Complexity as a curtain for fraud

April 19, 2010 | By | 7 Replies More

“Whoever knows he is deep, strives for clarity; whoever would like to appear deep to the crowd, strives for obscurity. For the crowd considers anything deep if only it cannot see to the bottom: the crowd is so timid and afraid of going into the water.”

Friedrich Wilhelm Nietzsche, The Gay Science (1882).

“. . . using financial complexity allegedly to deceive and then using so-called independent experts to validate the deception (lawyers, accountants, credit rating agencies, “portfolio selection agents,” etc etc ) . . .”

“Now we know the truth. The financial meltdown wasn’t a mistake – it was a con

Why are many human systems complex?  If we’ve learned anything over the past few years, it’s that there are two reasons—there are two kinds of complexity.

Sometimes, complexity is required to get the job done.  I think of this as “parsimonious complexity.”  For instance, the Mars Rovers are extremely complex robots, but every part of these magnificent robots has a specific function that furthers a clearly and publicly defined mission.

There are also instances where complexity is purposely injected into a system.  I think of these as instances of “gratuitous complexity.”

It’s important to keep in mind that all forms of complexity serve as entry barriers to activities, due to the limited attentional capabilities of humans.  Very few of us have the stamina or intellect to thoroughly understand all of the artificial systems people create; many of us don’t have the stamina to thoroughly understand even simple systems. When an activity is more complex, it is more difficult to understand and more daunting to those wishing to participate.  Activities that are more complex are thus accessible to fewer people.  For instance, chess is more complex than checkers, in that the state space of possible moves is larger in chess than in checkers.  Checkers is easy to learn and play.  But many checkers players don’t graduate to chess due to the increased complexity.   Some systems are so incredibly complex that only the chosen few are able to participate.

Image by Ia64 at dreamstime.com (with permission)

Image by Ia64 at dreamstime.com (with permission)

Gratuitous complexity is often injected into an activity for benign purposes, such as creating an art form in which only elite artists can participate.  For example, large numbers of amateur musicians can play folk music (much of which requires only 3 or 4 basic chords), whereas it takes a higher level of musical skill to perform more complex forms of music such as jazz and classical music.  Many folk musicians are thus excluded from performing jazz.  Many people who enjoy folk music don’t understand jazz.  In fact, the sounds of many types of jazz and classical music grate on many of them.

Sometimes gratuitous complexity is injected into a system for nefarious reasons, namely, to intimidate most outsiders and thus to exclude them from understanding the inner workings of the system.  Quite often the things being disguised are machinations of power and fraud, and those who are being excluded include regulators and law enforcement.  That seems to be the case with the modern financial services industry, and it has become similar the world over, as described by the U.K. Times:

This was the context in which Goldman’s Fabulous Fab created the disputed CDOs, Sean FitzPatrick [former Chairman of the Anglo Irish Bank] allegedly moved loans between banks and Lehman created its Repo 105s along with the entire “debt mule” structure revealed this weekend of inter-related companies to shuffle debt around its empire. London and New York had become the centre of an international financial system in which the purpose of banking became making money from money – and where the complexity of the “innovations” allowed extensive fraud and deception.

As these nefarious complex systems continue threaten the economy, what we desperately need is a quick test; we need to be able to tell the difference between parsimonious complexity posing and nefarious gratuitous complexity posing as parsimonious complexity.   Lest I be accused of making things needlessly complex, I’ll restate.  We need to be able to tell whether a system A) is complex because it is doing complex work, or B) has been concocted to be complex in order to hide wrongdoing.

I have a few tentative suggestions.  Here are the hallmarks of a nefarious and gratuitous complex system:

1) Notably intelligent and highly motivated outsiders endlessly struggle to understand the logic of the system or the need for the system (e.g., credit default swaps) http://en.wikipedia.org/wiki/Credit_default_swap
2) The people benefiting from a system are most vocal about the need for it.
3) Politicians who receive the biggest cash contributions from a complex industry are especially able to see the need for the industry.
4) Where those who are especially articulate about the need to tear a complex system down won’t particularly benefit from the change they are proposing.
5) Those attempting to justify a complex system can’t look you in the eyes while they attempt to explain it.

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Category: American Culture, Corruption, Fraud, law and order, Simple living

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (7)

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  1. Erich Vieth says:

    "Goldman Sachs Group Inc(GS.N) added aggressively to its political war chest in the months before it was charged with civil fraud, collecting a record sum for donations to 2010 election campaigns, according to government disclosure documents."

    http://www.reuters.com/article/idUSN1920004520100

  2. In Holland the saying goes:

    "Inflatie is het opblazen van getallen, zodat je er grotere delen van kunt stelen zonder dat dit opvalt."

    or freely translated:

    "Inflation is the blowing up of numbers, allowing you to steal larger parts of them without anyone noticing."

  3. Dan Klarmann says:

    I take issue with the chess/checkers comparison. The complexity of individual pieces in chess is greater, however the level of strategy is comparable. I remember a study reported in a Smithsonian article from a decade or two ago, that pitted chess masters against checkers masters. It turned out that a checkers master can give a chess master a run for his money in chess, but a chess master is swept away when they play checkers.

    The level of iteration is higher in checkers.

    • Erich Vieth says:

      Dan: Here's why I brought up checks and chess. It was not to demean checkers players. It's that checkers has been "solved" by computers, whereas chess has only been partially solved. As mentioned by this Wikipedia article, however, "Whether a game is solved is not necessarily the same as whether it remains interesting for humans to play." Chess has a much higher state space of moves. I'd be interested in reading more about the checkers players whipping chess masters at checkers.

      In the meantime, I should perhaps substitute tic-tac-toe for checkers (tic-tac-toe has also been "solved").

  4. I'm currently reading Joseph Stiglitz's "Freefall" about the 2008 crash and its "complexities" and he points out the various levels of deceit and self-deception involved. The puzzle so far (I haven't finished) is why no one in Washington seems willing to really bite the bullet and state unequivocally that what happened was theft and these people are thieves and laws should be passed to prevent this kind of thievery. Instead, they seem to be buying into the explanations of the financial industry.

    If you cannot state simply the purpose of an instrument, regardless of its actual structural complexity, then you are either in over your head or indulging fraud.

    Credit default swaps and related instruments are very simple in concept: they are bets that a given firm will be successful or not and the bet goes both ways. Someone will make money if the firm fails.

    But it is also a bet made with other people's money.

    Glass-Steagall was originally enacted to prevent conventional banks from doing that kind of thing because the money in their vaults wasn't theirs. Someone convinced Washington that we don't need such separations anymore. Obviously we do.

    Simple.

    Any explanation that tries to restate that in such a way that it appears to be the opposite of what it is is by definition Bullshit.

    We have seen in science instances of one scientist describing his or her work in terms that leave most of us reaching for dictionaries and lexicons, while another can describe the same thing in the clearest language that any bright 16-year-old can grasp. (This goes to purpose, not process.) The same ought to apply to economics.

    (Having gone through a number of economics books in prep for a novel once, I can tell you that it is not so much complexity that bores one to tears…it is just a boring topic. Until you lose your life savings, that is.)

    The test should be this: can you, as CEO or whatever of your financial institution, describe the purpose of a given instrument in three sentences or less so that everyone can understand it?

    No?

    Then you ought not to write such instruments.

    So say we all.

  5. Niklaus Pfirsig says:

    The basic strategy in Chess, checkers, and tic-tac-toe (and in many other board games consists of laying traps for your opponent that limits their moves while leaving you options as open as possible.

    Some of the games with simple rules can be deceptive where strategy is concerned. the game 4-in-a-row, (marketed as "Connect-Four") is an example.

    in the checkers-chess comparison, the complex gameplay makes it easier to set traps while at the same time making it more difficult to avoid you opponents traps.

    In the case of the bank failures, a major point of complexity was the "debt derivative formulae" often presented as a pair of calculus equations with no description or definition of the constants and variables or what the represented. These were supposedly used to determine the future value of aggregate collateralized debt, but without a context they became the mantra of the high priests of corporatism who also had no clue what the equations meant.

  6. Erich Vieth says:

    From a reader:

    Re: Complexity has become the modern enemy of truth.
    Sports jargon:

    1. Branch Rickey: “A full head swings an empty bat”

    2. Question to Babe Ruth: “Was it a fast ball or curve you hit for a home run”.
    Ruth: ” I do not pay attention to fast ball or curve, they throw it and I hit it.”

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