The Seductive Illusion of Incremental Change   (May 13, 2008)

We rely rather heavily on the folk wisdom of incremental change. An apt summary of the principle can be found in the ancient Chinese saying, "the journey of a thousand li starts with a single step."

And indeed, for long-term projects like building wealth, becoming physically fit, starting a family, planting an orchard, growing into a wiser, more understanding person, etc., then the daily incremental applications of discipline and management are the essential ingredients of reaching major goals/acheiving transformations.

But within this notion lies a trap which I call "The Illusion of Incremental Change." We all intuitively grasp the seductive appeal of this illusion, and I've illustrated it with three examples: trying to lose weight, responding to Hubberts peak/peak oil and the financial crises which are sweeping the globe.

Most of us "know the drill" when it comes to losing weight. Your first application of incremental modifications reap positive results: just cutting back on desserts and third helpings, and walking 20 minutes a few times a week results in losing a few pounds, and you feel pretty good.

Picking the "low hanging fruit" produces significant improvements, and with that the illusion is formed: if we just keep doing what we've been doing, little by little the problem will be chipped away to zero.

In a similar fashion, Peak Oil's ugly appearance in the U.S. 1970 was offset by the 'solution" which had worked for 100 years--just find more oil. Discoveries of the North Sea and Alaskan oil fields as well as major finds off Africa increased "proven reserves" by billons of barrels.

Financially, the initial "liquidity problems" of last year which were the proverbial canary in the coal mine of deep financial turmoil were addressed with massive injections of fresh credit by the Fed and the Treasury, which initially resulted in stabilizing fears of a broader credit freeze.

But if you haven't really changed your "diet" or behavior, then the second crisis soon builds to a head. You turn around, or so it seems, and you've actually put on an additional 30 pounds and are now pushing a BMI of 30--a level with serious health consequences.

In energy, the major companies have scoured the globe for new mega-fields, and come up empty despite 30 years of drilling and testing. "Finding more" is no longer working.

Despite hundreds of billions of new credit pumped into the ailing global financial system, the "credit crunch" and housing deflation continue apace.

As the chart illustrates, the application of the incremental changes which worked the first time around now yield little positive results. The inertia of our body's "set point" of weight and metabolism is not easily reset, and strict dieting seems to yield no weight loss despite the deprivation. In fact, the more stringent the diet, the more our body "rebounds" to ever higher weight when our discipline breaks down and we begin eating normally again.

Even as the warning signs appear that demand for oil will exceed supply, GM et al. keep offering incentives for Americans to buy low-mileage vehicles, and warm and fuzzy prognostications about the miracle of ethanol lull us into thinking the energy crisis is nothing but an illusion.

Unfortunately, the illusion is in the happy story that incremental changes will fix a fundamentally broken system. Now that the decay and rot at the center of the American banking and housing sector has been revealed, non-U.S. investors are refusing to fall for "the big con" that "everything's fine now, just go back to buying billions in bogus AAA bonds." Spendthrift Americans are going bankrupt or tightening their belts for the first time in years or even decades as they sense that the incremental adjustments are no longer working.

As nothing fundamental has actually changed, the real crises finally hit home. Weight gain and lack of exercise has led to diabetes, heart disease and a host of other ailments; peak oil is creating price increases and even spot shortages, and the financial house of cards is tottering despite hundreds of billions wasted trying to prop it up.

Despite the clear need for immediate, fundamental change, we continue pursuing the illusion that minor tweaks and modifications will 'do the trick" and we'll be saved from disaster.

But alas, the incremental tweaks and tricks are doomed to fail, and the system finally breaks down. Chronic illness proceeds to emergency and then to disability or death; spot shortages of energy become global shortages, and financial turmoil spills over into panic and a complete freeze-up of credit. The incremental adjustments to Medicare fail, and the system is declared bankrupt, short an overwhelming $10 - $20 trillion in underfunded liabilities.

The list goes on and on of systems which resisted fundamental change in favor of happy-happy illusory adjustments and minor fixes, all of which simply brushed the reckoning into the future, essentially fixing the ultimate momentum downward in fast-drying concrete.

Turning once again to the analogy many of us know from experience, losing weight and becoming fit is a brutal process, both in the internal psychological changes and in the external behavioral changes it requires. All that you once thought essential to your happiness and well-being--the second helpings, the weekly pizza, the fast-food lunches, the three scoops of real creamy ice cream, the pita pockets--all gone.

The sitting around on the sofa playing video games or channel surfing or IMing or gabbing on your cellphone for hours--some of it is gone, replaced with an hour of yoga or martial arts or walking in the real world or jogging or bicycling, or pruning trees for a couple hours or cleaning gutters or other real work that requires climbing ladders or moving heavy stuff around, stretching that hurts, activity that pushes your body from flab to muscle.

I know some of you will be tempted to accuse me of puritanism, and a pleasure in sacrifice and hard work. Perhaps there is some truth in that, but the reality is being healthy is more pleasurable than eating a big bowl of ice cream or sitting around watching TV or a mindless videogame. It's not a lecture, it's simply the truth. The illusion is that a good long walk is somehow a punishment or deprivation, when in fact it's the sitting around wasting time on mindless "leisure" which is the real deprivation.

In a similar fashion, an energy-wasting lifestyle is not "better" or "more fun" than a conserving one, any more than pizza and ice cream actually make you feel better.

And a financial "lifestyle" dependent on ever-growing mountains of debt--individually, in local governments and in our Federal government--is not increasing our financial health: it's destroying what little remains.

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