Complexity in FS: why trying to predict…is [still] futile


I thought it about time I revisited an article that s-p-e-l-l-s things out about as plainly as they possibly can be….

CxU=F…the ability of the system to adapt, often in completely unpredictable ways, means that you can’t model it and you can’t foresee the outcomes of any strategy of intervention. It’s all completely unknowable in advance. Once you accept this it becomes suddenly apparent that a huge swathe of modern finance is complete rubbish. For example, in a complex system you expect to see “tipping points” or phase transitions when the system suddenly and unpredictably switches from one stable state to another. As Caballero and Krishnamurthy have documented this appears to be exactly what happens during the episodes of liquidity hoarding and flights to quality associated with financial crises. People suddenly switch from a belief that they’re in a state where risk is measurable based on probability to one characterised by fear in the face of absolute uncertainty, so called Knightian uncertainty.

So, in the depths of the panic of 2008 we saw investors selling Collateralised Debt Obligations at almost any price largely because they didn’t know how to analyse them. What it looks like is that they bought these sub-prime backed securities because they’d been given the highest rating possible by the credit rating agencies. When some of these went bad the investors – many of them supposedly high powered institutions – belatedly recognised that they hadn’t got a clue about what they’d bought and sold, virtually at any price. One day they had nice risk models giving default probabilities, the next day they had junk.

via Complexity In Financial Systems: Why Trying To Predict The Next Crisis Is Futile | Timarr.

Presentation: what stage in the cycle do YOU think we are at?


I know what I think and I reckon and, had it not been for the unimaginable amounts of money created out of thin air by Governments, we would already be travelling the road to recovery in the new landscape!

I am no financial or banking expert but I really don’t believe one need be if embracing some ‘Systems Thinking‘. Of course, I would love to hear some reasoned arguments for and against my viewpoint. I hope you enjoy the presentation.

Here is some further “food for thought”

“In finance it’s often been survival of the fattest rather than the fittest”

Andy Haldane, Bank of England

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