Complexity lessons from nature for a better economic future…


Here is a very brief snippet from a recent article in ft.com. The writers, who form an, apparently, unlikely combination, are Andy Haldane, Executive Director for financial stability at the Bank of England, and Robert May, Professor of Zoology at Oxford University and former British chief scientific adviser.

You shouldn’t really be too surprised because, increasingly in “Corporate America” the realisation is that, rather than environmentalists and others who push a “Sustainability agenda” being the enemy, they have learned through their own performance that embracing Strategy for Sustainability IS transforming their results. And not just because “green washing” was so costly or that their “educated” customers are spending more but because it is genuinely better for their business, stakeholders and the environment.

Nor is this the first time that these unlikely bed-fellows have attempted to communicate a message so important that it is cultivating increasingly inter-disciplinary approaches – joined-up thinking. This is familiar territory for Ontonix. It highlights why Complexity Theory and systems-thinking are THE point at which a new understanding can be applied to begin the process of recovery…this quote may help your understanding of why complexity is so important:

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

.”..The present situation in banking is in many respects perverse. The magic of diversification, when assumed into banks’ risk models, means that large, complex banks often hold less capital than their smaller, simpler brethren. The rocket-scientists building models tell us this makes sense. But the rocket-scientists building rockets tell us it is nonsense. This error has cost the world dear. Through this year, the Financial Stability Board is leading the charge to boost loss-absorbing capital for the largest, systemically important institutions to correct this error. It is right to do so.”

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 “st … Read More

via Get “fit for randomness” [with Ontonix UK]

2 Responses to Complexity lessons from nature for a better economic future…

  1. Here is some dialogue regarding the ft.com article, that I hope someone will find interesting. It is taken from a discussion with a fellow member of the “Behavioural Finance: Theory & Practice” forum on Linkedin. Martin (Davies) is a Banker with RBS, Singapore :

    Martin Davies
    This is an interesting article but quite abstract. Calculus aside I am not sure you can compare the operation of a bank with that of a common virus because in the virus each level of new infection is in itself a random event even if the source contagion mutates in a previous host.
    I fair the question is; are big banks more resilient? Looking at the credit crisis alone both big and small banks failed, so the credit crisis is somewhat a null event for supporting this theory of big and small.
    Carrying on in the contexts of diversification and diversity – Big banks should in theory be more resilient however in my opinion only if they are rarely run like individual units.
    If you think about an economy, is a big economy more resilient than a small one? It should be because it derives its GDP growth from many alternate industry sectors but if the central government passes a new tax for example or a new law, then that can impact all industry sectors.
    I fair the same issue is with banks, when the central unit fails be that group risk or treasury, then all units collapse.
    What needs to change is the way a banks balance sheet and internal operating structure is built up. Firewalls between specific operating entities need to exist.
    The retail division, investment banking division, insurance division should be run as separate entities not divisions, they should be run as if they are projects. In reality you want cross fertilization benefits from one unit selling to the other, say host insurance contracts in the retail branches and on occasion sharing resources such as IT but each unit needs to function as a unit once it is cash positive. If the investment division collapses so be it the other units carry on.
    Extending on this point becomes complex so one needs to my comment here as nothing more than a quick observation.

    David Wilson • @Martin: This is something that Andy Haldane has been promoting now for nearly two years…progress is slower than the spread of the common cold apparently! Clearly he is focussing more upon the ability for “hubs” (big banks) to spread and accelerate contagion rather than upon mutation. However, THAT (mutation) could conceivably be the tipping-point at which other domains are infected.
    Of course, in complex (non-linear) systems identifying causality is very different to a linear system. Hence the need for an holistic perspective with the ability to monitor cause and effect interactions within a system or network. Without this ability how does one measure what “financial redundancy” is required and where?
    Of course “systemic risk” is a two-way street, so unless the GRC is as it should be, drawing unforeseen new strains through overly complex multi-tiered relationships will continue to be a risk.
    However, does anyone really think that resilience is or can be a “top down” thing? It must be inside “bottom up” in structure and “inside to out” in culture…otherwise it is little more than a re-spray!!!
    They are on the right track but it’s a jungle out there!
    David

    Martin Davies • David, I am actually with them on this.
    I started off saying “I am not sure you can compare …” and finished up with “be run as separate entities not divisions” … I literally talked myself into this.
    I am sold, at the very least it is a different method of looking at how these entities function and that in itself is a creative spin which could turn out some useful ideas or new approaches to banking.
    I agree with you, on resilience not being a “top down” thing —> Staying with the biology context of this discussion, it has to be omnipresent like an immune system,

    David Wilson • @Martin: That is good to hear!
    In between getting on with some other stuff(!) I have been thinking further about this subject. Really prompted by your initial comment, which is extremely useful as it is a “view from the inside”. It does appear that both banks and Regulators have a view that internal “partitions”, firewalls or some form of separation are the way forward. I think that would be a BIG, costly, mistake and, in time, be shown to be so!
    Here’s why: The last thing that already hugely complex organisations like banks need is more complexity in the form of internal GRC. Girding the Corporate loins in the manner of a Medieval Knight, with all the attributes just isn’t going to work…is it? Robust, maybe. But underneath all that heavy clanking armour is the strained heart of some unfit noble who is as likely to suffer through his lack of mobility. Excessive complexity is a killer: FACT
    GRC is necessary but Global Corporations and Banks need to be agile…more like Ninja warriors but they, first, need to “live” by the omnipresent values and code(s) of honour- perhaps an extension of your excellent immune system observation. Resilient, probably.
    This is not me living out some boyhood fantasy…honest! I’m sure you are familiar with the use of warfare analogies and, when it comes to this scenario it struck me that these work particularly well.
    This does bring me back to something that I have fervently believed for some years now, that nought will change until the Corporate culture changes and THAT requires transparency to rebuild trust within a GRC environment.
    David

  2. Noam Chomsky talking about US politics but let’s not kid ourselves that things are radically different in UK. The funding is not so much the issue as the lobbying:

    “Over a long period, like a century, you can pretty well predict policies by just looking at concentration of campaign funding. Thomas Ferguson, very outstanding political scientist, has done the main work on this, and it’s convincing. So, when you find that the core of the funding is the financial institutions, you can pretty well expect that the major policies will be to reward them.”

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