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Saturday, 5 January 2013

Understanding the Chinese mind

BROWSING through my library during the holidays, I came across a book on comparative Western and Chinese philosophy that had an old saying: “Every Chinese person is a Confucian when everything is going well; he is a Taoist when things are falling apart; and he is a Buddhist as he approaches death.”
 Chinese culture is like ancient pyramids of different worldviews built over one another. The earliest was animism, where one believed different gods; the Book of Changes taught two sides to every story; Confucianism was about knowledge of self; Taoism about following the natural Way; Legalism about ruthless pragmatism and order; Buddhism about letting it go. In the 20th century, China imported Western influences from Marxism to science and technology.

It is commonly believed that the Chinese think very differently from Westerners. Western minds are considered logical and scientific, whereas the Chinese mind is supposed to be elliptical, contextual and therefore relational. One possible reason is the ideogramatic nature of the Chinese language, based on pictures rather than alphabets, which positions everything in relation to everything else.

The Chinese word for crisis is both risk and opportunity; for contradiction an impenetrable shield facing an unstoppable spear. Chinese thinking tends to sees things within systemic context and history, probably because the fount of Chinese philosophy is the I Ching or the Book of Changes, circa 1049 BC, which is essentially dialectic in tradition, seeing the world as emerging from the conflict, synthesis and evolution from contradictory opposites.

Western science and intellectual tradition stems primarily from Greek Aristotlean logic, which is reductionist and linear, reducing complex ideas into simple theories and principles that could deduce, explain and predict the future. Aristotlean logic prevailed in the West, until the German philosopher Hegel (1770-1831) developed dialectics based upon the concept that everything is composed of contradictions, with gradual changes becoming crises. Karl Marx (1818-1883) built on Hegelian dialectics into historical change through class struggle and dialectic materialism, whereas Mao Zedong fused Marxism into Chinese agrarian reality to form a theory of revolutionary knowledge through practice.

In the 20th century, natural science, such as physics, mathematics and biology began to evolve away from the social sciences, particularly economics. The Anglo-Saxon tradition of linear, logical thinking continued to dominate in social science, through philosophers such as Karl Popper, who rejected the vagueness of dialectics. On the other hand, quantum physics, quantum mathematics, biology and information theory began to evolve into binary worldviews whereby change in nature evolved through the synthesis or erosion of opposites. This is much closer to ancient Chinese and Indian views that saw the world in constant change.

What has been missing so far has been a synthesis of the two divergent worldviews.

In his new book Antifragility: How to live in a world we do not understand, Black Swan author Nassim Taleb introduced option theory as a general tool to bridge dialectic thinking with mainstream bell curve statistics. The normal “bell curve” distribution is a widely used statistical tool for decision making in mainstream social science. Social scientists look for statistical significance in the high probability (95%) or “robust” zone of the bell curve, tending to ignore low probability events (2.5% each) in the long tails.

By ignoring the long tail events that occur rarely but have large impact when they occur, mainstream thinking like the economic profession missed systemic events like that 2008 financial crisis. There are of course two long tails, one being the “bad” Black Swan events that create systemic damage when they occur.

The other is the upside or “good” long tail events. Nassim calls “anti-fragility” as good actions that compensate for “fragility”, the bad events.

Intuitively, Taleb has reframed Chinese philosophy in modern mathematics with a scientific explanation. What he calls the central Triad of exposures Fragile, Robustness and Antifragile has the analogy in the Chinese trinity of female (ying), Golden Mean and male (yang).

The Confucian concept of Golden Mean seeks to avoid extremes and take the safe middle path. But Taleb's insight shows why the Golden Mean gets into trouble, because playing safe and mainstream ignores the uncertainty of Black Swan events that could eventually damage the system as a whole. Prudence and conservatism through adopting the Golden Mean prevents the practitioner from adopting “antifragile or (good) high risk-high payoff” strategies that would compensate for the uncertain unknown bad Black Swan events.

A Buddhist would immediately recognise the need to build up good deeds to compensate for the bad deeds that may befall oneself.

By not taking risks, Chinese dynasties that adopted Golden Mean strategies became closed societies that eventually imploded when disaster struck. On the other hand, in the run up to the Industrial Revolution, Western societies took large risks with high payoffs, in science, technology and even colonialism. Western society compensated for fragility by taking anti-fragile measures. No risk, no gain.

The easiest way to think about options and antifragile strategies is in stock market investment. Suppose you adopt a conservative strategy that follows what the market does on average (follow the index). If however the market suddenly drops by 30%, and your portfolio declines by 30%, you will never recover your capital if you continue to adopt market following Golden Mean strategy. To recover or do better, you have to take small bets on risky shares that are “anti-fragile”, meaning that if they win, they win big.

Antifragility loves volatility. Making small mistakes will avoid large mistakes. The more you try to be stable, the more unstable you become, which Keynesian disciple Hyman Minsky rediscovered as “stability creating instability.”。

Taking non-linear options on high risk-high return ventures was exactly what Deng Xiaoping did in his opening up strategy. He knew that the risks of failure were high (and unknown) but taking options by opening up new development zones and new policies created new payoffs and growth areas that were not imagined by the critics.

In 2013, Deng's successors may be making new, anti-fragile options.

Andrew Sheng is president of the Fung Global Institute.