Rational Risk, Part III
What Crime and Punishment can teach us about risk: GovCoin; Cyber Coping; Chips; Guns Versus Butter
He had dreamed that the whole world was doomed to fall victim to some terrible, as yet unknown and unseen pestilence spreading to Europe from the depths of Asia.
- Fyodor Dostoevsky, Crime and Punishment
Risk Developments this letter:
GovCoin
Cyber Coping
Chips
Guns Versus Butter
Transcending Risk
Did Fyodor Dostoevsky predict the global pandemic 155 years ago? In the final pages of “Crime and Punishment” Raskolnikov has a frightful dream of a global pandemic. This dream mirrors another feverish dream Raskolnikov has at the beginning of the novel. In the first dream he envisions a horrific scene in which a weak and helpless horse cannot pull a fully loaded cart. The horse’s furious owner takes it out on the horse, beating it to death. These two arresting visions highlight important ideas about imagination, volition and chance in risk.
Let’s begin with the importance of dreams and imagination. In contrast to the utopian rational idealism of Raskolnikov, his actual dreams are all nightmares. We’ve spoken before about the importance of the subconscious and its key like properties. As a literary device, a dream is an opportunity to speak directly to the reader; to unlock a door in the fourth wall. Dreams are where we develop ideas. They are the perception of that which our physical and rational selves cannot yet conceptualize. This means they can both offer warning and hope. Before every theory, there is a dream. It may be to found a company that changes the world, or to create a risk free asset, or to architect an impenetrable network. Raskolnikov’s first dream hints at his great hope, by placing himself in the scene as a child. The young Raskolnikov objects to the treatment of the horse, trying to intercede.
"Finish her off," shouted Mikolka and he leapt beside himself, out of the cart. Several young men, also flushed with drink, seized anything they could come across—whips, sticks, poles, and ran to the dying mare. Mikolka stood on one side and began dealing random blows with the crowbar. The mare stretched out her head, drew a long breath and died.
"You butchered her," someone shouted in the crowd.
"Why wouldn't she gallop then?"
"My property!" shouted Mikolka, with bloodshot eyes, brandishing the bar in his hands. He stood as though regretting that he had nothing more to beat.
"No mistake about it, you are not a Christian," many voices were shouting in the crowd.
But the poor boy, beside himself, made his way, screaming, through the crowd to the sorrel nag, put his arms round her bleeding dead head and kissed it, kissed the eyes and kissed the lips.... Then he jumped up and flew in a frenzy with his little fists out at Mikolka. At that instant his father, who had been running after him, snatched him up and carried him out of the crowd.
"Come along, come! Let us go home," he said to him.
"Father! Why did they... kill... the poor horse!" he sobbed, but his voice broke and the words came in shrieks from his panting chest.
"They are drunk.... They are brutal... it's not our business!" said his father. He put his arms round his father but he felt choked, choked. He tried to draw a breath, to cry out—and woke up.
He waked up, gasping for breath, his hair soaked with perspiration, and stood up in terror.
This is the process of radicalization. It is injustice that turns the innocent child with romantic beliefs into a cynic who thinks, “if such evil people can do bad things in the name of spite, then why can’t a good person do bad things in the name of justice?” Anytime individuals must struggle against a corrupt system (which is always) there is great temptation to employ the tactics of cynicism back at the system. It is the logic of the bad actor, of the nihilist, the terrorist and the insider threat. Notice that this act of rational will presages the arc of the book, turning Raskolnikov eventually into a murderer.
By the end of the book the arc is completed. Without spoiling the climax, we can discuss Raskolnikov’s second dream in the epilogue, which finds him seeking redemption, having seen the results of both rational will and of chance. The pandemic he describes in the dream is as much a metaphor as it is a literal warning. This is because disease is intrinsically understood by all people and the language of epidemics makes itself felt throughout risk disciplines. Fields as diverse as insurance, cybersecurity, banking, investing and intelligence, all borrow terms from epidemiology like “sanitize,” “contagion,” “virus,” and “exposure.” To address this dream, let us take it in three parts.
He dreamt that the whole world was condemned to a terrible new strange plague that had come to Europe from the depths of Asia. All were to be destroyed except a very few chosen. Some new sorts of microbes were attacking bodies of men, but these microbes were endowed with intelligence and will. Men attacked by them became at once mad and furious. But never had men considered themselves so intellectual and so completely in possession of thetruth as these sufferers, never had they considered their decisions, their scientific conclusions, their moral convictions so infallible.”
This first section echos the first dream, but on a global scale. The virus of extreme rationalism has taken hold across the world and subsumed all universal notions of truth and value. This is the moment when people believe in the Value at Risk models more than their own beliefs. It is the belief that an empty incident registry is an indication of no risk, not an indication of poor risk management. Risk professional Tony Martin-Vegue put it well in a recent article on decision making support, “If [choice, preference, or information] are missing, there is no decision to be made and, by extension, a risk assessment will be an exercise in frustration that will not yield valuable results.” Understanding the limits of rationality is a prerequisite for rationality. As the dream progresses we can see how this plays out.
Whole villages, whole towns and peoples went mad from the infection. All were excited and did not understand one another. Each thought that he alone had the truth and was wretched looking at the others, beat himself on the breast, wept and wrung his hands. They did not know how to judge and could not agree what to consider evil and what good; they did not know whom to blame, who to justify. Men killed each other in a sort of senseless spite. They gathered together in armies against one another, but even on the march the armies would be broken and the soldiers would fall on each other, stabbing and cutting, biting and devouring each other. The alarm bell was ringing all day long in the towns; men rushed together, but why they were summoned and who was summoning them no one knew. The most ordinary trades were abandoned.
Here we see the complete breakdown of order and inability to achieve collective accomplishments. Without understanding and judgement, that come not from a monopoly on truth, but from humility and submission to a cause greater than one’s self, society loses all accountability. Without accountability, warning systems serve no purpose. If you’ve ever seen a risk management system that provides more alerts than can be acted upon you know what Dostoevsky means. Lastly, it is significant that fundamental skills are tossed aside. The pursuit of a craft is not purely an economic rationalisation, but a belief that one’s efforts, however mundane they might be, contribute to society. The final part of the dream results in complete chaos.
Men met in groups, agreed on something, swore to keep together, but at once began on something quite different from what they had proposed. They accused one another, fought and killed each other. There were conflagrations and famine. All men and all things were involved in destruction. The plague spread and moved further and further...”
Supply chains break down. Companies can’t get anything done. Civic institutions fall into disarray and governments fail. This is the extreme endpoint of rational self interest. When risk is viewed from a completely probabilistic perspective, there is little point in deterministic action, and in a world of complexity, it is difficult to differentiate between the breakdown of collective efforts and random bad outcomes. An individual has such little control that even their own deterministic efforts are likely in vain.
This brings us back to the issue of volition and chance. Throughout the novel there are many examples of luck playing a part. Raskolnikov, waking from the first dream in a sweat, swears off his plans to murder the pawn broker, but he happens to overhear a conversation in which he learns that the broker’s younger sister and roommate will be out of the apartment, offering him the perfect window of opportunity to commit the crime. When his poor planning has left him without a murder weapon, he chances upon an axe stored away under a bench with some firewood. Again it is luck that allows him to slip away from the scene of the crime unnoticed as he ducks into an empty apartment while suspicious neighbors run up and down the stairs. In the most improbable stroke of luck, just when he suspects that the police have figured it out, a religious fanatic turns himself in, taking credit for the crime Raskolnikov committed, in an act of desperate self castigation.
By contrast, all of the good acts, mostly done by Dunya Raskolnikov, Dmitry Razumíkhin and Sonya Marmeládova (mentioned in Rational Risk, Part II) are acts of will. How can this be the case, if rational will leads to nihilism and global madness? The important difference is that the good characters are not rational. That is not to say they are irrational. The opposite of rational thought is not irrational thought (an oxymoron), but faith. Dunya serves her family and is prepared to settle for a less than ideal marriage for the financial well being of her brother and mother. Dmitry hopes to start a publishing company, not because he believes himself the arbiter of what is fit to be published, but because as a student and intellectual, he knows what people want to read. Sonya, the ultimate model of self-sacrifice devotes herself to Raskolnikov because she believes in redemption.
A year ago in the New Yorker, David Denby ended his piece on the rereading of “Crime and Punishment” by saying, “We would not lose our individuality, like the poor murderer in his exile. But neither could we escape responsibility for the mess we had made, a mess we had bequeathed to the students, and to all of the next generation.” This echos Camus dire warning to struggle on, as we discussed last week. The pessimistic and regretful tone also calls to mind Girard’s expert dissection of Dostoevsky’s texts, correctly identifying the link between romantic liberalism and nihilism.
Camus connects this idea directly to history by comparing Dmitry Pisarev to Raskolnikov. Lenin was so influenced by Pisarev he quotes him in “What is to be Done?” writing, “My dream may run ahead of the natural march of events or may fly off at a tangent in a direction in which no natural march of events will ever proceed. In the first case my dream will not cause any harm; it may even support and augment the energy of the working men....” Camus then writes, “Pisarev declares war on philosophy, on art, which he considers absurd, on erroneous ethics, on religion, and even on customs and on good manners. He constructs a theory of intellectual terrorism which makes one think of the present-day surrealists. Provocation is made into a doctrine, but on a level of which Raskolnikov provides the perfect example.” Camus observes that the self destructive romantic liberalism we observe in the novel manifests in history just after Dostoevsky died.
What, then does Jünger add to the conversation? His contribution is to guide the dissatisfied and disaffected back towards action, but not through rational self interest.
“Giving this man an inkling of what has been taken from him, even in the best possible present circumstances, and of what immense power still rests within him—this is the theological task. A true theologian is someone who understands the science of abundance, which transcends mere economy… someone who knows—and a knower in this sense is the little prostitute Sonya, who discovers the treasure of being in Raskolnikov and knows how to raise it to the light for him. The reader senses these gifts have been brought to the surface not for life alone but also for transcendence.”
This transcendent action can rise above rationalism and dismiss the cruel vicissitudes of chance. Duty, faith and calling, these are the motivations that sustain and elevate society. Isn’t that what technology, business and geopolitics are really about? Not just managing risks, but transcending them?
Risk Developments
GovCoin
The Cryptocurrency markets have been on an incredible tear that has attracted a lot of attention. It was just a matter of time before the government got involved, as Tyler Cowen makes clear in this excellent interview by Lex Fridman. Just a few short weeks later and it looks like his prediction is coming true. The U.S. Department of Justice has formed a task force to investigate the role of cryptocurrencies in ransomware, which could lead to serious regulation.
The DoJ isn’t the only government body looking at cryptocurrencies, either. The IRS is seeking authorization to summon users of the cryptocurrency exchange Kraken, who may have outstanding tax obligations. Meanwhile, the Chinese government is pushing ahead with its digital currency plans. To which Fed Chairman, Jerome Powell, said, “not... here. [Not] in real time.” It is interesting that he both rejects the notion of a central bank digital currency, with full observability for government, being popular in the U.S. and at the same time insinuates that the U.S. government can in fact fully observe payment flows, just with some friction.
This may be the end of unbridaled cryptocurrency utopianism, but the end of that kind of romanticism isn’t necessarily bad. Now we will see whether the faith in cryptocurrencies can sustain the enthusiasm of the early period without collapsing into a cynical tool for surveillance.
Cyber Coping
The spate of ransomware that provoked the DoJ, mentioned above has impacted corporates, governments and insurance companies. Bank of America CTO noticed a dramatic growth in the pace and rates of attacks this past year, and cyber threat intelligence firm Flashpoint uncovered an Iranian ransomware operation. This raises the question, how are insurance companies coping?
According to a Managing Director at one insurance brokerage, there are a broad range of answers from co-insurance to sub-limits on ransomware, to higher retentions and even some value-added services (although discussion of what and how those services work was pretty thin. Still, in a market that has broadly been converging on prices and coverage, it’s good to see a bit more diversity. Insurance often follows cycles. The best time to be selling catastrophe insurance is after the last 100 year storm. Of course, cybercrime is a manmade peril, so it is yet to be seen whether anyone can transcend this epidemic of ransomware by shifting the equilibrium. Raising rates and cutting coverage is zero sum, but value added services could raise a hidden treasure to the light.
Chips
More news on the semiconductor fabrication front. Samsung and Intel, numbers two and a distant three, respectively, in the semiconductor manufacturing industry are teaming up on a new microarchitecture. Meanwhile, the EU is exploring setting up their own Alliance between the four major European semiconductor firms. This would potentially provide a counter balance a potential megafab being funded by foreign capital. Intel is not shying away from that potential opportunity, asking for $8B in public funding, and as the only one of the three major semiconductor companies it looks like they have some leverage.
Guns Verses Butter
In the aerospace industry some firms (General Dynamics) had a really good quarter, and some firms (Boeing and GE) had really bad quarters. This is in part due to the dependence of Boeing and GE on the commercial sector, while General Dynamics provides its planes to the military. Despite travel beginning to bounce back, the economic consequences of the pandemic have not been completely ameliorated.
There is however a bright spot for Boeing. Its diversified customer base includes many countries besides just the U.S. government, including the government of India. The U.S. State Department has given the go-ahead to a deal to sell six P8 Poseiden planes used for signals intelligence gathering to the Indian Navy. As tensions mount with China Boeing will have the opportunity to sell much more to U.S. allies in Asia. On the other hand, India slashed its order by 25%, in part due to their ongoing economic issues, only worsened by the challenge of the pandemic.
Lastly, another competitor, Northro Grumman won a $959M defense contract to develop countermeasures for heat seeking anti-aircraft missiles. After all, with each F-35 costing somewhere between $77.9M and $117M you wouldn’t want to lose one. I’ve been thinking a lot about Peter Thiel’s comment that when you have a growing defense budget there is more room for innovation because in a flat or shrinking budget, all the money is spoken for by vested interests.
The “science of abundance which transcends mere economy” calls to mind this guns versus butter problem. Did the U.S. defeat the U.S.S.R. because it outspent them on military or because its standard of living was higher? Or was it both, or neither? It is possible the U.S.S.R. collapsed under its own weight and it is also possible that abundance somehow is not the result of ability to spend on guns and butter simultaneously, but the cause of it. That, as Jünger says, may be a theological problem.
Gratitude
Big thanks to Jeremiah Grossman, Tyler Cowen, Lex Fridman, David Denby, Tony Martin-Vegue and many others for sharing your ideas!