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psychology

US Defeat In Vietnam: Systematic Theory Of Mind Error

Introduction

Many theories have been proposed to explain the US Defeat in Vietnam. I will suggest a novel one. One cause was a Theory of Mind error made at the top levels of US political leadership.

It is clear that the US possessed much more in the way of conventional military assets in the conflict with North Vietnam than the opposing forces.  This point is widely accepted so I will not spend much time arguing for it.  For example, the US had tanks while the Viet Cong had no anti-tank weapons.*  US forces had “superb artillery and air support” (Sheehan, p. 447, 1988) which enabled any US troops facing locally superior odds to succeed.  

The entire US army fought with the doctrine of “superior firepower” (Sheehan, p. 243, 1988).  The financial resources that the US was able to apply also hugely outweighed those of its opponents in a largely peasant guerrilla army.  Sheehan (p. 624, 1988) writes that commodity aid to South Vietnam reached the staggering figure of $650m in 1966.

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This last point is decisive.  It has been wisely observed that:

“Most wars have been wars of attrition, settled by which side had more staying power through the ability to apply men and materiel.” **

The GDP of North Vietnam in 1965 was $6.0bn in 2015 dollars.  The GDP of the US in 1965 was $4.1tn in 2009 dollars. That is, 683x larger. This makes it very hard to understand the US defeat in Vietnam.

US Defeat in Vietnam: How Is This Possible Given the Resource Mismatch?

Consider the following highly insightful quotation.

“When McNamara wants to know what Ho Chi Minh is thinking, he interviews himself.” ***

Robert McNamara was the Secretary of Defense at the time, and so crucial to  managing the war effort.  It is clearly important to know what the enemy is thinking.  McNamara’s error was to do this in the way that most people do.  This is where we come to Theory of Mind.

Theory of Mind is the label in psychology for the way we predict and explain the behaviour of others.  We all do this all the time.  There is a vibrant debate in psychology as to how we do it.  The mainstream view is “Theory Theory.” This holds that children as young as five, who already have a serviceable Theory of Mind, have formed it by learning a theory of other people. Children do this in a scientific fashion. They propose hypotheses and then confirm or disconfirm them empirically. This is what psychologists think but I think it is implausible.

Simulation Theory

I support the opposing view, which is known as Simulation Theory.**** This suggests that we run our Theory of Mind by putting ourselves in the position of others and seeing what we would do.  This, according to the quotations, is exactly what McNamara did.  And it is why he was wrong and why the US lost.

We can see this same factor in action with another quote from a significant protagonist in Vietnam. Green Beret Colonel Kurtz who makes the following  observation on realising that the Viet Cong have removed the arms of all the children in a village who were vaccinated against Polio by US forces.

And then I realized… like I was shot… like I was shot with a diamond… a diamond bullet right through my forehead. And I thought, my God… the genius of that! The genius! The will to do that!

Col. Kurtz, Apocalypse Now

Theory of Mind Errors

The surprise of the Colonel is again an illustration of Theory of Mind error.  This goes to the heart of the US defeat in Vietnam.

If his simulation of the Viet Cong had been more accurate, he would have been able to predict their action here.  That he was not, and that he was able to see how effective, if inhuman, this strategy was, shows that he was perhaps able to adjust and improve his Theory of Mind more than McNamara was.

It also illustrates the type of Theory of Mind error we should expect.  McNamara was a company man. He had experience from his time running Ford in systems analysis and data handling.  So when he simulated Ho Chi Minh, he drew conclusions along the lines of “I am faced with overwhelming odds; all of the analysis says that overwhelming odds always win; I therefore cannot win. So I should give up.” But that is not what happened.

This forgets the “Blut und Boden” point hinted at by Kurtz.  It misses out the will to fight on one’s own soil irrespective of the prospects of success.  Also missed out is the will to enlist the entire male and female population in the war effort, with many women driving supplies down the Ho Chi Minh trail at night without lights under largely ineffective yet heavy US bombing.  It misses out what the French missed at Dien Bien Phu: the will to disassemble artillery pieces and carry them up jungled mountains by hand.

Institute for Defense Analyses Library
IDA Library

Alexandria, VA 22311 United States

 

You can also buy a copy at the link below if you want to know more about Theory of Mind. ****

Conclusions on US Defeat in Vietnam

We have now seen several types of relevant Theory of Mind error. We can conclude that this played an important role in the US Defeat in Vietnam.

References

* Sheehan, N. (1988)   A Bright Shining Lie: John Paul Vann and America in Vietnam.  Vintage Books

** “The other side has a vote”, The Economist, Oct 14 2017

***  This quotation is from James Willbanks, an army strategist.  It is written up in The Economist, “Buried Ordnance,” in the issue of Sep 14 2017.  The piece is a review of “The Vietnam War,” a TV documentary by Burns and Novick.

**** Short, T L 2015  Simulation Theory: a Psychological and Philosophical Consideration.  Abingdon: Routledge.  URL: https://www.routledge.com/Simulation-Theory-A-psychological-and-philosophical-consideration/Short/p/book/9781138294349

See Also:

#Proust: An Argument For #SimulationTheory

What Is “Theory Of Mind?”

Simulation Theory: A psychological and philosophical consideration

Cognitive Biases And How They Affect Stock Markets

The #Bitcoin Bubble Is Caused By The Halo Effect

Categories
psychology the psychology of successful trading Trading trading psychology

Problems Unwinding PFI

Introduction

PFI is politically unpopular. For that reason, politicians often announce that they will roll it back. Plenty of projects like hospital construction would be impossible without PFI. Many of the arguments against it fail since they do things like add up 30 years of interest and say that that is the cost of the project. There will moreover be significant problems unwinding PFI due to the bonds issued. I will outline that below.

Who Wants to Unwind PFI?

It was at one point Labour Party policy to unwind PFI. PFI contracts would be reviewed and if necessary, brought back in-house.  The report of that is here:

https://www.theguardian.com/politics/2017/sep/25/john-mcdonnell-labour-would-bring-pfi-contracts-back-in-house

Private investors who have put money into PFI schemes will need compensation.  A spokesman said “a future Labour government would compensate shareholders in PFI companies by swapping their shares for government bonds.” 

That might be acceptable, though equity holders may not be at all happy about being placed in a different part of the capital structure. They would have a completely different risk/reward structure and also have exposure changed to a different entity. 

It would work if they got enough government bonds.  I am not sure how popular a “stuff their mouths with gold” policy to ensure silence (and no lawsuits) will be but we will see.  The real problem however lies elsewhere.

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How Does PFI Work?

The way PFI works is that the government or an NHS trust signs a contract with a private sector entity, often a consortium the members of which will include prominently construction and financial firms.  The contract, very basically, will say “you agree that we will have a usable hospital between three and thirty years from now” and “we agree to pay you cash amounts for the same period.”  This removes risk from the government because it no longer has to build the hospital — which incidentally it probably cannot afford to do in any case — and any other interruptions to service during the lifetime of the contract. 

This by the way is why it is not an objection to PFI that it costs more: it should cost more because the government has avoided a great deal of risk.  We know that government projects go over-budget all the time. With PFI that risk passes to the private sector. Most critics do not price risk correctly.

The private sector consortium now has a good chance of receiving government cashflows for 30 years, providing it can build the hospital without problems.  These cashflows are excellent for backing bonds: or in the jargon, they are good candidates for securitisation.  Because they are such good candidates, almost all of them will have been.  One reason why they are so good is that there is very strong demand for such long bonds — from everywhere in these low rate times — but especially from pension funds.  Naturally they want long bonds because they have long liabilities.

What are the Problems Unwinding PFI?

Here’s the problem.  These investors focus on Repayment Risk.  This is the risk that you give them their money back before they were expecting it.  This sounds like good news for the investors, but it isn’t. The pension fund wants interest for 30 years at a rate fixed today. Now you have given them their money back they won’t get that.  This is especially painful for them if rates have declined in the meantime.  The current ultra-low rates environment just underlines this.  Imagine 10 years ago you bought a bond paying you 6% a year for 30 years and now they give it you back and say “go ahead and find another bond that pays you that much…”

Because investors hate this so much, they insist on what is known as a Spens clause.  This basically says that if you repay early, you have to roll up the remaining excess interest payments for the remaining life of the bond and hand that over now.  This will be unimaginably expensive because the excess interest will be calculated primarily from the original rate paid by the bonds and the general rate available.  That difference will be huge in a lot of cases because rates generally are so low.  So you will have to roll up a huge difference for maybe 20 years.

Conclusions: Problems Unwinding PFI Mean You Shouldn’t Do It

Conceivably the government could legislate to take out the Spens clauses.  But that would mean government had intervened radically in contracts agreed between consenting experts in full possession of their faculties…and would destroy the reputation of the City as a secure global marketplace.  We don’t need that ahead of Brexit.  In any case, it would also kill most of the pension funds.  Many of those are foreign, so even if the government were able to lean on the local ones, they would still pick up some fearsome litigation. Problems unwinding PFI are such to make it a bad idea even if PFI was a mistake, which it isn’t.

See Also:

The Psychology of Successful Trading: see clip below of me explaining my new book!

Cognitive Biases And How They Affect Stock Markets

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

UK Government Spending: Where It Needs To Be Cut And Why

Categories
psychology the psychology of successful trading Trading trading psychology

Kerviel: How He Got Away With It

Jerome Kerviel, accused of being a rogue trader, is now on trial. SocGen lost $7bn in the incident which heads the list of major trading losses.

http://en.wikipedia.org/wiki/List_of_trading_losses

How did he do it?

This is actually a very similar situation to Nick Leeson at Barings – number 11 in the top list. They were both involved in forms of arbitrage, which exploits tiny differences in price which ‘shouldn’t’ really be there. In fact, pricing theory fairly obviously requires that there can’t be a price difference between two identical items. If that were false – say if one loaf of bread had a different price to an identical one – then I could make a risk free profit by buying at the low price and selling at the high price. And there can’t be a risk free profit because everyone would pile in. You can see that what would happen would be that the prices would equalise.

Now this is what the arbitrageurs exploit. It all hinges on what ‘identical’ means. Not quite identical introduces some risk. Leeson was buying one product in Osaka and selling the same product in Singapore. Clearly if the product is the same, exactly, there is no risk. You might ask what might cause a price difference – there might be transient local factors such as someone big in Osaka decides to buy something. And then there could be a delay before Singapore catches up. And that catch-up process is exactly what the arbs do.

Kerviel was involved in arbing equity index futures and underlying equities. Equities are stocks, indices are groups of stocks like the FTSE-100 and equity index futures is just a bet on where the FTSE-100 will be in six months from now. Clearly you can do that on a risk free basis if you, say, sell the index and buy all the stocks in it. [Incidentally, if you want to be an insider trader but don’t want to go to prison, maybe you could buy an index in which the stock you can’t trade figures and then sell everything in the index except the one you aren’t allowed to trade…but I don’t recommend it…]

Why is it dangerous?

There are two common factors between this case and Leeson. In both, the alleged misdeeds were possible because the trader and the back office person were effectively the same person. Leeson actually did his own monitoring, an extraordinary failure which rightly cost the jobs of many at Barings. I could go further and say it was so remarkable that everyone involved in the company deserved to lose all their cash, but I know there were lots of Barings debentures held by grannies and I suspect we can’t expect them to have known what they were doing. While Kerviel came from back office himself and knew the control systems and would have known how to defeat them. I also will claim that back office types are rather easy for front office traders to browbeat and this history will have played a part in Kerviel’s psychology and the desire to get somewhere fast.

Secondly, because you are exploiting tiny price differences, you need to trade in vast amounts. And all the time. The control problem comes when you do not have offsetting equal and opposite trades but wind up taking huge uncovered positions. Leeson sorted this out with a fax purportedly evidencing a large receivable from a hedge fund. Towards the end, he was drawing in funding from all over Asia, which should have alerted someone.

What is odd about this case?

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You can’t make large amounts of money from arbitrage. You just can’t, because risk and reward are closely linked. You can see from the loaf of bread example that that has to be true. So if you are a manager in an I-bank, you need to get very concerned if your arbitrage desk is making large profits.

Now this leads to the strange consequence that Kerviel must have been concealing large profits. And this is what you see.

http://news.yahoo.com/s/nm/20100608/ts_nm/us_socgen_kerviel

“During the largely procedural first day of the trial, Kerviel’s lawyer said Societe Generale would have been clearly able to see data showing Kerviel’s extraordinary profits of 1.4 billion euros at the end of 2007”

Note that this is profit not revenue, and that SocGen as a whole might typically make a net profit around EUR600m in a quarter. Do you think you could spot Kerviel in there?

“Seated on a plastic chair in front of rows of lawyers in black garb, the ex-trader said his annual salary at Societe Generale was 48,000 euros in 2006 with an annual bonus of 60,000 euros”

Now that is not a lot of money for traders. They might typically expect to make 5% to 10% of what they produce, or more in some cases where they are reliably producing large returns. Apparently Kerviel was expecting to make EUR300,000 for 08, on a declared profit of EUR60m. That’s a 0.5% return. You can see that this is not enough. Someone with that type of track record could just set up on their own, use the track record to raise funds, and trade themselves for maybe 50%. There is another type of arb there.

The GBPEUR exchange rate in 07 was 0.67, so we are talking about someone earning a salary of £32k. This is not far north of what we used to pay graduate trainees in London. So what we have here is someone being paid back office amounts, a French I-bank culture in which you shouldn’t really pay very much or have high quality people, and back office resentment of the flash and the furious.

“Lawyers also read a transcript of a conversation between Kerviel and SocGen’s ex-investment bank chief Jean-Pierre Mustier when the scandal broke, in which Mustier reportedly said: “If you won 1.4 billion euros, that means you’re very good. What you did was a pain, but it’s not a big deal.”

If Kerviel can make that out, then Mustier has failed in a stunning way to understand what arbitrage is. It is a French word, after all. It may be difficult to see how Kerviel can avoid jail, but he cannot have been on his own in this one.

See Also:

What Is “Theory Of Mind?”

The Late Evaluation Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

The RMT Is Right, Just This Once

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Categories
philosophy psychology the psychology of successful trading Trading trading psychology

Do We Harm the Global Poor?

Peter Singer argues that we harm the global poor. By ‘we’, he means those of us living in the developed world, and by ‘harm’ he means actively damage. He is writing in November 1971 at a time of famine in East Bengal. He observes that if I am walking past a drowning baby in a pond, I have a duty to assist even if I might get my expensive suit dirty. He is careful to specify that it is a shallow pond: I am not being required to endanger myself. He compares the aid spend of the Heath administration at that time (£14.75m) with the projected cost of Concorde (£440m, with the out-turn being £1,400m). [You can scale all those numbers up by around 10x if you want to use RPI as an inflator.]

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Thomas Pogge goes further. Everyone in the West is culpable as a result of the industrial revolution being founded on uncompensated asset transfers in colonial times. We must now assist much more than we are currently doing.

Now I don’t agree with the premises but the argument seems valid. Singer says there is no difference between helping the baby and helping someone in sub-Saharan Africa under famine conditions. I think there is a disanalogy in that as Pogge points out, it isn’t just one baby in the pond – there have been 270m deaths from famine in the 15 year period starting in 1990. You can’t save that number of babies from drowning. The 270m number is more than died in combat in the whole of the last century.

I don’t think there is any case for Jobseekers’ Allowance to be paid in this country, at least while there are any job vacancies. You will doubtless disagree with me and saying I am being too harsh, and that people have a human right to work. I also disagree with that, but it doesn’t matter. Because the question for you is how to deal with the Singer and Pogge argument if you think there is a human right to work or to subsistence at the expense of others. Then:

Why is it OK to spend money on people in Bolton to keep them alive but not in Africa?

Singer wants us to spend maybe 25% to 40% of GDP on aid. He doesn’t want to use all of it because he admits that that would be counterproductive – it would be better to retain a strong economy than overtax it. But then in a variant of the above question, which is phrased for physicists since that was whom I was in the JB with last night, is:

Why is it OK to spend £5.6bn on the LHC when people are starving?

I have given my response to this. If you want to deny my exit is conscionable, then you will need a different answer. Maybe you want to say something like ‘ we should look after the people who are already here first’. But do you really want to say that? Why does conscience end at the borders, if it exists and produces duties? Why should people fortunate enough to be born here get looked after? Aren’t you dangerously close to saying ‘we should look after the people who look like me’? Or are you saying ‘I can see that homeless person so I should help him’ while people you can see only on television who are much worse off can be safely ignored…?

So I would announce the end of Jobseekers’ Allowance in three months with a three month transition period after that. I don’t mind weakening it if you don’t think I have a right to insist that people move – the phase out can occur only to the extent that there are no jobs locally available if you like. Note that this is not Incapacity Benefit – paid to those who medically cannot work – or Carers’ Allowance – paid to those looking after someone. I have said nothing about those benefits.

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I think if we must spend this money, it is morally better spent in Africa and even the economics say so. It is mathematically the case that almost 3 of those 270m people were the smartest person in 100m. I don’t know of any reason why people with the capacities of an Einstein wouldn’t be born anywhere in the world. Shouldn’t we be finding those people and helping them? You can be as smart as Einstein and also incredibly diligent; it won’t help you or us if you don’t make it to three months old.

See Also:

What Is “Theory Of Mind?”

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

#Norway Is Still A Safe Investment Option

The Psychology of Successful Trading: see clip below of me explaining my new book!

Categories
psychology the psychology of successful trading Trading trading psychology

Cutting UK Government Spending

This is a pair of pie charts showing the UK Government’s income and expenditure from a couple of months ago. This will doubtless be revised after the emergency budget on 22 June. You can see the size of the problem here. The difference between cash in and cash out is made up by borrowing. At the time these graphs were were produced, the gap was £704bn – £541bn = £163bn.

These numbers are generally expressed as a proportion of GDP. The limit under the Maastricht criteria was 3%. The UK is not in the Eurozone, but reports these numbers anyway. The situation improved somewhat recently to around £156bn p.a., but that is still bad at 11.6% of GDP.

UK borrowing below forecast, still worst since WWII

The questions are these.

Justification

Why is it OK for some people to spend other people’s money? If we continued on the previous path without cutting public spending, we would borrow maybe an additional £1,000bn over the course of a parliament. It would take probably 40 or 50 years to pay that back at best. We are spending it now, but will not hang around to pay it back. Why should people graduating with me this year have to pick up that tab?

Do we need cuts?

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There are still people who want to borrow more and spend more. “Now is not the time to be making severe cuts to the economy. Cuts too deep and too soon risk the economy falling back into recession,” said Brendan Barber, TUC general secretary, which has warned that the plans could increase unemployment and the benefits bill. Well, that’s true – but what is the alternative?

Where to cut?

If you want to solve a cashflow problem, you have to reduce spending and increase income (or taxes). The government has decided this split will be 80/20. If you want to do something serious about this problem, you have to look at the largest item, which is by far social security spending at £231bn p.a. on the above pie charts.

To put that in perspective, the LHC, which is the most expensive scientific experiment ever built, cost £5.6bn.

http://en.wikipedia.org/wiki/Large_Hadron_Collider#Cost. What would the UK economy be like if we built 41 LHC’s in Leeds every year?

See Also:

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

Where To Cut UK Government Spending: An Alternative Approach

Where To Cut UK Government Spending: An Alternative Approach

Categories
psychology the psychology of successful trading Trading trading psychology

Problems With Quantitative Easing

So the G20 has worked out we need to stop pumping money in and start repairing the fiscal balances of governments. A good move. Even Strauss Kahn, who has been frankly a bit overly French on this, is on board with the change. Surprisingly, it seems to have been the Americans who have been dragging their feet the most.

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Still waiting for the Hungarian shoe to drop properly. Maybe that is containable since they are not in the Eurozone, but when the spokesman for the Premier says that talk of sovereign default is ‘not exaggerated’ you know things are serious.

The G20 also dropped the idea of a global bank levy, saying rather disingenuously that it would be up to individual countries to take their own steps. That’s disingenuous because the whole point is that you can’t do something like that unilaterally because it won’t be effective and it will be counterproductive.

Merkel’s ban on naked shorts (should be policy also for German holidaymakers) was a brilliant move if you were seriously interested in relocating three desks worth of traders from Frankfurt to London for a short period. If that wasn’t high on your policy agenda, then…not sure what you get.

Populist driven economic policy is generally even worse than the democratic outcomes elsewhere because people are actually actively bad at economics as opposed to merely being poorly informed and generally uninterested as in other spheres.

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So what does this mean? Markets seem to have been spooked more by poor NFP numbers out of the US than anything else yesterday, but in any case not enough may have been known during opening hours – the G20 communique is reported as of lunch time today. So we’ll see on Monday. And also whether this top cap thing in the Gulf is going to work.

See Also:

The Psychology of Successful Trading: see clip below of me explaining my new book!

UK Government Spending: Where It Needs To Be Cut And Why

Where To Cut UK Government Spending: An Alternative Approach

John #McDonnell’s Characterisation Of #Finance Is Misconceived