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Live, From Tsinghua University, It’s Saturday Night!

Jonathan Lipson

Herbert Kohn Professor of Law, Temple Law School (2012-Present). Previously Professor of Law, University of Wisconsin Law School, professor at Temple (2004-2010) and University of Baltimore (1999-2004) law schools. Before that, a lawyer in Boston and New York.

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2 Responses

  1. Timon says:

    Lately I’ve been thinking about a metaphor for a certain kind of complexity: a vicious clique of 13-year-old girls. A complete graph of every undermining comment, and instance of or reaction to jealousy, sycophancy, revenge — it could overwhelm the computing power of Palo Alto, CA. It is possible for complexity to be meaningless in itself (say the tax code), but to concisely and elegantly convey something if viewed impressionistically (congress is cosmically corrupt.)

    I think a good little heuristic for telling when complexity is more a symptom of misunderstanding than a cause of it, is whether experts in the field dwell on how complex what they do is — in my experience electrical engineers like to explain themselves and offer clear analogies and examples, while people who worked at hedge funds go on about how impossibly complex their system of guaranteed returns is. (If I had a nickel for every time I’ve heard about the complexity of this or that political or historical atrocity, I would be Neel Kashkari.)

  2. A.J. Sutter says:

    A. Before I comment on your questions, I’d like to ask: what was the general reaction to the talks (yours and others) from the Chinese attendees, especially students? Were there any questions or reactions that surprised you? Did people express any loss of confidence in US-style economics or business practices? In my experience as an occasional guest lecturer to Chinese grad students in finance, the unexpected nature of some reactions is what makes the trip worthwhile. (And BTW, was that ex-Bundeskanzler Helmut Kohl, or a homonym?)

    B. (1) All of the factors you describe sound pretty plausible. Since “complexity” is such a buzzword these days, it might be wise to avoid it if possible, and just talk about deals being “overly complicated”. I don’t think you want to give in to fashion and gravitate toward a “complexity theory” notion of complexity; in any case, there are several flavors of that, not just the Santa Fe Institute version of it espoused by Murray Gell-Mann & al. and favored by US-based social scientists with physics/computer science envy.

    (2) “What’s so bad about it? Don’t parties willingly choose it?” Parties may willingly chose it, but not its consequences — because the complexity makes consequences difficult to see. The real issue may be more transparency and predictability than “complexity” per se. And what’s bad about it is that the consequences of that choice may affect many more people than just the parties.

    (3) What to do depends on what role you’re playing. If I were advising a client considering such a deal, I might suggest that the complexity of the deal doesn’t pass the smell test, and that he should look for a different kind of deal to do. If he insisted on doing it, and if I felt that the complexity really did mask something dishonest or at least questionable, I would either cover my rear with numerous cautionary memos to him, or even end the engagement (been there, done that, though not with subprime stuff). This goes to a larger point, which I address at the end of this comment.

    (4) “If it is a problem, won’t excess complexity cure itself?” Do you really think the Depression is an acceptable model for fixing issues like this? Wouldn’t it be better to avoid such a drastic type of correction? Also is there really only one “market” for “legal technology”? Or could the repeat of this problem in another country lead to another global mess in the future?

    (5) These are good questions, to which I don’t have any good suggestion at the moment other than my very Reagan-era “Just Say No,” supra.

    Larger point: Although you pointed out many conflicts of interest in your talk, you implicitly assume that regulation is the way to deal with them. You omit mention of individual ethics. If I may wax anecdotal: I know from friends who worked at a California bank branch (retail) several years ago that there was internal debate about whether to push subprime loans on customers, e.g., introduce them to brokers. Several people wanted to do it because they’d earn fees for originating the loans; one even mentioned she was about to retire in a year or so, and if there were any problem with the re-sets she’d never hear about it. Fortunately, the branch manager was against it on ethical grounds (and more fortunately, she had the ear of the bank’s CEO, so that the entire bank, a subsidiary of MUFJ, stayed clear of them). The point is, this catastrophe began with — and maybe could have been avoided thanks to — a lot of those individual ethical decisions. That would have been a very important message for the Chinese university audience to hear, IMHO.

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