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The Actuary The magazine of the Institute & Faculty of Actuaries

Anniversary Penguins

P enguin Books has turned 70 years old. To mark
the milestone, Penguin Books has released a col-
lection of 70 short paperbacks. In this article, I review two of the titles: Hotheads by Stephen Pinker and The Economics of Innocent Fraud by John Kenneth Galbraith.

When Robert Oppenheimer successfully tested the atomic bomb, his infamous first utterance was a translation of an ancient Sanskrit verse. ‘I am become Death, the destroyer of worlds.’ Humanity now had a self-destructing technology. Nuclear war would destroy the planet. Imagine
It is 1962, and you are the president of the United States the Soviet Union has dropped an atomic bomb on New York you can retaliate the nation’s policy is to retaliate the policy was designed to deter attackers; if you don’t follow through, the deterrent would have been a sham on the other hand the damage has been done you will go down in history as one of the worst mass murderers of all time retaliation would be sheer spite... but then it is precisely this line of thinking that emboldened the Soviets to attack. (Pinker, 2005).
Pinker, professor of psychology at Harvard University, explains a well-known solution to this problem: to hand decision-making to a computer and tell the world about the automatic retaliating architecture. A ‘doomsday machine’ would not be reprogrammable. It would retaliate if the USA was attacked, the paradox being that safety comes from the credible threat that a counter-attack is inevitable.
Pinker analyses the nature of conflict. Common sense indicates that having options is a good idea. Common sense is wrong. Options can harm you. Pinker describes other examples that run counter to common sense. Communication ability can be a liability. If you want to meet a friend at 6.30pm near the clock tower, call them from a payphone: declare your intentions and hang up.
Other paradoxes are quirky. Being rational is not necessarily an asset. If someone knocks on your door requesting £10, otherwise threatening suicide, you will probably ignore the request. If that same someone has bloodshot eyes, the probabilities change. Terrorists, kidnappers, and dictators have an interest in displaying mental imbalance.
Even information can be a handicap. The driver of a security van is better off not knowing the security code of the vaults, provided that there is also a message on the van saying, ‘Driver does not know the security code’.
However, some behaviour carried out for purpose of credibility can prove very costly. Pinker describes the case of the Falklands War. There was no significant British empire to defend by the 1980s. There was no significant strategic or economic importance to fight for the Falklands. Yet Britain went to war with Argentina to reclaim the Falklands. Some calculations suggest that, with the cost involved, each Falkland islander could have been given a lifetime pension and a handsome property.
Pinker’s essays also discuss the more pleasant things in life. He discusses altruism. Pinker notes that an animal acting in the interest of the group is actually a counter-Darwinian explanation of survival. Instead, genes spread, by wiring animal brains to love their kin and try to help them survive. This is the ‘selfish gene’ theory. He writes about happiness. You feel happier when you are paid more, but less happy when you learn of the extra pay rise of your colleagues. Moreover, despite decades of economic growth in developed nations, reported happiness has remained broadly the same. Pinker discusses love. Dating is a marketplace, and the marriage contract is beneficial to both parties in the long run.

The Economics of Innocent Fraud
Galbraith, the famous Harvard economist addresses the theme of ‘innocent fraud’. Can we innocently commit fraud? The notion of ‘innocent fraud’ seems like a contradiction. However, Galbraith’s purpose appears fine. Innocent fraud could come from false principles given a legal or academic clearing.
Galbraith points out nicely that some fraud is innocent. This is a nice high-level premise. If an action is legal, this does not mean the action is right. An example that most actuaries probably know about: financial statements that stick to the letter of financial standards are legal, but they purport to a type of fraud if they mislead. Galbraith addresses corrupt accounting practices in the late 1990s, but the principle applies to all parties in the financial reporting process. To apply the principle in the UK: are the massive deficits in pension schemes an ‘innocent fraud’? is a question that would bother many people. The outstanding debts amount to tens of billions of pounds.
However, while Galbraith points out the major theme nicely, the definition of his theme appears to be weaker. For example, Galbraith laments the lack of consumer and voter sovereignty given the advertising techniques of firms and political parties. He lays blame on the economics profession for fraudulent academic instruction. However, there are many reasons why people do not vote. A vote is one decision. Individuals face a multitude of policies to vote on. There is the view that political parties target the ‘median’ voter and so may disenfranchise other voters. There are also sound reasons for corporate advertising. Advertising provides information and is not always of the persuasive variety. Advertising in itself is also a competitive industry.
Galbraith also laments that gross domestic product is a measure of economic and social progress. He suggests that artistic, educational, and cultural aspects of life matter. However, the likelihood is that in some shape or form, these aspects of life feed through to the computation of GDP.
Galbraith’s fame arises from his well-known criticism of management not working in the interests of shareholders. This point survives in modern economics.