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Foreign Policy Makers and Fund Managers Are the Same

Sunday, January 8, 2017 10:34
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Just like active financial managers, foreign policy leaders do not always live up to expectations. The reason both fail is tied to a deep problem of the human condition: we are almost always unaware of the specifics of what is going on outside of our immediate surroundings. Furthermore, we often underestimate the magnitude of our ignorance on these specifics. The economist F.A. Hayek thought deeply about this condition, which has become known as the “knowledge problem.”

Just like stockbrokers, politicians are forced to make decisions with incomplete and sometimes inaccurate information.The knowledge problem explains why so many stock picks are busts. The Wall Street Journal has even reported that picking stocks is a “dying business.” There is simply too much valuable knowledge about a company that most investors can’t know, like the mood of the employees or whether the CEO has a good relationship with the board. People are simply too complicated for investors to be able to predict how different human and business interactions will play out over long stretches of time. But stockbrokers make their decisions anyway, and that’s okay; we give them our money with the understanding that they are imperfect.

The knowledge problem applies equally to discussions of war. Just like markets, the international political system is a vastly complicated network of people, ideas, and resources. Just as people trust financial managers with their life savings, we trust our political leaders to protect American security. And just like stockbrokers, politicians are forced to make decisions with incomplete and sometimes inaccurate information.

However, our political leaders are gambling with more than money. They’re gambling with the lives of men and women. They’re gambling with our national debt and the future our children will grow into.

The Afghanistan Gamble

For example, US leaders made a particularly large gamble since the turn of the century with their choice to invade Afghanistan, promising peace and democracy. It didn’t turn out as planned.

But Americans shouldn’t be too surprised. Foreign policy is just as unpredictable as stock markets because it is determined by the behavior of flawed people who are not very different from anyone else. And despite our best guesses, no one knows quite how the consequences of individual actions will evolve over time. The cascading effects of millions of unanticipated reactions lead to unintended consequences, which on an international scale can become staggeringly huge.

Stockbrokers are beginning to accept their limitations. Will Trump?These consequences include over 2,200 American lives lost and almost 10 times as many injured. In 2014, the Congressional Research service calculated that the war in Afghanistan had cost taxpayers $686 billion. Since then, Brown University’s Costs of War project estimates that cost will rise to over $2 trillion by 2053 when veterans’ healthcare and other long-term costs are included. Tragically, there is little to show for all the blood spilled, promises uttered, and dollars spent.

The attempted reconstruction of Afghanistan exemplifies how difficult it is to predict what can be accomplished. Despite billions invested, relatively simple projects like roads failed to meet expectations. Brown researchers have called U.S. reconstruction efforts “poor or even counterproductive” across the board.

Back home, American workers faced the unintended consequences of war. The Cost of War project estimates that millions of jobs could have been created domestically if the United States had not obliged itself to regime change in Afghanistan and Iraq.

Given the very apparent way in which American foreign policy has fallen victim to the knowledge problem over the past 15 years, President-elect Donald Trump should be skeptical of his ability to actively manage world affairs or effect regime change abroad. Unintended consequences will always arise, and given the chaos that exists in certain parts of the world, Mr. Trump may be tempted to intervene just like President Bush did in Afghanistan. But the proof is in the price tag. Stockbrokers are starting to realize that limited predictive power mitigates their ability to actively manage stocks. They are beginning to accept their limitations. To Mr. Trump, I ask: can you?


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