck by insight, and move to action within a newly revealed, previously undetected texture of our world. This type of tinkering helps insure against tunneling - the source of blowups - by minimizing human-imposed, platonic reductions of the complex, recursive, and unknown dynamics of our world. At its core, stochastic tinkering embraces unknowledge, and this theory-free search process has fractured human history repeatedly in ways that have advanced our lives and our world exponentially (stochastic tinkering has an unmatched track record: see the discovery of the laser, the internet, and the personal computer for recent high impact fractures).
So, if stochastic tinkering is a bottom-up, diversified (polycentric) modus operandi for searching and acting in a world that we do not understand, how could top-down, centralized (monocentric) social engineering via design on high cause blowups?
Well, centralization causes us to blow up at the same time because centralized systems tunnel into narrow domains and construct narrow portfolios that lack diversity. Massive diversification is the best way to hedge against blowups. Prices and rates set in open/free markets reflect highly diversified inputs, while centralized price and rate setting mechanisms suffer from tunneling. Diversification respects the humble limits of being human.
Here are two glaring examples of tunneling due to centralized price and rate fixing/setting that have resulted in tremendous blowups, despite having conveyed the illusion of control for many years:
Exhibit B: Federal Reserve ... produces blow ups (turn on the TV), despite the illusion of control, and it generates a dangerous "hidden inflation tax" that goes unnoticed because of the problem of silent evidence (watch this video and this one).
Undoubtedly, Medicare and the Federal Reserve represent centralized social engineering systems that could learn a bit from the multifractal complexity and system robustness of healthy human hearts: reimbursement and interest rate setting should parallel healthy heart rate maintenance and enhancements processes.
Surely, the bottom heart rate recording appears to be "more stable" and "more predictable" and thus healthier than the top heart rhythm. Right? Wrong. Yes, the top heart rate recording appears messier, less controlled, less stable, and less tractable than does the bottom one. However, the top recording illustrates a healthy human heart rate pattern: a multifractal. Meanwhile, the bottom sinusoidal, repetitive, and simplistic wave reflects a diseased, unstable, and unhealthy heart state of Congestive Heart Failure (CHF represents a blowup to part of the heart).
In developing a case to blow up Medicare and the Federal Reserve - we can find more creative and much more effective alternatives - in order to prevent further and future blow ups, I draw on Dr. Ary Goldberger's wonderful, perceptive statements and developments in his piece, "Nonlinear Dynamics, Fractals, and Chaos Theory: Implications for Neuroautonomic Heart Rate Control in Health and Disease," published on PhysioNet (please click here to read and cite). Remember, breakdowns in multifractal complexity signal disease and aging ...
On PhysioNet (click here), Dr. Goldberger (one of my newest heroes) states: "Note that according to classical physiological paradigms based on homeostasis, neuroautonomic control systems should be designed to damp out noise and settle down to a constant equilibrium-like state. However, the healthy heartbeat displays highly complex, apparently unpredictable fluctuations even under steady-state conditions. In contrast, the heart rate pattern from the subject with heart failure shows slow, periodic oscillations that correlate with Cheyne-Strokes breathing." Clearly, the Federal Reserve, as a "control system," attempts to "damp out noise" in the economy and "settle [the economy] down to a constant equilibrium-like state." However, healthy economies and markets, like healthy hearts, "display highly complex, apparently unpredictable fluctuations even under steady-state conditions." If we learn anything from healthy human heart rates, we should learn that "slow, periodic oscillations" deceive us, and this illusion of control and stability precedes unexpected blow ups - negative Black Swans - that devastate us. An economy dependent upon the Federal Reserve suffers from an anesthesia (click here) that stems from an illusion of control and stability. For too long, the platonic notions of steady-state homeostasis and equilibrium have blinded our abilities to embrace reality.
Interestingly, sustained oscillations, complex periodicity, and periodic spikes in heartbeats are associated with sleep apnea as well. Abrupt changes, intermittent bursting, and multifractal complexity are hallmarks of healthy heartrates, neuronal signaling, breathing patterns, and sleep rhythms and waves. On the surface, as illustrated above in the "healthy vs. heart failure" heart rate images, diseased hearts appear stable and safe, but this opacity deceives us wildly. This deception of predictability represents heart failure, not health; similarly, interest rate setting by the Fed silently selects for negative Black Swan blow up events from off-model hits that penetrate the false, superficial robustness of the Fed's models, theories, and tools (despite how elegant they appear and how much sense they make on paper).
A mantra to remember: "A Healthy Heart is a Fractal Heart" (click here)
Similarly, as a centralized price setting entity, Medicare fixes (and the insurance companies simply follow suit) reimbursement rates to physicians and the healthcare system in an attempt to control and dictate the structure and function of our nation's healthcare system. To achieve this social engineering agenda via design on high, Medicare uses the Resource-Based Relative Value Scale (RBRVS, click here) in an attempt to capture and assign value to every thing that occurs within our healthcare system. In short, this is a "Lego manual," a hallmark, bureaucratic product required by all social engineering design systems. Not surprisingly, these top-down Lego manuals tend to grow exponentially as centralized systems continually attempt to exert even more control when they discover that their envisioned plans and hoop-jumping mandates turn out differently than expected - unintended consequences - alas, the market always adjusts.
So, let's build a vivid analogy that relates prices and interest rates to heart rates. Healthy heart rates reflect decentralized inputs from numerous sources throughout our bodies (our bodies are comprised of trillions of cells) - similar to prices set in free-markets - and, although these healthy heart rates appear messy, they reflect robust cardiovascular systems that are fluid, dynamic, and capable of handling far-from "equilibrium" shocks and changes. The Fed is like an artificial, human designed pacemaker that, via top down design on high, imposes periodic interest (heart) rates on complex economic (physiological) systems. This design mechanism gives many the illusion of control, but erosion occurs silently as a result - the devaluation of the US dollar, for instance - until unexpected blowups occur - the current mortgage industry collapse.
Let's return to Dr. Goldberger's (read about him here) thoughts: "A system that has only one dominant scale becomes especially easy to recognize and characterize because such a system is by definition periodic - it repeats its behavior in a highly predictable (regular) pattern: namely, that the wide range of illnesses are associated with markedly periodic (regular) behavior even though the disease states themselves are commonly termed 'dis-orders'."
He continues on: "When physiologic systems become less complex, their information content is degraded. As a result, they are less adaptable and less able to cope with the exigencies of a constantly changing environment. To generate information, a system must be capable of behaving in an unpredictable fashion. In contrast, a highly predictable, regular output (i.e., a sine wave) is information-poor since it monotonously repeats its activity." I suspect that prices set by Medicare and interest rates determined by the Federal Reserve reflect poor information content, and that open/free market prices and rates would reflect and capture more information - although this information capturing process is invisible (the "invisible hand" at work) - than would centralized decisions made on high by a small group of fallible humans. Prices and interest rates set freely and openly in markets reflect local factors, personalization / individualization, and ecological intelligence (see microfinance in economic development) - this organic process enhances our ability to factor for the invisible and account for the unknown, even if we do not realize it. Markets produce prices and interest rates from the bottom up, and this process tends to build robust systems that are adaptive and "able to cope with the exigencies of a constantly changing environment." Yet, as we have learned from the images above, healthy heart rate dynamics display unpredictability and irregularities, but health and real-world stability/robustness underlie and drive this multifractal complexity. So, learning from healthy hearts, we should expect healthy prices and interest rates that emerge from open markets to display similar variations; but, despite what most would jump to conclude, these variations do reflect robust, organized systems; remember, "spontaneous order" (click here) emerges in sugar crystal formation, and this order is unique, yet stable, complex, yet simple. Healthy human heart rates reflect spontaneous order within human bodies, and these rates embody the immense biochemical complexity the drives and governs our physiologies. Maintaining and enhancing natural, healthy human heart rates via Evolutionary Fitness is a much more effective approach to producing healthy people than is installing artificial pacemakers in every person's heart to set heart rates that human engineers deem "optimal" for each individual.
Again: central price and interest rate setting degrades the information content of these numbers. In the Information Age, a humbler approach to capturing and conveying information to citizens and consumers would be to unshackle our markets from the social engineering forces of Medicare and the Federal Reserve.
Returning to Dr. Goldberger's splendid writing, we stumble upon a few more gems: "A key feature of the class of fractals seen in biology is a distinctive type of long-range order. This property generates correlations that extend over many scales of space or time. For complex processes, fractal long-range correlations are the mechanism underlying a 'memory' effect; the value of some variable, e.g., heart rate at a particular time, is related not just to immediately preceding values, but to fluctuations in the remote past." I highly doubt that a monocentric group of experts sitting around a table possess the capabilities to understand and factor for this level and type of sophistication.
In addition, "[f]indings from nonlinear dynamics have also challenged conventional mechanisms of physiological control based on classical homeostasis, which presumes that healthy systems seek to attain a constant steady state. In contrast, nonlinear systems with fractal dynamics, such as the neuroautonomic mechanisms regulating heart rate variability, behave as if they were driven far from equilibrium under basal conditions. This kind of complex variability, rather than a regular homeostatic steady state, appears to define the free-running function of many biological systems." The "free-running function" of open/free-markets benefit from innovation jumps in history and fractures via breakthroughs much more often and rapidly than do centralized systems (see Dr. Morton Meyers' critiques of the NIH's funding process and philosophy in his book, Happy Accidents) that tunnel dangerously into narrow domains.
Finally, speaking to medicine, Dr. Goldberger states: "From the most general perspective, the practice of bedside diagnosis itself would be impossible without the loss of complexity and the emergence of pathologic periodicities. To a large extent, it is these periodicities and highly-structured patterns - the breakdown of multi-scale fractal complexity under pathologic conditions - that allow clinicians to identify and classify many pathologic features of their patients." As a researcher of Congestive Heart Failure, this perspective interests me and will surely guide my future inquiries ...
Overall, we must remember a point that the brilliant Navanit Arakeri (click here) recently and astutely blogged about: the "Tradeoff between Volatility and Kurtosis" (read here). Variance, the second moment, distorts our understanding of risk. Navanit shows that the fourth moment, kurtosis, shifts when we attempt to limit variance. Silently, this kurtotic shift creates "fat tails" that increase our exposure to "unlikely" events. This skew exposes us to blowups ... despite our blindness. Medicare and the Federal Reserve tunnel on variance; they lack diversity.
In the end, trees emerge from the ground, growing from the ground up in a recursive, self-affine manner to produce brilliant branching patterns and structures. Ben Hogan, the great golfer, said, "The secret is in the dirt" (read here). Without advanced technology like video cameras, Ben Hogan built one of the greatest and most reliable golf swings ever "from the dirt up." We could learn from Ben. Learning from trees, Ben Hogan, and healthy human heart rate dynamics, I suspect that we should reevaluate our philosophy on centralized price and interest rate setting; in short, given the states of our healthcare system and economy, we should not only think outside-the-box, but we should blow these boxes - the Medicare and Federal Reserve models - up from the bottom up and engage the undirected stochastic tinkering entrepreneurial engine of open/free-markets in hopes of maximizing our exposure to the positive Black Swan producing envelope of serendipity - our desperately needed solutions are hidden, waiting in the wings for us to stumble upon them and bring value to and improve people's lives for the better forever.
Out of respect for the humble limits of being human, let's limit our artificial pacemaker implants as much as possible - despite our physical engineering prowess in mediocristan - because social engineering via top-down design on high fails miserably in extremistan: healthcare and economic systems blow up. I am optimistic that by respecting the humble limits of being human in this manner, we will, paradoxically, stretch the limits of being human in far greater ways than we can imagine right now: diversified human creativity and solution searching drives innovations that change our world dramatically - let's construct broad portfolios of solution searchers, not narrowly defined systems directed by "experts" sitting around tables. We are local animals; we are the experts ...
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