The Small, the Big and the Beautiful

I am always delighted to find out that the ramblings on my humble blog do appeal to others sufficiently that they decide to “follow” it. When I can I do try to check out their blogs for kindred spirits from whom I can learn. Sarah Denie is one such…thanks Sarah! This is a mere extract from a great, recent, article.

the key factor of all economic development comes out of the mind of man”. Our actions, transactions and interactions ultimately stem from our mental models; the way we perceive the world and ourselves within it. The darker side of this coin is that all economic destruction – whether it is a collapse of the financial system, serious damage to the worlds’ ecosystems, or the exhaustion of earth’s resources – are also fruits of the mind of man. It is our perception of separateness, from each other and from our natural environment, that has misshapen the concepts of wealth, value and wellbeing into individual rather than systemic qualities. It is for this reason that we find ourselves in a system in which economic gains are considered value-creating, even if they destroy the very source they sprung from.

This piece reminded me of words of wisdom from some of  history’s great leaders and intellectuals, from Jesus, Confucius and Ghandi to Benoit Mandelbrot and countless others who, in one way or another, tell us or have demonstrated the need to look within and at smaller scales for solutions to even the biggest problems. Such is the nature of complex [non-linear] systems where, courtesy of the “Butterfly Effect” the very small – even invisible to the naked eye – can have unpredictably large impacts.

“…in its beginning it is easy to cure, but hard to recognise; whereas, after a time, not having been detected and treated at the first, it becomes easy to recognise but impossible to cure”

– Niccolo Machiavelli


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Living with Black Swans: balancing the books in uncertainty

OK I’m a self-confessed fan of NNT but early on in this interview with his former Professor he again hits the nail on the head. He reminds us of the lessons that every business (and political!) leader needs to learn..

“…You have to avoid debt because debt makes the system more fragile. You have to increase redundancies in some spaces. You have to avoid optimization. That is quite critical for someone who is doing finance to understand because it goes counter to everything you learn in portfolio theory…. I have always been very sceptical of any form of optimization. In the black swan world, optimization isn’t possible. The best you can achieve is a reduction in fragility and greater robustness. You may have heuristics, but not an optimization rule. I hope the message will finally get across because I haven’t succeeded yet.

People talk about black swans but they don’t talk about robustness, which is the real lesson of the black swans.”

Business Leaders of the current culture are not, generally, “agents of change”. As I have said before we need to cultivate Risk Leaders. Those who, not only,  recognise the flaws of the current culture but are motivated to create, champion, execute and capitalise upon new models and strategies.

Apart from the clamour, from better informed and more demanding consumers, for greater transparency, accessibility and demonstrable sustainability, the pressing NEED is for this new breed to embrace the concept that robustness (or NNT’s anti-fragility) can ONLY come from by creating (and maintaining) a sound business infrastructure…from the bottom up or, as I feel is even more appropriate, from the “inside out”: i2o”.

The relevance of scaling and causality

Such problems as Taleb highlights can only be addressed if the owner can view the business (or system) at the appropriate “scale”. Otherwise how would one know where and by how much to “increase redundancy” to build RESILIENCE in order to survive unforeseen and unforeseeable future events?

After all redundancy and robustness cost NOW and need to be maintained, so, have an ongoing impact upon profitability.

Benoit Mandelbrot: The “heretics” are taking over the asylum

Benoît Mandelbrot at the EPFL, on the 14h of M...

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Thankfully the times have changed and, much as they have resisted, institutions are finally getting the message that they can no longer get away with marginalising or burying the theories and other creative contribution of passionate and capable individuals whose work draws conclusions that challenge the very basis of their power and wealth.

Issues that were once buried or “swept under the carpet” are having to be dealt with because thinking citizens have the means to communicate (like never before) with like-minded individuals. Questions have been and will continue to be asked and for as long as Government; Church; Corporation; Financial institutions, are shown to be so deeply flawed and refuse to embrace transparency they are contributing to their own downfall.

So, unless I am a complete idiot(!) the message in this – 11 min – interview is that the whole basis of “efficient market theory” and, therefore dirty big chunks of time and money associated with modelling risk, were obtained by what can only be described as a massive deception? Well, if we are talking about deliberately and knowingly ignoring the the impact of infrequent (random) major “events” – Black Swans – on the basis that the truth was too inconvenient then what other conclusion can there be?

When it comes to interview style he ain’t no firebrand like Nassim Taleb but then again neither was the late Peter L Bernstein. But both men possess the wisdom and presence of another era with enormous relevance for NOW. NOT rebels and NOT heretics.

Benoit Mandelbrot on Risk, Efficient Markets, and Bachelier

Pt 1: In a fascinating in-depth interview with John Authers, investment editor, 85-year old mathematician Benoit Mandelbrot discusses his now 40-year old groundbreaking critique of the “efficient markets” hypothesis and why new theories on price movement discontinuities are needed after the credit crunch. Benoit Mandelbrot is an emeritus professor of mathematics at Yale University.

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