Stability is a Dangerous Illusion

Our reputation, the report underlines, is our most valuable asset. Our reputation, the report makes clear, “is ultimately defined by the actions and decisions we take every day.” And to restore and safeguard our reputation, they launched a world-wide brand campaign saying “We will not rest.”

Little was said about their 65,000 employees and that was mainly to report that there were 65,000 of them. No mention was made of flexibility or adaptability. Nothing was said about uncertainty, chaos, or luck. Not one word about the future and what was needed to adapt to demands and shape events. And that was a pity, because in September 2011, one employee lost $2.5B.

At first, the CEO, Oswald Gruebel, distanced himself from what happened. On the morning of 19 September 2011, he said “If you ask me whether I feel guilt, then I would say no.” But the fraud took place over three years, the same length of time as Gruebel had been in charge. It was part of a pattern of irresponsible trading that had been criticised by the Swiss government, who had bailed it out in 2008, and by its main shareholder, the Singapore government, who had stayed loyal throughout its losses.

Within a week of that rejection of guilt, came his resignation. The chairman, Kaspar Villiger, said that Oswald Gruebel wanted to assume responsibility but it felt a lot like the complete opposite. The bank announced that it would be shrinking its investment banking division so that it could permanently reduce its risks. Many shareholders had argued for exactly those changes since the bailouts but it took the fraud to convince UBS that it had no choice but to adapt to circumstance.

The stability at the top of the company seems to have convinced UBS that it could avoid adapting despite what appeared like overwhelming evidence that such changes were necessary. It survived more than $50 billion in toxic debts but did so with strategies more about confidence boosting denial than situation transcending adaptation. Gruebel came from retirement to try to save UBS before retiring again via resignation.

Back in 2009, Grubel’s predecessor, CEO Marcel Rohner, resigned just a few days after speaking of the need to restore “trust, profitability and stability”. At the time, he argued that the deep institutional experience of UBS would help them restore confidence in the future. Unfortunately, it was exactly those deep, embedded institutional habits that got them into difficulty and those same habits that did not allow them to think their way out of those difficulties. You can’t escape bad habits by thinking in old ways. He resisted the changes that were needed because it was too institutionally painful to deliberately cause instability.

People will put up with remarkably awful circumstances. Or, more accurately, people will end up stuck in remarkably unhappy situations. Despite efforts to improve the way things are, they stay the same, or even get worse. No-one is happy; no-one can escape their unhappiness.

Each individual move is played to the individual player’s advantage. Each person does what seems likely to lead to the best possible result but somehow the sum of all those actions is considered by all as a failure. And this failed game doesn’t just happen once, as an unintended consequence of self-interested decisions. It happens again, and again, sometimes for generations with no-one quite able to escape the logic of unhappiness.

Typically this miserable equilibrium continues until someone can shift actions past immediate logic towards renewal. It can happen accidentally, with an unplanned event jarring circumstances so that people act quite differently towards each other. It can also happen deliberately, if there is a deep understanding of the game that allows someone to alter the shape and behaviour of the game.

Even where there is a deep understanding of the game, it must exist in the head of someone who is a player in the right position to make some of the necessary moves. There needs to be someone embedded deeply enough in the situation to set off a chain of events. From inside, these events can disrupt the maladapted system. They can transcend the damaging historic patterns that have seemed inescapable.

The area of science that looks most closely at problems of this kind is game theory. It views all relationships and transactions between individuals and groups as a form of game. Not a game that is played for fun, but a relationship that involves moves, or actions, by all players. And a game that leads to outcomes, varying levels of victory and defeat.

The first significant work into game theory began in the 1920s with a series of papers published by émile Borel. He didn’t write much but what he did write was to prove influential. This included his now famous thought experiment about the ability of an infinite number of monkeys to create Shakespeare’s complete work if given long enough to keep randomly entering characters into an infinite number of typewriters.

His work had flaws but attracted the attention of others who were inspired to develop it further. Prominent among these was John Von Neumann, a Hungarian born mathematician. At the age of six, he could tell jokes in classical Greek, by the age of twenty two he received his doctorate in mathematics in Budapest, by the end of 1929 he had published thirty two major papers, or one per month.

One of those papers was about zero-sum games, where there is a limited amount that can be won or lost, with perfect information, where everyone involved knows what everyone else has done. Von Neumann showed that in such games there is a pair of strategies allowing all players to minimise their maximum losses. These strategies were described as optimal even though real world results could be mutually damaging and unattractive.

The classic game was the prisoner’s dilemma. Two prisoners are kept in separate rooms. Each prisoner has to choose whether to confess and accuse the other prisoner. If both prisoners keep quiet, both receive one year in prison. If one confesses and the other does not, the confessor will be freed while the other prisoner gets twenty years. But if both confess, each will receive five years. The most likely outcome is that both confess unless they have complete trust in the other prisoner, sufficient trust to risk fifteen more years locked in a cell while the other man walks free.

From the 1950s, game theory was expanded by many scholars and applied to different kinds of problems in many practical and theoretical fields of study. This ranged from cooperative games, where both groups try to find the best compromise agreement, to non-cooperative games where both groups try to defeat the other.

Not surprisingly game theory in military strategy was given a lot of attention. The attraction was that game theory would provide endless victories to those who understood it best, while dealing countless defeats to those who did not grasp its intricacies. The USA would figure out how to out-think the USSR with the help of genius mathematicians from the old country. Game theory plus nuclear weapons would maintain their super power status and overcome all enemies.

Yet there were limitations to the power of game theory applied in this way. For one thing, international conflicts are not constant-sum games with a fixed amount to be won or lost. They are variable-sum games where more can be won if all sides make certain choices. Thomas Schelling, an American academic, won his Noble prize for pointing out over many years, that there can be common interest in cooperating even in games that start non-cooperatively.

Winning is not just about defeating the enemy by killing him or destroying his weapons. Winning is not just about being the last man standing. Or even the last man laughing. Winning can be a game of adaptation; a bargaining process through which all sides may shape a better future.

As Schelling points out, a successful strike by workers is not one that ruins the employer, nor is a successful war one that destroys peace, wealth or the lives of brave young adults. As he argues, the most successful strikes, and the most successful wars may be those that never take place. And if that is true of industrial and military conflict, it may be true of many other mutually destructive games in society, business and politics. They are open to the possibility of game-changing-games.

There are a number of difficulties with real world games. There is seldom perfect information available about the choices everyone will make, and so each person must guess what may happen. They may be wrong about those choices, making inaccurate assumptions about actions and motives. Equally, ability to make choices that actually deliver the best possible outcome may be constrained by prejudice, habit, or hatred.

Even where a situation is miserable for all involved, one or all groups may not recognise the possibility of a better situation. Despite recognising the opportunity for something better they may be unwilling to act because they do not trust or want to help other groups. The rest of the group may be unable to understand what would be necessary to shape a better future or simply unable to break the destruction patterns of behaviour.

If any side is irrational, then rational moves by any other side are made less likely and perhaps dangerous. The hope in a destructive, miserable equilibrium is that somehow the other side can be coaxed, maneuvered or loved into cooperation. This can be attempted by bribing groups, or threatening groups, making it more attractive not to destroy but has seldom been enough to overcome the root causes of non-cooperation.

These irrational deadlocks cannot generally be overcome simply by saying that they are irrational. Not only is this taken as insulting, if the accusation is accurate, it cannot be fully understood, accepted, or acted upon precisely because they are irrational. Not necessarily in all matters, but in the particular matter of the miserable equilibrium they cannot see sense. They have at least partial blindness to all strategies based on anything except mutual antipathy and distrust. They refuse better sight.

The Palestinian-Israel conflict is one of the more famous examples of a game where two groups cannot reach agreement to improve an unhappy situation. Over the past 64 years there have been between 51,000 and 92,000 killings in military actions from both sides.

One estimate for the total cost of the conflict to the global community is $12 trillion in direct support, mainly to Israel, and consequences in terms of increased instability. The same estimate suggests the average Israeli citizen would be now earning nearly twice as much if they had peace.

In 2004, nearly 60% of Israelis and over 50% of Palestinians supported the peace deal put forward by President Clinton in 2000. This Camp David settlement became popular immediately after the death of President Arafat which led to an increase in optimism and moderation. By 2011, the numbers had dropped to 52% of Israelis and only 40% of Palestinians.

Events since 2004 have decreased the number of supporters for a peace deal. They have either sabotaged themselves in a self-destructive push away from a better situation or been sabotaged by a minority of extremists who do not want a peaceful solution. There have even been accusations that the Israeli government has used formal game theory to avoid peace because an absence of conflict would reduce its influence.

In 2005, Robert Aumann became the eighth person to receive the Noble Prize in Economic Science for work on game theory. He is a resident of Jerusalem and explains that it is the specific school of thought developed in Israel that provided the basis for his success. It has been argued that use of game theory has prolonged the conflict by deliberately using provocation to destroy the trust necessary to reach a peaceful solution.

Game theory can be as irrational, destructive or limited as any other way of reaching a decision. Starting with the assumption that peace is impossible, for example, introduces prejudice that disallows certain actions. An attempt is made to perpetuate the status quo out of fear of a future that is worse. Yet that fear prevents moves that could make the future better. While the appearance of rationality stops the irrationality of particular actions from being discussed regardless of consequences.

They are beautiful theorems with potentially ugly consequences, a set of strategies deliberately chosen to force the game into vicious infinite regress. These are actions taken by political players who act independently of their own electorate to try and keep everything as it is. It is stability at a terrible price, one that cannot be sustained forever.

There is suspicion that a two state solution with endless preconditions is discussed deliberately because it is so easy to sabotage any agreement. Yet, without actual agreement, then a one state solution with an Arab majority, due to higher birth-rates, may be the outcome. And at that point, the architects of prolonger conflict will be forced to choose between democratic equality through reconciliation or risk unwinnable civil war.

Moving beyond the immediate limitations of a miserable game to one played with rules that increase benefits to all groups is possible. But it requires behaviour that is counter intuitive, particularly to those who have committed to one way of thinking surrounded by those who appear equally fixed in their patterns of behaviour.

Von Neumann showed how easy it was for fairly minor preferences for living among people like us can lead to radically segregated communities. These preferences can grow more dangerous in time as the mutual interests of segregated groups appear to diverge. When it seems natural for one group to prosper at the expense of another’s failure, great injustices can happen. Those playing a losing game can be trapped.

“Adapt or die” Botha declared to white South Africans in 1979. But it would be another fifteen years until that adaptation would start to transcend the political past of a damaged society. It would require moves that went beyond immediate rational self-interest to transform the miserable equilibrium into one of the world’s most unexpected successes.

South Africa’s president recognised the need for adaptation but he wanted to adapt in order to preserve the superiority of whites rather than to change the nature of the game for all.

In South Africa, apartheid trapped a whole country in a specific losing game for more than forty five years. Racial inequality had existing long before but was increasingly supported in law as agricultural reforms and industrialisation increased competition for jobs first on the land and then in the cities. In 1905, the right to vote for all black people was removed and they were limited to living in particular areas. In 1910, whites were legally given complete political control over people of all other races. In 1927, blacks were prevented from practising skilled trades.

There were attempts to move away from rigid segregation during WWII by the government led by Jan Smut’s United Party who support from Indian and mixed race voters. These reforms were overturned by those who feared that racial integration would allow blacks to compete fairly for jobs and business.

The infamous Sauer Commission claimed that stricter separation of races was necessary to avoid a loss of personality for all groups. In 1948, it formulated laws that divided the country into thirteen nations, forcing people to live in those areas defined by race. Identity cards were issued to all over eighteen that specified racial group that was determined by official government teams. Marriage or even sex between groups was made illegal. Racial discrimination was established as a requirement for employers. In 1970, the citizenship of blacks in South African was formally removed. Every change was intended to maintain stability of superior political and economic power for the white minority.

It has been argued that apartheid policies adapted according to economic incentives of the majority of white people. When most were workers without capital they supported segregation. As they gained higher level skills and capital their support switched to an anti-apartheid stance. It had become more attractive to have complementary skills while white could benefit from a growing newly invigorated economy as its elite.

Such an explanation is informative but doesn’t explain why apartheid was so extreme, petty and vindictive. It doesn’t make it much clearer why apartheid lasted long after it was of economic value to white South Africans. Nor does it explain how the game eventually changed.

Significant pressure to reform started from the mid-1980s, the same time as economic and sporting sanctions were established. There was also a kind of social embarrassment experienced as South Africa tried to limit freedoms decades after the civil rights movement in the USA and elsewhere. It is possible to evade some of the economic consequences of sanctions but much harder to avoid the stressful stigma attached to them.

Despite pressure from outside the South African government became more stubborn. To preserve self-identity it followed policy that was self-destructive. This is a common maladaptation, defending the indefensible to maintain a fatally flawed game with actions that are yet more damaging. The aftermath of collapse after stubborn reinforcement can be varying levels of hard or soft, catastrophic or transcendent.

The hardening of positions in South Africa was an attempt at adapting to survive without the imagination necessary to transcend. . In place of working together there is a never-ending series of punishments. Oppression caused uprisings which provoked brutality which created support for armed resistance leading to cross-border raids by the army.

At many points to have entered a death spiral where each side thinks it would like to cooperate if only the other side felt the same. From the 1980s, the government was led by Pieter Willem Botha who took advice from Samuel Huntington, a political scientist from the USA. Huntington argued that inevitable reforms would encourage violence. To preserve stability the government needed to create a mighty state security system that would use any means necessary. These means included violence, torture, duplicity, deceit, faulty assumptions and purposeful blindness.

The use of political science in this way was a barrier to more creative ways of transforming from apartheid. It set in motion a deliberate escalation imposed on emergent political and cultural changes.

By 1985, the ANC aimed to make black townships ungovernable. Its people took over councils and attacked any accused of working for the government. They used petrol bombs, beatings and necklacing - murder caused by burning tires placed around victim’s necks. Debate was stopped using emergency powers, and without legitimate debate came not the hoped for stability but more extreme resistance.

Their leader, Nelson Mandela, had been in jailed in 1964. He was locked up on Robben Island off the coast of Cape Town. At first, Botha denounced him but then moved him to a prison on the mainland. He was allowed visitors, including foreign reporters. Mandela was offered his freedom, after twenty one years, if he would renounce violence. But he refused in a written statement saying that violence was a product of government policy and would not be necessary when full democracy was established.

In 1989, Botha was replaced by FW de Klerk who announced the freeing of Mandela and the unbanning of the ANC just six months after his appointment as president. Despite a very conservative political campaign he chose to lead the verligte - enlightened – within his party. He opened negotiations with to establish a non-racist future.

Within four years, the first free elections were held for all races. De Clerk served as deputy president in a government of national unity for two years and then retired from politics. He was to say later that stability had been restored to South Africa. It was stability made possible by actively making huge changes allowing the country to continue to develop.

It was meant to be a difficult challenge. Teams of hackers and mathematicians entered a computer tournament based on the work of Robert Axelrod, an American political scientist, on cooperation through evolution. Difficult challenges are meant to be complex and so the solutions to the challenge were expected to be long and complicated.

To everyone’s surprise, the winning entry was just four lines of code. Each line contained one rule. And those four rules were remarkably effective at encouraging cooperation. They follow a strategy called tit-for-tat where the player will cooperate or punish in direct response to the opponent’s previous action.

The past matters; but only the immediate past. It doesn’t matter what has happened the move before or the move before that, because the player forgives the past. The only action that matters is the one that has just be completed. As a result, it will always pay the opponent to cooperate, regardless of previous history of punishments. 

The first rule, unless provoked the player will always cooperate. The second rule, if provoked the player will retaliate. The third rule, the player is quick to forgive. And the fourth rule, the player has a good chance of competing against the same opponent more than once.

Anatol Rapoport was an anti-war and an active pro-peace campaigner. He created his solution to the computer challenge to demonstrate simple ways in which players could learn to embrace cooperation rather than conflict. His experience in World War II led him to dedicate his working life to establishing the legitimacy of peace studies. He aimed to ‘kill the institution of war’ by showing the benefits of cooperation patterns.

In the transition from prison to presidency, Mandela demonstrated the forgiveness part of this tit-for-tat strategy. By putting the past behind him, he was able to deal with his opponents on the basis of what they did rather than what they had done in the past. De Clerk responded in a similar way when he released Mandela from jail, he worked on the basis of what had just happened, the previous move. He freed up his actions.

Many researchers feel these simple rules of niceness, provocability, transparency, and forgiveness may provide clues into how human societies work cooperatively. In healthy societies, people learn quickly to work with someone on the basis of the most recent events. Bad behaviour is punished consistently in a proportionate way before starting afresh.

It is not the punishment that is interesting in the game. It is the way that forgiveness resets the game that is particularly instructive. Without forgiveness the game must continue as a round of punishments, and in the real world those punishments would probably increase over time. To forgive is a rule operating out of step that allows the game to change[MJM1] .

Successful adaptation relies on cooperation just as much as competition, there is generally more to win in cooperating than competing. This is particularly if competition is destructive since it removes value from the game being played. You win but you lose. The best long term adaptation is to find a way of working together again regardless of previous actions.

Human culture has this forgiveness built in at some level and in some people. We seem to have evolved the ability to be nice even when it does not serve our short term benefit. Where it works, inherited cultural memory is able to look in the future by relying on very long term experience. It tells most people, most of the time, that some give and take is necessary to avoid slipping into bloody, vengeful hell on earth.

Video game designers delve into game theory and make it practical because they want to model reality in the most interesting ways possible to create fantasy worlds with mechanics that engage video gamers. To avoid just one dominant strategy ruining the game, they spice things up.

One way of spicing things up is use intransitive moves. A form of game like ‘paper, rock, scissors’ where there is no single strategy that always wins because everything can be beaten, and beat, something else. One move is related to another move which in turn is related to the original move. This intransitive set-up forces players into more nuanced moves.

As one game designer describes it: “Consider a game where one kind of unit has long-range attacks, which is defeated by a short-range attacker who can turn invisible; this in turn is defeated by a medium-range attacker with radar that reveals invisible units; and the medium-range attacker is of course weak against the long-range attacker.”

In 1999, David Meyer, the father of quantum game theory, suggested that games played with quantum rules would be very different to those played with traditional rules. He tells a story based on the science fiction series Star Trek featuring Captain Picard, played by suave, bald Patrick Stewart. Our brave captain is visited by Q, an all-powerful alien, who threatens to destroy the star ship. It’s a thought experiment designed to show quantum strategies.

The only way to save his crew is to avoid losing a game of heads and tails with an electron. The electron will be in either a spin-up or a spin-down state which cannot be seen by the captain. Picard must simply make a series of guesses. The captain decides to choose spin-up and then keep flipping the electron. In this way he will win as often as he loses.

What Picard doesn’t know is that the electron can be in both spin-up and spin-down states at the same time – a superposition. They hide the electron in a box in a spin-down position. Q uses his first turn to put the electron into a super-position. Picard makes his completely ineffective move by turning the electron. And then Q makes his move returning the electron to its original state that will always be spin-down.

Using these rules means that Q will win every single game, because the electron is always in two positions at once. This makes Picard’s attempt to change the situation ineffective because it still leaves the electron in two positions. And Meyer, described by some as the father of quantum strategies, suggests the potential superiority of a game played with quantum rules which overcome limitations of traditional games.

In a way described by Einstein as ‘spooky’, quantum mechanics has revealed how particles and even objects can become entangled. Even at long distances objects have already been shown to have an information connection which operates at many thousands of times faster than light.

It appears likely, at a molecular level, that nature has taken advantage of this in playing its games of adaptation and survival. At a higher level, every move in a game communicates information which changes the nature of subsequent moves. Even when nothing is done, there is intention. Even when there is no obvious way in which intention is communicated to other players in system or society, there is an effect.

Quantum games are those in which individual moves are entangled so that they are no longer independent. It becomes impossible for one move to be made without a consequence for other moves. This is true even if that consequence is not a conscious on the part of another player.

Problem games, like the UBS culture of extravagantly risky expansion, or the Israeli-Palestinian conflict, can be transcended by what appear to be out-of-turn moves. These moves are unexpected, and overcome their lack of movement by provoking cooperative moves from the other sides in the game. And these are most likely when someone has been sensitised enough to the needs and fears of others.

If you want to be radical, then listen to other people. The ability to empathise can develop the adaptation required to change the way that a game is player. Mandela in prison appears to have transcended his circumstances, an ability to use empathy to out-emote his opponent as well as out-think him. When he says the best way to defeat an enemy is to make him your friend, he is explaining how he outwitted the game.

These examples suggest the danger of clinging onto stability at all costs. For UBS, it became almost impossible to accept the need to be smaller and less complex in the short term. Even after admitting toxic debts of more than $50billion it required a further loss of $2.5billion due to fraud and the subsequent loss of its CEO for those changes to be seriously considered.

For Israel and Palestine, it has become almost impossible to move beyond the sabotage of extremist groups and logic of one-sided expansion. Even after tens thousands of killings and a direct cost of more than $1 trillion to the Israelis, they so far unable to understand the nature of the adaptation needed or be capable of making those adaptations happen.

While for South Africa, a way was found of changing the focal point of the game to allow players from all sides to choose between alternative outcomes. Unexpected behaviour from various people and groups involved altered the flow of the destruction game of apartheid. Stability of actions was sacrificed to shift significant groupings in society to a new place, not perfect but one in which democracy was made possible without war. The danger of stability was avoided by not believing in the illusion ??

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