Gawande:: to err is human [or don’t mess with complexity!]

@atul_gawande by pixbymaia (Photo credit: pixbymaia)

OK, so this isn’t quite what Atul Gawande says in his excellent book, ‘The Checklist Manifesto’ (link to title on Amazon) but, when highly skilled people whom we trust to see us across thousands of miles of open sea in an aircraft or through a critical 6 hour surgery, it may as well be! It is a strikingly similar message to that promoted by Nassim [Black Swan] Taleb and, implicitly, by Ontonix.

I don’t know about you but, if I am going on a transatlantic flight, under the knife or entrusting a lifetime’s worth of savings to an expert, I really don’t care that they may use a checklist to improve their chances of success! Rather that than rely upon a fluffy mascot, lucky bandana or some other such nonsense!

More Skin in the Game in 2013:: Nassim Taleb [Project Syndicate]

Without sound foundations the global financial sector are little more than licensed “cowboy builders”!

The ancients understood that the builder always knows more about the risks than the client, and can hide sources of fragility and improve his profitability by cutting corners. The foundation is the best place to hide risk. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.

More Skin in the Game in 2013 by Nassim Nicholas Taleb – Project Syndicate

Related articles

• Quote of the Day – Nassim Taleb (cobb.typepad.com)
• Antifragile: How to Live in a World We Don’t Understand by Nassim Nicholas Taleb – review (guardian.co.uk)
• Taleb: Learn to Love Volatility (ritholtz.com)
• How Crises Model the Modern World (fitforrandomness.wordpress.com)
• Ontonix:: how to correct ratings (or how to stop the manipulation) (fitforrandomness.wordpress.com)

So, what does the future hold?

…NO-ONE KNOWS! Deal with it. Move on.

It doesn’t matter whether you have a calculator or a PhD, a supercomputer and a job with a 200 year old financial institution that is a fact. So, can we PLEASE get over our prediction addiction and deal with what we are able to influence in the real world!?

Coincidentally, this morning, I read an excellent book review (Models Behaving Badly by Emanuel Derman) and I wanted to share his quote about mathematical models: “we are trying to force the ugly stepsister’s foot into Cinderella’s pretty glass slipper. It doesn’t fit without cutting off some of the essential parts.” 

But here is yet another expert making the same point…

Simulations of highly dynamic natural systems have shown that models of growing complexity are moving slowly toward reasonable replications of reality: global climate modelling is a fine example of this slow, but indisputable, trend. In contrast, forecasts of interactions of social, economic, technical, and environmental developments are not going to improve by making models more complex. This is because so many critical variables determining eventual outcomes cannot be either anticipated or, when they get considered, their probabilities cannot be confidently placed within bounds narrow enough to generate a restricted fan of possible outcomes that might be used in confident decision making. Once the inherent uncertainties make the outcome fan too wide, there is little point in building more complex models: we might have obtained pretty much the same results with a small electronic calculator and the proverbial back of an envelope.

What to Do Instead

Airmic:: ‘Black Swan’ events – avoiding extinction

Practical advice, courtesy of AIRMIC & Marsh. The article is well worth a read even though all it really does is reiterate some of the key points I have been putting across since I started my original blog in 2009!

I have selected this extract as it identifies a huge failing that “stalks” the whole financial and risk sector but about which too few are prepared (or able) to be honest and many are even less forthcoming about its impact: ASSUMPTION.

The truth is that, without a healthy dose of assumption, the basis for flawed economic theory, mathematics that is as misleading as it is elegant and the computing power to turn it all into plausible financial models, they would not find it so, relatively, straightforward to relieve the populous (directly or indirectly) of our hard earned cash to enable them to wield – and abuse – the power that it brings!

Ontonix: "Optimal does NOT mean best"

Nowadays it is very popular to seek optimal solutions to a broad spectrum of problems: portfolios,  engineering systems, strategies, traffic systems, distribution channels, networks, policies, etc. But have you ever wondered if optimal really means best? Well, it does not. Optimality is not the most convenient state in which to function. The reason?

Optimal solutions are inherently fragile.

Our economy (but not only) is fragile because everything we do is focused on maximizing something (profits,  performance, success) while minimizing something else (risk, time, investment, R&D) at the same time. This leads to strains within the system. Everything is stretched to the limit (or as much as physics will allow). This is exactly what one should not do when facing turbulence. The focus should, instead, be on:

• Solutions that are fit, not optimal.
  
• Simplifying business models and strategies.
  
• Accepting compromises not seeking perfection. Improve, don’t optimise.

 

Read the full article: Ontonix – Complex Systems Management, Business Risk Management.