Risk intelligence in Baalbeck

Last week I went to see the Roman ruins in Baalbeck, Lebanon. I had wanted to visit Baalbeck ever since I arrived in Beirut two months ago, but had hesitated about going because I’d heard that the security situation there was dicey. Last year, seven Estonians were kidnapped in while cycling near Baalbeck, in the Bekaa Valley. Last month, the US Embassy in Lebanon sent an emergency message warning Westerners not to travel to the Baalbeck area because of clashes between the Lebanese authorities and local criminal groups. The latest clash erupted only last week, when three Lebanese Army soldiers were wounded during a shootout early Tuesday in the town of Baalbeck itself.Dylan in Baalbeck

Browsing online, however, I came across various traveller’s bulletin boards that told a slightly different story. One tourist noted, on 14 March, that they were with some friends in the Baalbeck ruins early the previous Sunday morning, when suddenly they heard lots of automatic arms fire in nearby, and also “heard what sounded like something whizzing across the sky above us, which was followed by a few very large explosions.” However, it seemed to start up and die off quickly and all at once so they assumed it was a military drill of some sort. The travellers didn’t seem that scared.

It’s important to take reporting bias into account when reading newspapers and searching online for security information. Journalists don’t file reports saying “nothing happening round here,” and tourists are far more likely to post something online when they hear gunshots than when they don’t. So it’s hardly surprising that a Google search for “Baalbeck warnings dangers” will turn up a bunch of scary stories.

One way of getting a better idea of the security situation somewhere new is simply to ask people who’ve been there recently. This way, you avoid giving too much weight to the self-selecting sample of those people who go to the trouble of writing about stuff. So last week I asked everyone I knew in Beirut if they had been to Baalbeck recently, and whether they thought it was dangerous. The overwhelming consensus was that it was fine.

Weighing up all the evidence I had gained from newspapers, online reports, and gossip, and taking into account the various biases that might distort these sources, I tentatively concluded that my chances of being shot or kidnapped in Baalbeck were minimal – low enough to constitute an acceptable risk. So my sister and I headed out there in one of the rickety minibuses that are the cheapest way of getting around in Lebanon, and for a few hours the following morning, we had the ruins to ourselves.

Right + Early II: The Ehrlich/Simon Bet

In the article I mentioned in my last post, the New York Times said Jeremy Grantham was right but early. Jeremy Grantham passed the favor along by saying that Paul Ehrlich was right but early. He referred to a famous 1980 bet between economist Julian Simon and Paul Ehrlich, an entomologist who specializes in being spectacularly wrong about everything.

At the time, Ehrlich was claiming we were running out of commodities and prices would soon soar, destroying global civilization and killing billions of people. Simon challenged him to pick any five commodities and any date more than year away. Ehrlich picked Chrome, Copper, Nickel, Tin and Tungsten and 1990 as the date. A  basket was created with $200 worth each (at 1980 prices) of the five metals. The difference between the inflation-adjusted to 1980 dollars price of the basket in 1990 and $1,000 would be paid by Simon if the basket cost more than $1,000, or to Simon if the basket cost less than $1,000.

All five commodity prices went down, the basket was worth an inflation-adjusted $618 in 1990, so Ehrlich paid $382. Ever since Ehrlich and his fellow travelers have been explaining why he was really right (it’s just those inconvenient facts that got in the way). Now Grantham trumpets that Ehrlich has finally be proven right. I checked the numbers and as of last Friday the inflation-adjusted prices were Chrome ($196.60), Copper ($241.83), Nickel ($200.52), Tin ($126.42) and Tungsten ($205.36) for a total of $970.73.  However Grantham claims Ehrlich still won because three of the five commodities sell for more than $200. Actually what I find most impressive is how little commodity prices have moved over the years in real terms.

Grantham misses the risk intelligence point completely. Ehrlich claimed to be absolutely sure the prices would skyrocket. He was so sure, he pushed for policies that would impoverish or kill more than half the world, and he supported China’s horrendous population control policies (it turned out democracy and economic growth were far more effective in solving population growth). Moreover, he claimed to understand why prices would increase, meaning he should have been able to pick the five commodities most likely to go up in price, and the time interval most likely to prove him right. Being almost right 20 years after the deadline is WRONG!

Simon did not claim the prices would surely and always be below $1,000, just that it was a good bet given a specific deadline. Nevertheless, it is interesting that commodity prices have not declined in real terms. Since the beginning of the industrial revolution the ratio of commodity value to finished good value has fallen, as design and fabrication become more important (an apple is worth its commodity value, a pot is worth more than a lump of clay, a computer chip is worth far more than the sand and other materials it is constructed from).

I think what Simon perhaps underestimated was the tripling of real global GDP from the greatest economic boom in human history that brought billions out of poverty. Commodity consumption remained roughly constant, so commodities have roughly one-third the relative economic importance in 2011 versus 1980. If GDP had grown more slowly, real commodity prices would have declined. But explosive growth offset the long-term trend toward making labor and intangible assets more valuable than physical stuff; therefore real commodity prices stayed about the same.

The big difference between Simon and Ehrlich’s ways of thinking is not that Simon was right and Ehrlich wrong. It’s observing, and learning from observation, versus denying or explaining away all contrary evidence. That’s why Ehrlich is always so certain, even when his story is 180-degrees different from his story last year.

Now, guess which of Simon or Ehrlich’s ideas are shared by more policy experts.

Right + Early = Wrong and in denial

The New York Times had a fawning interview with Jeremy Grantham, describing him as “right but early.” If you tell me it will rain tomorrow, and it doesn’t but it rains next week, you were wrong. If you claim you were just early, you are in denial about being wrong.

It is possible to make a useful prediction when you are uncertain of the timing. I might say, for example, that commodity prices are in a bubble and will decline to half their current values sometime in the next five years. That could be right or wrong. But if I say merely that commodity prices will decline someday, I will either be proven right or the issue will still be open. I cannot be proven wrong, so the prediction has no meaning.

People with poor risk intelligence seize on current trends and extrapolate them to absurd levels. They get a lot of publicity for this. Other people argue against them, pointing to signs that the trend is already slowing, that it generates countervailing forces and that in any case it has to hit some limits.

What happens next? Either the trend does accelerate to cause some disaster, proving the prophet of doom correct. Or the trend slowly and quietly slows and reverses, in which case people never think to credit the skeptic with a victory. If they think about it later, they remember the trend and the guy who postdicted it, and misremember the order of events so they think he was right. The skeptic is remembered as a guy who denies all possibility of disaster and confused with people who either don’t care about disaster or profit from them.

Reputation tends to go to lucky fools and doomsayers who never remember being wrong (and therefore never learn).