Fund Strategy Magazine: Complexity lessons from nature for a better economic future…

In case you thought that “complexity management” is just more mumbo jumbo from the financial sector I suggest that you read the following piece and any of my previous blogs on the subject of complexity.

Complexity analysis, mapping and management is available NOW and, if a business leader is intent upon gaining a greater insight into their operations, making more informed decisions, managing more effectively, gaining competitive advantage and “staying ahead of the curve” this is the time to contact me: or on +44 (0) 7919 917150.

In the wake of the 2008 crisis, some economists have started to base their financial models on an approach that mirrors biological ecosystems, focusing on how companies interact and markets evolve. Vanessa Drucker reports from New York.

A model is like a little toy. Social and natural sciences use theories, based on assumptions, in an imperfect attempt to make sense of the world outside. While the history of science traces refinements in our understanding, reality may, over time, reveal how painfully inaccurate the models were.

Just as new theories shook the foundation of physics in the early 20th century, financial theory faces its own upheaval. Before the crisis struck in 2008, regulators tended to focus on individual financial firms and banks, rather than on addressing systemic risk across the entire global network. Traditionally, a micro-style financial theory looked individually at how to evaluate a company, a derivative, a swap or even a collateralised debt obligation (CDO), or how to optimise a portfolio or annuity. More recently, a movement has been gaining momentum to model how firms relate and interact dynamically.

To tackle the problem, economists consider an “evolutionary” paradigm, as an adjunct to, or replacement for, the rational expectations framework that has dominated the field for more than 60 years. Both physical and financial activities can be described by parabolic partial differential equations, a tool that could illustrate either heat diffusion or options pricing.

Read the remainder of this enlightening article here.

”Imagine assessing the robustness of the electricity grid with data on power stations but not on the power lines connecting them”

One Response to Fund Strategy Magazine: Complexity lessons from nature for a better economic future…

  1. David says:

    COMMENT TAKEN FROM FUND STRATEGY ARTICLE COMMENTS (by DGW):A superbly insightful piece that reinforces the need (recognised by the Nobel Price for Economics awarded to Elinor Ostrom) for a multi-disiplinary approach to resolving many of the problems of our own making!Unless we recognise and manage the complexity of systems, whether natural or man-made our greatest assets stand to become our biggest liabilities. Sustainability can no longer be solely about the environment when we recognise the impact of the pursuit of relentless "unregulated" economic growth in social and cultural domains. A fact widely recognised across many fields of academic study and research: WEF; Nassim Taleb; Ulrich Beck; Adam Werbach; Elinor Ostrom…. Complexity is a fundamental characteristic of every dynamical system in nature. But this is also true of man-made systems. The amount of functionality of a system is proportional to its complexity. Every system has an upper limit of complexity beyond which the system WILL deteriorate…and in some instances "crash"! A valuable lesson from nature that we chose to ignore in favour of attempting to model probability and risk. RISK DOES NOT EXIST IN NATURE…CONSEQUENTLY IT CANNOT BE MEASURED.Unfortunately, to serve its own purposes, the financial sector added complexity, in the form of opacity, to the system.I am in the process of introducing to UK, what we believe to be the World’s first quantitative complexity analysis and management solution so, hopefully, the tools are more readily avialable than some of your contributors may have thought!!7DF3163703347130!1165.entry

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