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Expert, Financial Derivatives and Risk; Author, Extreme Money: The Masters of the Universe and the Cult of Risk
Parallel Errors

Confluence of factors is highly influential in setting off changes in complex systems. A common example is in risk — the "Swiss cheese theory". Losses only occur if all controls fail — the holes in the Swiss cheese align.

Confluence, coincidence of events in a single setting, is well understood. Parallel developments, often in different settings or disciplines, can be influential in shaping events. A coincidence of similar logic and processes in seemingly unrelated activities provide indications of likely future developments and risks. The ability to better recognize"parallelism" would improve cognitive processes.

Economic forecasting is dismal, prompting John Kenneth Galbraith to remark that economists were only put on earth to make astrologers look good. Few economists anticipated the current financial problems, at least before they happened.

However, the art market proved remarkably accurate in anticipating developments, especially the market in the work of Damien Hirst — the best known of a group of artists dubbed yBAs (young British Artists).

Hirst's most iconic work — The Physical Impossibility of Death in the Mind of Someone Living — is a 14-foot (4.3 meter) tiger shark immersed in formaldehyde in a vitrine weighing over two tons. Charles Saatchi (the advertising guru) bought it for £50,000. In December 2004, Saatchi sold the work to Steve Cohen, founder and principal of the uber hedge fund — SAC Capital Advisers, which manages $20 billion. Cohen paid $12 million for The Physical Impossibility of Death in the Mind of Someone Living, although there are allegation that it was only $8 million.

In June 2007, Damien Hirst tried to sell a life size platinum cast of a human skull, encrusted with £15 million worth of 8,601 pave-set industrial diamonds, weighing 1,100 carats including a 52.4 carat pink diamond in the center of the forehead valued at £4 million. For the Love of God was a memento mori, in Latin remember you must die. The work was offered for sale at £50 million as part of Hirst's Beyond Belief show. In September 2007, For the Love of God was sold to Hirst and some investors for full price, for later resale.

The sale of The Physical Impossibility of Death in the Mind of Someone Living marked the final phase of the irresistible rise of markets. The failure of For the Love of God to sell marked its zenith as clearly as any economic marker.

Parallelism exposes common thought processes and similar valuation approaches to unrelated objects.

Hirst was the artist of choice for conspicuously consuming hedge fund managers, who were getting very rich managing money. Inflated prices suggested the presence of "irrational excess". The nature of sought after Hirst pieces and even their titles provided an insight into the hubristic self-image of financiers. With its jaws gaping, poised to swallow its prey,The Physical Impossibility of Death in the Mind of Someone Living mirrored the killer instincts of hedge funds, feared predators in financial markets. Cohen "… liked the whole fear factor."

The work of Japanese artist Takeshi Murakami provides confirmation. Inspired by Hokusai's famous 19th century woodblock print The Great Wave of Kanagawa, Murakami's 727 paintings showed Mr. DOB, a post nuclear Mickey Mouse character, as a god riding on a cloud or a shark surfing on a wave. The first 727 is owned by New York's Museum of Modern Art, the second by Steve Cohen.

Parallelism is also evident in the causes underlying several crises facing humanity. It is generally acknowledged that high levels of debt were a major factor in the ongoing global financial crisis. What is missed is that the logic of debt is similar to one underlying other problematic issues.

There is a striking similarity between the problems of the financial system, irreversible climate change and shortages of vital resources like oil, food and water. Economic growth and wealth was based on borrowed money. Debt allowed society to borrow from the future. It accelerated consumption, as debt is used to purchase something today against the uncertain promise of paying back the borrowing in the future. Society polluted the planet, creating changes in the environment which are difficult to reserve. Under-priced, natural finite resources were wantonly utilized, without proper concern about conservation.

In each area, society borrowed from and pushed problems into the future. Current growth and short-term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.

To dismiss this as short-term thinking and greed is disingenuous. A crucial cognitive factor underlying the approach was a similar process of problem solving — borrowing from or pushing problems further into the future. This was consistently applied across different problems, without consideration of either it relevance, applicability or desirability. Where such parallelism exists, it feeds on itself, potentially leading to total systemic collapse.

Recognition and understanding of parallelism is one way to improve cognitive thinking. It may provide a better mechanism for predicting specific trends. It may also enable people to increase the dialectic richness, drawing on different disciplines. It requires overcoming highly segmented and narrow educational disciplines, rigid institutional structures and restricted approaches to analysis or problem solving.