“Complexity, Concentration and Contagion”:: Andy Haldane & Bank of England making progress
Friday, 13 July, 2012 1 Comment
We should all be grateful that “thinkers” like Andy Haldane are in positions of influence. The only problem being that, at the current rate, YET AGAIN, we stand to learn the most painful of lessons after-the-event instead of embracing tools that can provide crisis anticipation or “anticipatory awareness” to (if not avoid) then mitigate the impact of contagion.
The excellent author, Mark Buchanan, recently wrote:
Over the past three decades, the global financial system has become more dynamic and interconnected, more concentrated and complicated than ever before. Financial engineering seems to know no limits to creating new instruments that link institutions in new ways.
He also referred to “The Architecture of Complexity” by Herbert A Simon, an extraordinarily original paper published 50 years ago, the economist, psychologist and artificial-intelligence pioneer Herbert Simon asked the question, Why does nature so consistently organize itself into hierarchies? Why, that is, are so many of its creations designed as systems of systems?
The following is the abridged version of Herbert Simon’s parable about two Chinese watchmakers…a variation on Occam’s Razor!?
There once was two watchmakers, named Hora and Tempus, who manufactured very fine watches. Both of them were highly regarded, and the phones in their workshops rang frequently. New customers were constantly calling them. However, Hora prospered while Tempus became poorer and poorer and finally lost his shop. What was the reason?
The watches the men made consisted of about 1000 parts each. Tempus had so constructed his that if he had one partially assembled and had to put it down– to answer the phone, say–it immediately fell to pieces and had to be reassembled from the elements. The better the customers liked his watches the more they phoned him and the more difficult it became for him to find enough uninterrupted time to finish a watch,
The watches Hora handled were no less complex than those of Tempus, but he had designed them so that he could put together sub-assemblies of about ten elements each. Ten of these subassemblies, again, could be put together into a larger subassembly and a system of ten of the latter constituted the whole watch. Hence, when Hora had to put down a partly assembled watch in order to answer the phone, he lost only a small part of his work, and he assembled his watches in only a fraction of the man-hours it took Tempus.