International Law

Why Were Warnings Ignored?

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Richard Posner has both an interesting question and outline of an answer to why the financial crisis was a surprise.

"Why was the crisis not foreseen?

An article on the front page of the business section of yesterday's New York Times attributes that blindness to "insanity," more precisely to a psychological inability to give proper weight to past events, so that if there is prosperity currently it is assumed that it will last forever.

This explanation is implausible--often people fail to adjust to change because they expect the future to repeat the past--and unhelpful, especially when one remembers that the academic specialty of Federal Reserve Board chairman Bernanke is the Great Depression.

We can get more help in answering the question of unpreparedness, or neglect of warning signs, from the literature on surprise attacks, notably Roberta Wohlstetter's great book Pearl Harbor: Warning and Decision (1962).

As she explains, there were many warnings in 1941 that Japan was going to attack Western possessions in Southeast Asia, such as the Dutch East Indies (now Indonesia); and an attack on the U.S. fleet in Hawaii, known to be within range of Japan's large carrier fleet, would be a logical measure for protecting the eastern flank of a Japanese attack on the Dutch East Indies, Burma, or Malaya.

Among the factors that caused the warnings to be disregarded are factors that may also have been decisive in the neglect of the advance warnings of the financial crisis now upon us: priors (preconceptions), the cost and difficulty of taking effective defensive measures against an uncertain danger, and the absence of a mechanism for aggregating and analyzing warning information from many sources.

Most informed observers in 1941 thought that Japan would not attack the United States because it was too weak to have a reasonable chance of prevailing; they did not understand Japanese culture, which placed a higher value on honor than on national survival.

Securing all possible targets of Japanese aggression against attack would have been immensely costly and a big diversion from our preparations for war against Germany, deemed inevitable.

And there was no Central Intelligence Agency or other institution for aggregating and analyzing attack warnings."

Wohlstetter's book is a deep exploration of both the theory and mechanics of surprise.

Thomas Schelling wrote a short forward to the book, which bears review.

Schelling highlights a number of factors which lead to the surprise: neglect of responsibility, failed alarms, slowness to believe, etc.

But, in typical insightful fashion, Schelling doesn't simply list the usual suspects, he works both sides of the street.

So, we hear of neglected responsibility, or of responsibility so poorly defined or delegated that action gets lost; of gaps in intelligence of or intelligence so precious it could not be shared; of alarms that failed to work or of alarms that have rung so often they have been disconnected; of the unalert watchman or of the alert watchman who doesn't want to be chewed out from his superior; of contingencies no one thought of or contingencies everyone assumes that someone else is looking out for; of procrastination, or of disagreements honestly held that result in delay; of human slowness to believe that this is it.

A thorough going examination of this episode of financial surprise might do very well to categorize all the evidence using Schelling's model.

Posner has started, with his post, more is needed.

Full post as published by Misleading Advertising Law on October 13, 2008 (boomark / email).