Wednesday, February 28, 2007

Human Factors

The precipitous drop of the stock market this week reminded me of what Norbert Wiener called the problem of the "extremely smooth curve" in his 1948 treatise on Cybernetics: anticipating such curves may optimize performance by virtue of their gradual movement, but as representations of actual information they lack the sensitivity of more troublesome, less predictable, but more accurate "rough curves."

My former UCI colleague, philosopher Tim Schoettle, wrote his dissertation about investor perceptions the stock market. Writing in a bull market, he argued that there wasn't a ceiling for the value of the Dow. But computer programs can do much more rapid belief-updating than people can, and with particular pre-programmed sell-off thresholds the market tumbled 200 points in one minute, one of the the fastest declines in the market's history, which was later characterized as a "computer glitch." So perhaps with new rapid-response networked technologies "rational" computers may be more likely to set off a panic than "irrational" people, as events begin to cascade around the globe.

Virtual capitalism also functions at the level of the individual, as more citizens rely on on-line bill paying or investment interfaces on the Web. In "Blogging Away Debt," The New York Times reports that some consumer spendthrifts aspire to sound financial management through the sacrament of confession and hope to gain some fiscal discipline not by moving numbers around more rationally on their desktops but rather by confessing to their bad financial decisions online.

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