Worth Reading

The moment we found a Bosavi woolly rat (with thanks to Leon Wild).

The New Yorker‘s Sasha Frere-Jones on Trent Reznor and Nine Inch Nails’ final tour.

My 2008 presentation on Reznor and Radiohead’s strategies during ‘label shopping’ negotiations.

What Reznor possibly wished he had produced and why it leaked to BitTorrent.

Sears Holdings chairman Edward Lampert responds to Barron’s.

TNR‘s Peter Boone and Simon Johnson on the next financial crisis.

Johnny Rotten revives Public Image Ltd.

Richard Metzger’s new site Dangerous Minds.

Mumbai Siege: The Hunt for the Perpetrators

Counterterrorism analysts search for answers as the official death toll from Mumbai’s siege rises to 183 people.  We now enter Susan Moeller‘s second stage of post-terrorist attacks: the hunt for the perpetrators and seeking justice.  See my October 2001 analysis here on the September 11 aftermath and Henry Rollins’ reaction in New York City.

Slate‘s Anne Applebaum observes that we don’t yet know much about the group that carried out the attacks.  Applebaum’s analysis echoes Walter Laqueur‘s ‘new terrorism’ thesis in the mid-to-late 1990s: attempts at mass casualty attacks, tactics from the guerrilla and insurgency playbook, an ideological mix, and groups that either do not claim credit or who are not on the radar of counterterrorism analysts.  Applebaum captures Gregory Treverton‘s distinction between solvable ‘puzzles’ and potentially unsolvable ‘mysteries’ in intelligence analysis.

“The particulars of the attacking group are unknown; the
political-military equation from which the group has almost certainly
arisen is not,” notes The New Yorker‘s Steve Coll.  The most plausible hypotheses for Coll and other counterterrorism experts are: (1) Pakistan’s intelligence services may have funded the group in a clandestine/proxy war with India; or (2) the group emerged as an autonomous cell that was ideologically motivated by the clandestine/proxy war.  Coll explains why at this early stage the Mumbai siege is closer to Treverton’s ‘mysteries’:

If past investigations into such groups prove to be any guide, it may
be difficult to find clear-cut evidence of direct involvement by
Pakistani intelligence or army personnel. This is because Pakistan,
knowing the stakes of getting caught red-handed, has increasingly
pursued its clandestine proxy war against India in Kashmir and on the
Indian mainland through layers and layers of self-managing and
non-state groups. The Pakistani government and its domestic Islamist
proxies, including nominally peaceful charities based in Pakistan but
with operations in Kashmir, almost certainly pass through money and
weapons on a large scale. They do so, however, in such a way that is
very difficult to trace these supplies back to the government.

Applebaum highlights the epistemological challenges that counterterrorism analysts face; Coll offers some guidance on how to conduct an investigation on the basis of ‘contingent’ beliefs and alternative hypotheses.

Pakistan’s government denies any role
in the Mumbai attacks.  Perhaps forensic analysis of crime scene
evidence will provide answers and shift the current speculation from
Treverton’s ‘mystery’ to ‘puzzle’.  Or maybe not.

The next day Coll analyses India’s claim that the group Lashkar-e-Taiba was behind the Mumbai attack.

Decision Sciences For The Masses

Malcolm Gladwell‘s new book Outliers: The Science of Success (New York: Little, Brown & Co., 2008) appears to be the publishing event of the week.

Gladwell (The Tipping Point, Blink) spearheads a group of writers who are masterful at using anecdotes about insights from statistics, system dynamics and the decision sciences that will interest a broad readership.  This group also in  Chris Anderson (The Long Tail), James Surowiecki (The Wisdom of Crowds), Nassim Nicholas Taleb (Fooled by Randomness, The Black Swan), Tim Harford (The Undercover Economist), Steven Levitt and Stephen Dubner (Freakonomics), and Michael Lewis (Liar’s Poker, The New New ThingMoneyball) also belong to this group.  Apart from outliers and tipping points these books explore intuitive decisions, long tail distributions, the Law of the Many, chance, low probabilty high-impact events, martingales, and data-driven decisions.  Each author has a different background: Taleb is an epistemologist and former trader, Anderson is a technology pundit, and Lewis, Gladwell and Surowiecki are essayists and journalists.

For me, six observations emerge from these authors.  First, they have a writing style that appeals to a broad audience.  Second , they provide an introduction to quantitative elements of decision-making and judgments.  Third, their publishers have created a niche market in airport reading and popular science paperbacks.  Fourth, they differ in their approach to theory building: Anderson, Gladwell and Surowiecki take an insight, interview people, and promote it; Taleb, Harford and Lewis draw on their domain experience; and Levitt and Dunbar illustrate how a subject matter expert can collaborate with a journalist to reach a broader audience.  Fifth, their books have seeded a range of Web 2.0 strategies, which vary in rigour, validity, generalisability and applicability to real-world analysis.

Finally, their publishers have used their marketing appeal to build an audience during turnarounds and post-acquisition integrations: Gladwell and Surowiecki helped revive The New Yorker, Levitt and Dunbar’s blog gained The New York Times an Internet readership, and Anderson revamped Wired after Conde Nast‘s acquisition.

Bryan Burrough on Bear Stearns’ Demise: A Dark Possibility

Bryan Burrough is legendary in M&A circles for co-writing Barbarians at the Gate (Harper & Row, New York, 1990) with John Helyar, the cautionary tale of RJR Nabisco’s leveraged buyout and the winner’s curse faced by deal-maker Henry Kravis.

Burrough’s latest investigation for Vanity Fair contends that short sellers used CNBC and other media outlets to spread rumours that destabilised Bear Stearns and sparked a liquidity run on the investment bank’s capital.  Burrough’s thesis has sparked debate that overshadows his investigation’s strengths: a strong narrative and character portraits, new details of the negotiations with JPMorgan Chase and the Federal Reserve, and a cause-effect arc that shifts from CNBC’s internal editorial debate to the effects its coverage has on the marketplace and the subjective perceptions of individual investors and senior decision-makers.

In the absence of a ‘secret team’ or a ‘smoking gun’ how could Burrough’s thesis be tested?

Theoretically, Burrough’s hypothesis fits with: (1) a broad pattern over two decades of how media outlets respond to media vectors, systemic crises and geostrategic surprises; (2) the causal loop dynamics and leverage points in systems modelling; (3) the impact that effective agitative propaganda can have in psychological operations; and (4) the complex dynamics and ‘strange loops’ in rumour markets (behavioural finance) and rumour panics (sociology), notably ‘information cascade’ effects on ‘rational herds’.

This is likely a ‘correlation-not-cause’ error although it does suggest a dark possibility for strategic intervention in financial markets: could this illustrative/theoretical knowledge be codified to create an institutional capability, deployed operantly, and which uses investor fears of bubbles, crashes, manias and various risk types as a pretext for misdirection?  Behavioural finance views on groups and panics, and George Soros‘ currency speculation against the Bank of England’s pound on Black Wednesday suggest the potential and trigger conditions may lie in the global currency/forex markets (using stochastic models like Markov Chain Monte Carlo for dynamic leverage in hedge funds) and money markets (using tactical asset allocation).  If possible, this capability could also create second- and third-order effects for regulators, the global financial system and macroeconomic structures, and volatility in interconnected markets, which may actually be more dynamic and resilient than this initial sketch indicates.

To meet quantitative standards and validate Burrough’s hypothesis a significant forensic and data analytics capability with error estimates would also be required.  ‘Strong’ proof may not be possible: Burrough’s hypothesis is probably an unsolvable ‘mystery’ rather than a solvable ‘puzzle’ (a distinction by intelligence expert Gregory Treverton that The New Yorker‘s Malcolm Gladwell later popularised).

Ironically, several CNBC analysts have already decided: they used parts of Burrough’s hypothesis to explain the subsequent short-selling driven volatility of Fannie Mae and Freddie Mac‘s stock prices in mid-July 2008.