Lawyers, Bankers, and Explananda

Posted by Jeff Lipshaw

In this morning's Wall Street Journal, James Freeman, an assistant op-ed page editor, reviews a book about James Dimon (The House of Dimon) written by one Patricia Crisafulli.  I came for the gratuitous dig at lawyers, stayed for the pop social science, and then got to thinking about it in connection with a post on philosophy of science over at PrawfsBlawg by guest-blogger John Pfaff.

Apparently the book is a paean to Mr. Dimon, who has managed to guide JPMorgan Chase, as yet unliquified, through the financial institution meltdown.  It's Freeman's dig, I think.  Here's the relevant text:

How has giant JPMorgan Chase weathered the financial storm while giant Citigroup was overwhelmed by it? The simple answer, to judge by Ms. Crisafulli's book, is that Morgan has been run by a seven-day-a-week number-cruncher who interrogates managers about the risk exposures in individual transactions. Citi, meanwhile, sailed into the howling winds with a lawyer on the bridge.

The master, commander and lawyer atop Citigroup, CEO Charles Prince, missed the signals on the deteriorating housing market and allowed risks to pile up in off-balance-sheet structured investment vehicles (SIVs).  (Emphasis mine.)

The highlighted sub-heading embedded in the text is the following explanandum ("thing to be explained"): Why has JPMorgan Chase weathered the financial storm better than its rivals?  This promises to be delicious:  the explanans ("explaining thing") has something to do with lawyers at the helm of banks.

Unfortunately, I'll never know, unless somebody else reads the book and tells me (I've lived through enough corporate leaders - unless there's good gossip about people I know I'll put my time to more productive use!) because the column never again addresses this apparently key connection.  There may be something to that hypothesis, but I'm not quite sure if this goes beyond a quick bit of demagoguery.

Instead, most of the rest of the column is devoted to two other explanans:  (1) that Mr. Dimon is something of a control freak ("he spends 80 hours a week examining and refining the operations of the firm, in constant communication with subordinates in various units"), and (2) that he did sensible things like cut costs, avoid $87,000 area rugs and other executive perks, and increased the bank's reserves for loan losses while increasing lending standards.

The social science challenge, of course, is linking the explanans and the explanandum, which gets us into philosophical ruminations about causation.  John Pfaff proposes that physics, unlike the social sciences, produces genuinely testable hypotheses.  I'm not sure about the "unlike."  I suggested in a comment the real problem is the generation of the hypothesis itself, which is the result not of induction nor deduction, but of what Peirce called abduction, or inference to the best explanation. As Steve McJohn, my colleague here at Suffolk (he's got a fun little essay on it), said to me in the hallway just a couple days ago, it's abductive reasoning that's still the black hole.  When you hypothesize, and that's coming out of some barely understood black hole, how do you know whether the hypothesis (the "null hypothesis" - the one you are going to test), even if descriptive in aim, isn't normative in construction?  Hilary Putnam went so far as to say that even physical science hypotheses are affected by this.

Let's play with that a little bit here.  I'm inclined to think that the only thing that really made the difference between JPMorgan's winning and losing is the last thing - increased loan loss reserves and tightening lending standards.  That's my inference to the best explanation.  Now we have a social science empirical design of experiment challenge.   Consider the following null hypotheses on the explanandum "why did JP Morgan do better than its peers?"

- Its CEO was a control freak micro-manager.

- JPMorgan engaged in penny-ante cost cutting.

- JPMorgan's executives worked in cubicles instead of plush offices.

- JPMorgan increased loan loss reserves and tightened lending standards.

- JPMorgan's executives took longer vacations.

- JPMorgan's CEO was not a lawyer.

Strict logical positivists (and other inheritors of the empirical tradition in science) are very, very uncomfortable with talk of causal explanation, mainly because it has a way of lapsing quickly into metaphysics.  Physics can go a long way with observable phenomenon and deductive logic (and just a smidgen of inexplicable asymmetric directionality, like time) - biology less so - and social science even less.  Actors in social settings and social institutions have reasons for acting, have motives, and assign meanings.  They have, as H.L.A. Hart would say, internal points of view.  It's tough to hypothesize in those instances merely with observation and deduction.  You need to get to more robust causation models, like counterfactuals (would the explanandum have occurred in a possible world in which the particular explanans did not exist?)

All of which is to say that there's still a lot of thinking to do about the explanatory power of social science empiricism generally, and certainly in law.