Probabilistic Decision Making

I first learned about probability decision making in a basic math class, and it’s a fairly basic idea. When information about a future outcome is imperfect, you weigh the utility of a particular outcome and its probability of occurring against all other outcomes and their probabilities, and then decide which road you want to venture forth on. We all think probabilistically to some extent when we lay out pros and cons before making a big decision. Of course, no divine being is handing down the probabilities to us, so how risk-averse or risk-inclined we are affects our individual decisions.

Robert Rubin wrote in his book, In an Uncertain World, that probabilistic thinking got him through every decision he made from his daily work as a Wall Street risk arbitrageur to policy recommendations he made as a member of President Clinton’s cabinet. Since nothing in life is certain, the best one can do is research all the variables and, using all available information, make informed decisions that one expects will likely produce the best outcome. Even in hindsight, decisions made probabilistically should be judged not on their eventual outcomes but on how wise they were given the information at hand. That seems fair to me, though I know that internalizing this mode of problem solving is harder said than done; there are many math PhDs who throw their training out the window once they land their hedge fund jobs. Probabilistic thinking is a general mindset, and he makes it seem so straightforward too, as if that’s all one needs to become a partner at GS and a cabinet secretary giving advice to the president on world affairs. Rubin seems like a clearheaded, somewhat quiet, and very nice guy, but not a genius and maybe not much smarter than my friends.

Rubin has had a career that frequently called for probabilistic decision making, but in my own life, there are not many decisions I need to make probabilistically since much of what I do is deterministic. In my work, problem solving involves analysis but oftentimes the common sense solutions jump out at me. Life in other respects is likewise predictable. Really, the decisions I make in the absence of certainty come down to things like how to play a hand of poker and which stocks to buy and which startup to join. These are some of the few risks I take in a fairly deterministic existence, which might also explain why I so much enjoyed making each decision.

Travels to the Ends of the Earth

I just finished a fascinating book by Robert Kaplan, The Ends of the Earth, about his travels to places I probably will never go, like West Africa and Central Asia and Cambodia. Some of the more interesting things I learned are:

• that nation-states only exist on paper in much of the world, such as in much of West Africa where governments and national unity are weak and borders inconsequential. It’s sourly amusing that Sierra Leone is currently Hollywood’s favorite codeword for violent African sh*thole with both Blood Diamond and Lord of War set there.
• that Samuel Huntington got it wrong about civilizations clashing on religious lines. In much of the world, it is rather on ethnic and tribal lines that they clash. In the Caucasus, Shiite Azeri Turks see themselves more as Turks than as Muslims and are hostile to Shiite Iranians, who side with Christian Armenians, who themselves see the Azeris as Turks and therefore related to the same Turks who perpetrated the Armenian genocide of 1915.
• that the word Turk comes from the Chinese tu-kiu. What a rich and diverse history these people have, spread as they are from Turkey to Central Asia to Western China to Mongolia and Korea, and as the inheritors of Greco-Roman traditions during the days of the Byzantine Empire.
• that if I were religious, I would probably be a Sufi.

But the most interesting thing I read today was this:

“Culture is renewed when people from the city, with intellectual resources, settle in the villages.” … [That] is the lesson that the shah of Iran and other third world despots never learned: that the village, not the city, is the key to modernity; that a nation cannot be modern while its villages are still medieval.

He is talking about how cultural-religious conservatives were able to hijack Iran’s trajectory of modernization because modernity had spread too unevenly among its people. It is the same challenge that faces India, where water scarcity and religious violence and vestiges of the caste system weigh on the villages even as the cities produces computer programmers aplenty. And that faces China, where the villagers in many parts are as poor as they were 20 years ago and still suffer the corruption of the same local officials even as their country becomes an economic powerhouse.

Ever since I took that class with Abbas Milani, I have believed that how successfully a people embraces modernity is the single most important question they face. With a modern culture, they shed feudal allegiances and grudges, begin to think of themselves as united people, educate themselves and build strong economies, and generally take responsibility for their own national fates. Without it, they slide into fundamentalism, insularity, and factionalism.

Foreign aid needs some creative destruction

I recently read a fascinating book that has me now convinced that we approach foreign aid for economic development in completely the wrong way. The US gives billions and billions of foreign aid every year in large grants to other nations and through massive centralized efforts like the World Bank and this new (red) campaign. Unfortunately, much of that money comes back to the West by way of corrupt officials and businesspeople who open high net-worth accounts with the major banks. Another big chunk of that aid falls ever so short of doing any real good because they follow a pattern of central planning, which shouldn’t really come as a surprise to anyone. What does a economics PhD in Boston really know about helping Ugandans build their economy? What does Bono really know about helping Africans?

The book included a great anecdote about how Western rock musicians responded to reports of mosquito-borne malaria in Africa by hosting a charity concert and shipping lots of mosquito nets to Malawi. Once the nets arrived in the capital, they were never distributed to the countryside where they were needed the most. The city residents, however, each received multiple nets. In their hands, the nets were turned to other uses besides covering beds, and a black market developed for others who wanted to purchase the supposedly donated nets. Compare that to the NGO that operated like entrepreneurs and charged small fees for the nets. Although the NGO initially was criticized for charging the poor, they were ultimately more successful than the pop musicians because, with the small fees they collected from the poor but willing customers, they developed a supply chain that successfully delivered nets to the countryside!

Another telling example is how we are spending our money on AIDS medicines versus how those drug recipients would rather that money be spent. The West spends $1500 to prolong the life of an AIDS patient each year, yet when asked directly what they most want for themselves, the patients overwhelmingly response with the same set of priorities: jobs so that they can support their children, education for their children, avoidance of HIV transmission to their children, and jobs once their children finish school. It both warms and breaks my heart that the first thing those HIV-positive Africans want is to work and ensure a future for their children. Perhaps this is a harsh way of putting it, but the truth is that there are more worthwhile ways to spend aid money than to keep throwing money at an incurable disease. (Yet we’ll keep sending nets and AIDS cocktails because those efforts are big and newsworthy and easy to put on a political resume.)

Homegrown entrepreneurism versus central planning from afar – I think I know where I’d place my bets. This is something that resonates strongly with me, as I see this kind of decentralized market development in Silicon Valley as a key reason for its vibrancy and success. Private enterprise are naturally more oriented toward efficiently finding and delivering what people need. And government initiatives that incorporate elements of demand analysis and market feedback tend to be more successful.

I imagine that American foreign aid policy could be far more effective if it ceased most of its foreign aid and instead established “venture” funds to finance entrepreneurs with specific plans to build businesses in developing nations. These entrepreneurs can be Americans (the most diverse citizenry on earth) or local companies in need of capital to match their dreams. These development “venture” funds would differ from microfinance funds in that they would be able to finance larger projects than your typical www.kiva.org project. I can see these funds financing ranches and roads and whatever proposed by local entrepreneurs – and that’s the point, to listen less to ourselves and more to the developing nations. Repayment plans would be lenient, and whatever money returns to these funds would be reinvested for future projects. To discourage fund recipients from cheating the system, the funds would keep records on those recipients and their employees the same way technology VCs do.