Thursday, November 14, 2019

"Asymmetric ignorance" and the "hiding hand"

Is uncertainty a virtue in decision-making within large and complex systems? Does absence of full information about the future state of the world increase the likelihood of optimal actions by agents?

Albert Hirschmann talked about his theory of "hiding hand". He had said that governments are often either too risk-averse or too intimidated to undertake large, complex endeavors. He argued that in such cases it would help to have a hiding hand that encourages policymakers and politicians to temporarily overlook the challenges and take decisions. This may well have to be the spirit underlying any complex reform endeavor or large projects like this or this.

Oxford economist Bent Flyvjberg talks about how the proponents of large infrastructure projects use "strategic misrepresentation" involving hiding the true cost of mega-projects to secure their approvals. The belief in all such cases being that the biggest challenge is to bite the bullet and initiate the project or the reform, and then address the problems as they emerge. 

Similarly, on the monetary policy side, researchers have talked about the value of asymmetric ignorance in disciplining agents' response to monetary policy. Former US Federal Reserve Governor, Donald Kohn has argued that the Fed may be communicating more certitude to the markets than may be appropriate. 
Mr. Kohn believes that some of the ways the Fed now communicates to markets—by way of its “dot plot” of interest-rate projections, as well as its other forecasts—have come to be viewed as more certain than they are. He believes the Fed, both in the presentation of these views and in the remarks of officials, has reinforced the certainty of its outlook, even when officials already know much about the future is unknowable. The Fed’s quarterly forecasts should be aligned with “the rhetoric of uncertainty and data dependency and the true state of economic knowledge,” Mr. Kohn said. The Fed should stop summarizing key projections with medians, and portray the amount of uncertainty the Fed has around its various forecasts.
 In this context, The Economist writes that it might help if central banks talk less,
Microeconomists have long known that ambiguity can have strategic uses. Employment contracts, for example, do not specify every action an employee must take, nor all the obligations of an employer, possibly because it may be better to leave room for either side to punish the other’s bad behaviour. In recent years Bengt Holmström of mit, who in 2016 won the Nobel prize for economics, has argued that central-bank opacity has its uses in credit markets. Most of the time, he argues, these markets, unlike stockmarkets, are “information-insensitive”—they do not respond much to news. In contrast to stocks, there is no upside for the lender when things go especially well, and default is a remote risk, especially when loans are adequately collateralised. “A state of ‘no questions asked’ is the hallmark of money-market liquidity,” he argues.

In a panic, however, money-markets dry up as the risks loom larger. Lenders find themselves having to scrutinise every transaction. Restoring stability might require a promise that is light on detail, and thus hard to pick apart. At the worst of the euro zone’s sovereign-debt crisis, for instance, Mario Draghi, the head of the ecb, pledged to do “whatever it takes” to keep the single currency safe. Mr Holmström also notes that when the Fed provided emergency lending to banks during the financial crisis, it did not disclose which institutions received support, for fear that any associated stigma could provoke bank runs.
It also talks about the success of central banks with shaping inflation expectations, which may be coming in the way of the fight against disinflation.  

It does seem that, ironically enough for a world awash with information, scarcity (of information in this case) may indeed be a big disciplining force!

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