No.5｜Why can't we stop being wrong?

This article is a translation of this article.

We cannot easily change our behavior even when we expect a bad outcome.

Economic disparity, financial problems, declining birthrate and aging population, global environmental issues.... These problems are constantly being shelved.

In this section, we will discuss some of the reasons why we are unable to change our conventional behavior.

1) The runaway nature inherent in the principle of competition

Most people view competition favorably. They believe that competition leads to the efficient use of capital, technological development, and the betterment of society. Adam Smith's "The Invisible Hand" in classical economics, for example, describes the efficacy of the free market as follows

Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.

Cited from https://www.investopedia.com/terms/i/invisiblehand.asp

This is true in a sense. Unfortunately, free competition always carries the potential risk of creating a runaway. A famous example is the "tragedy of the commons".

Suppose that a common pasture is available to everyone. The rational grazers, seeking to maximize their own interests, think this way. What are the benefits of adding another animal to the herd?
・The grazers receive all the profits from the sale of additional livestock.
・The negative effects of overgrazing are distributed to all grazing parties. The negative benefits will be divided by the number of grazers.
Putting these two benefits together, we conclude that increasing the number of livestock is a wise course. As a result, livestock are multiplied endlessly, leading to destruction.

Reference: https://science.sciencemag.org/content/162/3859/1243

The difficulty of this problem is that even if all the players are rational economists who can make rational decisions and can expect catastrophic consequences from their actions, the It is not possible to avoid its worst consequences (degradation of the pasture) through individual efforts.

This tragedy is not limited to the pastures. This can happen in any competition.

A fisherman earns his living by catching fish. If the fish population is large, the selling price will decrease (due to increased distribution), so they will try to catch more fish. On the other hand, if the fish population is small, the selling price will increase (due to decreased distribution), so they will still catch more fish. Regardless of population size, there will always be an incentive to catch more, and unless cooperative regulations are established within and between nations, they will continue to compete until they are extinct.

A more serious example is the multilateral military balance.

Two neighboring countries prepare their armed forces in case they are invaded by another country, "even if they really do not want to go to war". While we seek to maintain a higher level of military strength than our opponent for the sake of security, our opponent thinks the same way. Mutual suspicion leads to an overestimation of the military power of other countries and forces a never-ending arms race.

Thus, even if it is rational at the micro level, it does not necessarily produce the desired result at the macro level where it is synthesized, which is called the Fallacy of composition.

A run to financial institutions and out of stock due to idle rumors are also part of the fallacy of composition. Acting ahead of others may maximize individual benefits, but it undermines the benefit of the whole. In the confusion caused by the coronavirus, it is still fresh in our minds that there was a run to toilet paper, which was not a problem for the supply.

These cannot be stopped unless the individual puts the good of the whole at the expense of his own interests or restricts his freedom by force.

2) Moral hazard due to slow feedback

Slow reflection of results on actions is another reason why it is difficult to take action.

It takes more than 20 years to generate a return (increased tax revenues, etc.) on the costs of countermeasures (child care, child rearing, education investments, etc.) to the falling birthrate. The adverse effects of climate change are expected to accumulate gradually and become more severe in the coming generations.

These problems are likely to be addressed later, as not taking action maximizes short-term gains. This can easily lead to a moral hazard: as long as there is no problem during one's term of office or lifetime, there is no problem. Short-term gains and losses are often overvalued, even though long-term profits should be the priority.

3) Debilitating feedback loop

When you run out of stopping power, or when things have accelerated in a bad way, there are times when there is no way to stop it.

It is a case of impoverishment as we fight for the last drop of water. Calling on reason will no longer settle the confusion. For example, it is similar to the voluntary suspension of operations in the corona disaster.

While infection control measures call for self-restraint, compensation is inadequate. For the cash-strapped stores, closure could mean "economic death". They have no choice but to keep going to avoid immediate economic deprivation, even if that means tarnishing their reputation, inviting the spread of infection, and prolonging the period of restraint.

This is not a rare event. Throughout history, this debilitating feedback loop has driven many civilizations to ruin.

Roughly speaking, the history of many civilizations follows a common path. Initially populated by agriculture on the fertile valley floor, it reached a point where it resorted to cultivation on sloping land. As vegetation is cut away and continuous tillage exposes the bare soil to rain and runoff, this is followed by rapid slope soil erosion in the geological sense. In the following centuries, agriculture became more and more intensive, resulting in nutrient shortages and soil loss, which reduced yields and made new land unaffordable, oppressing the local population. Eventually, due to soil degradation, agricultural productivity will be insufficient to support the burgeoning population, and the entire civilization will collapse.

Cited from 『土の文明史』 (Japanese translated into English)

If the pressure to produce more food due to population growth can only be met by overusing and abandoning the land, the end result is destruction.

Examples of these debilitating feedback loops are countless: Australia's forest fires, which lasted more than 240 days from July 2019, showed us the fury of climate change. Greenhouse gases are released by forest fires, and higher temperatures caused by it may make it more likely to occur. Besides, rising temperatures cause the Arctic ice to melt, which increases the amount of solar radiation absorbed, causing the temperature to rise. The extinction of one organism threatens the survival of others, further accelerating their extinction.

A point that cannot be restored once it has passed is called a "point of no return (non-returnable point)". Once this is exceeded, no matter how hard you try, you cannot start over. The problem is that it is hard to predict "when that point will come". We may only recognize in retrospect whether or not we have passed that point.

After catastrophic food and water shortages have occurred, after the loss of most of the species, it is too late to begin to act until climate change has raged. If you start running away from the flood when it's in sight, you won't get away in time.

Some may think these problems are exaggerated. But if you don't expect the worst, the worst will happen. Risks must be properly assessed. We must do our best prophylactically, because things are serious. (If there is a 5% probability of an unprecedented catastrophe due to the climate crisis in the next 100 years, the risk is too high.)

We have learned a great lesson from the outbreak of the pandemic. Although pandemic was predicted, no action was taken. Prior to the outbreak, television and newspapers rarely dealt with it. It is not a good thing to judge that the disaster happened by chance.

Especially in Japan, environmental awareness and risk management capacity are very low. Protecting the environment is rarely evaluated in Japan. Even if you have talented people, there is no field to work in.

As long as the music is playing, you've got to get up and dance.

This was stated by Citigroup CEO Charles Prince before the Lehman shock hit. We are constantly being played by the economy. We are not going to change their behavior forever.

Isn't it time to rethink our life?
・Are your jobs and dreams linked to the well-being of the next generation?
・Do we tell these inconvenient facts in our education?
・Are we neglecting the younger generation by imposing only absurd expectations and responsibilities on them?

Show what you do, tell them, let them do it, and praise them, or else they will not move. (Stated by Yamamoto Isoroku)

We should take these words seriously.