I am reading a fascinating book at the moment, entitled “Think Twice: Harnessing the Power of Counterintuition” by Michael J. Mauboussin.  The book is about decision-making, and it provides some very useful advice for groups as well as individuals concerning how to avoid making bad decisions that generate (mostly undesirable) unintended consequences.

The following excerpt from Mauboussin’s book (entitled “Unintended Consequences: Feed an Elk, Starve an Ecosystem”) provides a particularly compelling example.  It brings to mind Hayek’s notion of “spontaneous order”, which refers to “…the spontaneous emergence of order out of seeming chaos; the emergence of various kinds of social order from a combination of self-interested  individuals who are not intentionally trying to create order.” (see http://bit.ly/bbJrVf).   In Hayek’s world, the price system plays a particularly critical role in that it helps coordinate the activities of these self-interested individuals.  Unfortunately, in the public sector such price signals are either muted (often due to various legal/regulatory restrictions) or not present, and when this occurs the risk of (adverse) unintended consequences naturally increases (as in the cases described below).  This helps to explain why, as John Steele Gordon points out, government can’t run a business.

Unintended Consequences: Feed an Elk, Starve an Ecosystem

“When you are dealing with a system that has lots of interconnected parts, tweaking one part can have unforeseen consequences for the whole.  Take the example of Yellowstone National Park.  In retrospect, it looks like the park’s woes started when explorers in the mid-1800s couldn’t find enough food in large areas of its 2.2 million acres.  Formally designated in 1872, Yellowstone had seen much of its game – elk, bison, antelope, deer – disappear at the hands of hunters and poachers in the preceding decades.  So in 1886, the United States Cavalry was called in to run the park.  One of its first orders of business was to resuscitate the park’s game population.

After a few years of special feeding and favorable treatment, the elk population swelled rapidly.  Indeed, the animals became so abundant they started overgrazing, depleting essential flora and causing soil erosion.  From there, events cascaded: The decline in aspen trees, consumed by the hungry elk, shrunk the beaver population.  The dams the beavers built were important to the ecosystem because they slowed the spring runoff from streams, discouraged erosion, and kept the water clean so that trout could spawn.  Without the beavers, the ecosystem deteriorated rapidly.

Yet the managers of the park were oblivious to the fact that the elk population explosion was responsible for the trouble.  Indeed, after roughly 60 percent of the elk population starved to death or succumbed to disease in the winter of 1919-1920, the National Park Service overlooked the lack of food and falsely blamed the deaths on another group of Yellowstone residents: the predators.

Taking the situation into their own hands, they killed (often illegally and illicitly) wolves, mountain lions, and coyotes. Yet the more they killed, the worse the situation grew. The population of game animals began to experience erratic booms and busts. This only encouraged the managers to redouble their efforts, triggering a morbid feedback loop. By the mid-1900s, they had all but eliminated the predators. For example, the National Park Service shot the last of the wolves in 1926, only to reintroduce them roughly seventy years later.

And so it went. The bungling supervision of Yellowstone illustrates a second mistake that surrounds complex systems: how addressing one component of the system can have unintended consequences for the whole. Alston Chase wrote about the National Park Service, “They had been playing God for ninety-five years and everything they did seemed to make the park worse. In their attempts to manage this beautiful wild area, they seemed caught in a terrible ratchet, where each mistake made the park worse off and no mistake could be corrected.”

That unintended system-level consequences arise from even the best-intentioned individual-level actions has long been recognized.  But the decision-making challenge remains for a couple of reasons. First, our modern world has more interconnected systems than before. So we encounter these systems with greater frequency and, most likely, with greater consequence. Second, we still attempt to cure problems in complex systems with a naive understanding of cause and effect.

The US. Government’s decision to allow Lehman Brothers, the investment bank, to fail in September 2008 is a good illustration. The government’s position was that since the market largely understood Lehman’s poor financial condition, it could absorb the consequences. But the bankruptcy announcement roiled global financial markets because Lehman’s losses were larger than people thought initially, contributing to an increase in global risk aversion. Even parts of the market that were perceived to be safe, like money market funds, received a jolt. For example, the Reserve Primary Fund, one of the oldest and largest money market mutual funds in the United States, announced it had lost money for its fund holders because the Lehman Brothers debt that it held had been wiped out. The announcement shocked investors and undermined confidence in the broader financial system.”