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Confidence Tricks

October 11, 2007

Pragmatist like Charles Peirce and William James to knowledge to be beliefs that had cash value – ie, that you would be willing to act upon. Last week, account-holders in Britain’s fifth largest mortgage lender, Northern Rock, brought to light a perverse way of looking at the Peirce-James definition of knowledge by acting on beliefs that had no-cash value, thus triggering the first bank run in Britain since 1866. This got me thinking of the relationship between individual and collective confidence, and by implication, on the relationship between knowledge individually held and knowledge collectively held. Money, for example – the stuff of bank runs – expresses a fiduciary relationship between citizens and the state. I know what I can currently buy for a pound sterling even though this knowledge ultimately depends in some mysterious way on what I believe I can buy for a pound sterling. Confused? There is worse to come. What I can buy for a pound sterling also depends on what you believe I can buy for a pound sterling, and on what your neighbour believes I can buy for that sum, and on what your neighbour’s neighbour believes, so on. In a sense, then, knowing exactly what I have when I have a hundred pounds in my account – knowledge that I will act upon when I sign my next credit card slip – is dependent on a complex web of beliefs that link me up with the whole British social fabric as well as a number of Pushtun Tribesmen lost in the mountains of Waziristan whose minds is currently focused on poundings more than on pounds.

We are, of course, dealing here with the difference between the real and the nominal economy. In the real economy, when I buy a chair to sit one, as the purchaser, I am the only point of reference needed to judge whether the chair is strong enough to carry my weight. You may not believe that it will carry my weight, but this will not in itself alter the load-bearing disposition of the chair. My own belief on the matter may not be justified, but again, this will not alter the properties of the chair. How different the nominal economy in which what you believe constrains what I can legitimately believe. As Keynes once pointed out, those who make money in stock markets are not those who have some detached knowledge of whether prices will rise or fall in some abstract universe of their own making, but rather those who sense whether you will believe that prices will rise or fall and will act accordingly.

Should we treat the nominal economy as suis generis? I think not. Consider some other situations in which your beliefs are conditioned by the beliefs of those you interact with.

  1. You are sitting close to the departure gate waiting to board your flight. Suddenly three people get into a line and everybody else follows. Has there been an announcement? No. The ground staff is still just sitting there joking, chewing gum and ignoring you. But, you argue, if some people are getting into line, they must know something that you don’t.
  2. At some point in August 1991 in Moscow, Boris Yeltsin stood up on a tank and waved a flag. The TV cameras were trained upon him. Yeltsin may or may not have believed that his side had won the standoff with the communists, but by waving the flag he was proclaiming this to be his belief. Now those watching him on TV knew that others were also watching him on TV and that if everybody came to believe that Yeltsin had won, then this would actually help him win. All this make-believe delayed by more than a decade Russia’s return to its old Soviet habits under Putin
  3. You live in a city where petty crime and street violence has increased. Streets now get deserted at night, which in itself increases the general sense of insecurity. The city authorities decide to increase the number of police patrolling the streets. Your belief that you may be safer in the streets at night will depend on whether other believe that they will be safer and become willing to walk the streets once more. Increasing police patrols is designed to induce a tipping point in the collective belief of the citizens in favour of going out at night.

In all the above cases, the confidence with which a belief is held – and hence acted upon – depends on how collectively it is held. And as last week’s bank run on Northern Rock demonstrated, confidence is a fragile thing delicately perched at the edge of chaos, but no less real in its effects for that.

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