The Art of the Long View

I would like to write what I heard from and learned through a book authored by Peter Schwartz, an amazing futurist I met at Summer Davos. The gray-hair guy whose face is always full of beaming smile gave me great implications for thinking about the future.

1. Why we need scenario

Scenario is a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out. Scenario writing is not for the prediction about the future, but for the good preparation for the uncertain future. In the real world, we don’t know ahead of time which scenario would take place. However, if we prepare for all scenarios and train ourselves, we will be able to deal with the situation better.

In a sense, scenario works as a vehicle for helping people learn. Granted, we can learn or prepare for the future even without scenarios, but we might need to take a look at pitfalls of human cognitive behavior - we human beings tend to deny the possibility of unwanted future, and developing scenarios are useful tools to avoid missing important factors.

2. How to make scenarios

Alternate focus of questions

Scenario builders should consider both narrow questions related to specific situations and broad ones the world at large. Otherwise, it’s easy to lose sight of issues that could be important.

Think with groups

If you think about the future, it is easy to be caught by one’s mental cycle. Discussing the questions with diverse people help us avoid failures.

See interactions between driving force and status quo

The world evolves through the dialectic process of something new and old. Schwartz mentioned about key sources of the driving forces that shape the new world, which he call “STEEP”:

- Society: Changes in the society could affect the future state of the world. Population growth, literacy rate, cultural diversity, etc need to be taken into considerations

- Technology: This force is one of the most important driers of future events. Politics can change, but a scientific innovation, once released into the world, cannot be taken back

- Economy: Economic phenomena do shape the future as well. The change in transportation costs changed the state of oil industry, for example. Fiscal deficit of developed countries would be the recent powerful driving force to influence the future of the world

- Environment: The impact of ecological damage on human affairs and the increasing public perception of ecological harm will have impact on the state of the future

- Politics: Regulations and foreign affairs do affect the state of the world.

Needless to say, the relative importance of each factor varies from state to state. Thus we need to rank them and concentrate more on crucial factors.

When you want to see where the new forces are generated, one way is to go fringes. At the outer edge are the ideas which the majority rejects. Albert Einstein was a patent clerk in Geneva who couldn’t get a university teaching job. The two “Steves” who founded Apple had roots, respectively, in Eastern mysticism and the “hacker” outlaw computer subculture.

Another way is to meet remarkable people. When you ask questions to youth, conventional thinkers and specialists, you’ll be able to understand more about the generating forces that will eventually shape the world.

To see the current situation, or the voice of the majority, the best ways are:

- See TV programs (not news), because they represent what people perceive and produce.

- Listen to popular music, because those songs show the public feeling

- Poll data also help us understand what people are thinking of

- Meeting people and asking questions help as well

Over the interaction between status quo and new forces, we see the breaking points, or perception-shaping events. For instance, global warming became the issue for millions of people, when a NASA meteorologist testified before Congress on long-term climate changes as the result of pollution in a slow news day. These perception-shaping events matter, because the changes in public perception can pivot the direction of history more swiftly and irrevocably than money or military power.

Critical uncertainties

Predetermined elements (driving force and status quo) are not enough to write scenario. In every plan, critical uncertainties exist. Scenario planners seek the critical uncertainties out to prepare for them. These critical uncertainties provide nodes for the scenario making trees.

3. Others

Let me share some interesting remarks that he made.

About network

Network exists thanks to generosity. The powerful network is created by powerful idea, strong relationship and generosity. It is fundamentally unique that being generous creates value and that some key driving force of the society exists thanks to generosity.

Future of lives

Biotech is making significant progress. In 20 years, 80 years-old people would look like 40s. We may be able to live longer than 200 years. This means that the timeframe of our lives will undergo dramatic changes. One initial but important advice is to choose spouses wisely.

Magazines worth reading as an information source

The Economist is in his opinion the single best source of information about what is happening in the world. The other good sources are Discover (science), Wired magazine (tech), Foreign Affairs (international relations), etc.

4. Remarks

I found that scenario writing is very akin to what investment professionals usually do in case analysis. When we make investment decisions, we come up with several cases to evaluate how the future could be and to see if we can manage even the worst situation. Investors’ case studies often are narrow-minded, and this book offers me a bird’s-eye view in scenario planning. As the interaction of various forces shapes the world, we ought to take more factors into consideration to prepare well for the future.

Reference

Peter Schwartz, “The Art of the Long View”, Crown Business (reprint edition), 1996/4/15

A Treatise on the Family

Gary Becker, a Nobel laureate economist, analyzed marriage, births, divorce, division of labor in households, inequality, altruism and other nonmaterial behavior with the tools and framework developed for material behavior, i.e. economics. His purpose was to develop a rational choice approach to the family. In his book, “A Treatise on the Family”, Becker used basic tools of economics and derived conclusions, some of which may sound counter-intuitive.

Division of labor

Becker analyzes division of household labor in chapter 2 of the book. He argues that even if a husband and wife are intrinsically identical, they gain from a division of labor between market and household activities, with one of them specializing more in market activities and the other specializing more in household activities. What he introduced to derive the conclusion is the concept of relative advantage and human capital investment. The followings are the theorems in chapter 2 (page 33 to 36):

Theorem 2.1. If all members of an efficient household have different comparative advantages, no more than one member would allocate time to both the market and household sectors. Everyone with a greater comparative advantage in the market than this member’s would specialize completely in the market, and everyone with a greater comparative advantage in the household would specialize completely there.

Theorem 2.2. If all members of a household have different comparative advantages, no more than one member would invest in both market and household capital. Members specializing in the market sector would invest only in market capital, and members specializing in the household sector would invest only in household capital.

Theorem 2.3. At most one member of an efficient household would invest in both market and household capital and would allocate time to both sectors.

Theorem 2.4. If commodity production functions have constant or increasing returns to scale, all members of efficient households would specialize complete in the market or household sectors and would invest only in market or household capital.

These theorems would explain the fact that in many families, there is division of labor to some extent, and in some cases those who spend time for market labor also do for household labor as well. Becker’s statement also shows us that why the labor division is made based on sexual differences – it is because only a slight difference leads to division of labor and once the division is made, the comparative advantages of family members would get fixed. Note, however, that Becker did not say that biological difference is the sole reason of labor division, or “exploitation of household women”.  

Becker also mentions about the recent trends in women’s labor force participation rates, fertility, and divorce rates. The rapid expansion of the service sector enabled more women to participate into market labors. Thus, “the growth in the earning power of married women raised the forgone value of their time spent at child care and other household activities, which in turn reduced the demand for children and encouraged a substitution away from parental, especially mothers’ time. Both of these changes raised the labor force participation of married women. The gain from marriage is reduced, and hence the attractiveness of divorce is raised, by higher earnings and labor force participation of married women, because the sexual division of labor within household becomes less advantageous.” (page 55)  The same can be said for the women in the course of economic independence in developing countries.

Competition in marriage market

Chapter 3 and 4 analyze the competition for marriage partners among men and women of different incomes, abilities, education ages, family backgrounds, and other attributes.

An efficient marriage market develops “shadow” prices to guide participants to marriages that will maximize their expected well-being. These prices, central to the analysis in this chapter and the subsequent one, are responsible for the more powerful implications.

The general concept of marriage in Becker’s model is that marriage increases output of both male and female, and the marginal increase of output from an additional husband/wife is positive. In this setup, polygamy is more beneficial for both male and female, if either men or women differ significantly in efficiency (ability to generate output), or if the ratio of eligible men to eligible men and eligible women differ significantly, the conclusion that is analogous to the efficient use of resources.

Becker’s model explains under what situation people would invest more in superior skill (the skill that makes one attractive), e.g. having education, training, etc. Becker argues that, when the marginal contribution of women/men to output is greater, people have more incentive to invest to increase their efficiency. Usually, polygamy increases the expected marginal increase of output, as men/women can choose more than one mate.

This model suggests explanation of why polygyny is more common than polyandry. The situation originally begins with a small difference. If the marginal contribution of women is larger, that incentivizes men to invest more in their skills and women to invest less (as they have more expected opportunity to get married), and that raises the average efficiency and the inequality in efficiency of men relative to women. The difference of contribution for output may be coming from biological difference. Becker said that both average and standard deviation of years of schooling are usually much lower for women than men in poor countries with monogamous marriages, where presumably the marginal contribution of women to output is greater than the marginal contribution of men because of the value of having many children. (page 104)

Becker then analyzes assortative mating using the same framework. He says that correlations between intelligence, education, age, race, nonhuman wealth, religion, ethnic origin, height, place of origin, and many other traits of spouses are positive and strong. Especially the correlation between spouses by intelligence is strong – it is as high as that between siblings. On the other hand, persons who marry out of their race, religion, age cohort, or education class have relatively high probabilities of divorce, even when other traits are held constant. (page 117-118)

Becker argues that preferences could well affect the equilibrium sorting if costs were no the same in all households. For example, persons with similar preferences have an incentive to marry each other if costs are lower when the consumption patterns of mates are more similar, as they would be when some commodities are jointly consumed, when production of commodities is more efficient at a larger scale, or when specialized consumption capital lowers the costs of particular commodities. (page 123)

Love can also be understood in Becker’s framework. Love can be defined such that her/his welfare enters his/her utility function or that he/she values emotional and physical contact with her/him.

The demand for children

Becker applied the same economic framework to fertility.

One factor deeply affecting child birth rate is children’s future productivity. In the past, there was more child birth in suburban area, because having more children was more productive on farms than in cities. The reason is that agriculture in the past did not require any complex labor, and thus children at young age can contribute to enhance a family’s productivity. The contribution of farm children has declined as agriculture has become more mechanized and complex in the course of economic development.

Second factor is the value of the time of married women, because the cost of the mother’s time is a major part of the total cost of producing and rearing children. The number of children is strongly negatively related to the wage rate or other measures of the value of time of wives. Becker said that the growth in the earning power of women during the last hundred years in developed countries is a major cause of both the large increase in labor force participation of married women and the large decline in fertility. (page 140)

Third factor is education and the number of children. There are negative correlation between the number of children and the quality of education for them (see the table below). Becker points out that Jewish families have been smaller than average over the last 150 years and have invested more in human capital, and in recent decades they have had higher incomes.

Country and period	Change in birth rate	Change in schooling
US 1920 -1930	-24%	+81%
US 1960 – 1972	-38%	+33%
Japan 1950-1960	-45%	+37%
Taiwan 1960 – 1975	-51%	+100%
England & Wales 1871-1901	-26%	+21%

Becker also points out that government programs significantly affected child birth rate. The recent increase in fertility rate in France would be a good example to show that families would respond to the monetary incentives in deciding the number of children.

Inequality and Intergenerational Mobility

Becker also analyzes inequality. He argues that even if all families were basically identical, incomes would be unequally distributed because of the unequal incidence of endowment and market luck. The inequality prevails over generations, as lucky parents invest more in their children, and the increase in the children’s incomes would induce them to invest more in their own children in the succeeding generation, and soon until all descendants benefit from the initial luck (page 203). Moreover, Children’s incomes are linked to their parents not only through investments but also through such endowments as reputation, connections, knowledge, skills, goals provided by their family environment, genetically determined race and other characteristics.

Altruism

Becker’s argument about intergenerational mobility assumes that parents feel better if their children are better off, i.e. the utility function of parents are made of both their own income and the quality of children. Becker analyzes the altruism in the family in this book as well. According to Becker, “altruistic” means that one’s utility function depends positively on the well-being of others.

Say an altruist is the mother of a family and has several beneficiaries, including children, spouses, parents and siblings. Becker analyzes the situation more profoundly and proposes an interesting theorem (page 288):

Rotten Kid Theorem: Each beneficiary, no matter how selfish, maximizes the family income of his benefactor and thereby internalizes all effects of his actions on other beneficiaries.

Corollary: Each beneficiary, no matter how envious of other beneficiaries or of his benefactor, maximizes the family income of the benefactor, and hence helps those envied.

Remarks

It is surprising to see that the economic model of this book well describes the behavior of family to the large extent. Human beings may not be rational as an individual but may be very rational as a group, and frameworks of economics are very powerful tool to analyze the situation (sometimes they reveal uncomfortable truth though). That is why I believe to learn economics is valuable for everyone even for those who don’t care about economy.

Reference

Gary Becker, “A Treatise on the Family”, Harvard University Press (Enlarged edition), 1993/10/15

What matters to me the most

Sometimes it's very easy to forget who I am, but recent events reminded me of what matters to me the most.

To be innovative, to achieve cool things, or to make the world more convenient place to be, does make me happy and excited. That said, I realized that I won't be satisfied with those things, if my changes to the society do not solve such issues as poverty, violation of human rights, lack of opportunities and so on, which literally plague people even now. I may be able to create another Facebook (I know e probability is really low), but I would retrospect my life and regret it, saying that "so why did I spend my precious time just to make the world convenient?".

Now I recall what Frantz Fanon said. I don't exactly remember what he said, but it goes something like this: If the building of a bridge does not enrich the awareness of those who work on it, then that bridge ought not to be built.

Things are now crystal clear. Now I see what I need to do from now.

Summer Davos 2012

Annual Meeting of New Champions 2012 (known as Summer Davos) was held from Sep 11 to 13th. Having attended the forum, I felt it is great privilege to be invited such a session. 

I think the most valuable things in this forum is that you can meet people in the cutting-edge and ask questions in person. Granted, you can learn what is hot in every industry through internet nowadays, but to hear something directly from people's mouth and to be able to ask questions are totally different experience. Not to waste my time,  I asked questions in most of the sessions. 

A few sessions were quite interesting to me: the future of finance, education and the role of business. I would like to post separate entries if I can. 

Above all, perhaps the people amazed me the most were Global Shapers (I belong to the community as well). It was such an experience to see that people of the same generations are doing something great around the world. They gave me inspirations and motivations to continue and put more efforts on what I am doing now.