Complexity, Leadership and Policy Making:: A New Hope? l Huffington Post

Oh how I would love to believe that there was real cause for “new hope”! But I fear that the author(s) have, in the last sentence, (just about) summarised why I wont be holding my breath.

Not only are Financial leaders “trained to use” linear models but they have spent so long and so much on creating and promoting them: through Politicians; traditional media; Academia (Classical Economics in particular); clever (if ambiguous) marketing and reaping the excessive rewards of their endeavours, that they have become, like Rating Agencies, “pillars” of a flawed belief system and self-serving culture: hubs of systemic risk.

What they had not “modelled” was the true cost of adding layer upon layer of complexity – perhaps they should familiarise themselves with some Complexity facts. Whilst this course served them well in a, now past, era it has made them so fragile that they have lost the agility required to adapt to the uncertain and volatile environment that they have created. They are casualties of their own success…with wider society as misinformed victims!

…the world is not a complicated system: it is a highly complex one that most institutions and people in charge are not yet properly equipped to handle.

Fortunately there is a new lens to help us understand these strange patterns of behaviour, a form of “human microscope.” That lens is the science of complex systems, simply applied. It gives us the power to understand how small and large numbers of ‘things’, be they people, cars in traffic, or actors in a financial system, interact and create dynamic patterns of behaviour. These coordinating patterns occur frequently, at all levels of observation, from neurons firing in the brain to a crowd acting in unison. And like all complex systems, predicting collective patterns is anything but simple. This is because there is no direct, linear and unequivocal relationship between individual and collective behaviours.

We believe that people should stop thinking that a linear approach, where a leader, or group of leaders, decides what regulation or safeguards should be used to solve a crisis. Linearity is not enough to understand our world and try to solve its problems. It simply does not work. Looking at a crowd, for instance, we might feasibly know the individual behaviour of each person, each component of the system. We might even be able to determine the interactions of some of these components. But, crucially, we cannot predict with any certainty what the outcomes will be. At least not with the linear models most leaders have been trained to use.

via Olivier Oullier: Complexity, Leadership and Policy Making: A New Hope?.

Risk: If we already “know” what we can’t but…

Rodin's The Thinker at the Musée Rodin.

Image via Wikipedia

…can, no longer, be sure of what we think we know, what do we actually know that is of any use to anyone relying upon our expertise?

No this isn’t an introduction from Donald Rumsfeld as a guest blogger but part of a serious question that, if isn’t answered correctly poses hard questions for the future of our industry.

Perhaps some explanation would help: we “know”, (well, understand) that we cannot predict the future – which could be pretty worrying for an industry whose success or failure relies upon the frequency and impact of a variety of events that haven’t yet and may never happen. But, in the absence of “special powers”, we have relied upon what we know i.e. what we can learn from the occurrence of similar events, in the past. We now have vast quantities of data, accumulated over many years by a wide variety of sources. The type of information with which Statisticians, Actuaries, Economists, Carol Vorderman can have hours and hours of fun with, aided by tried and tested techniques and the most sophisticated technology in our history.

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Data Mining: Detecting patterns isn’t the same as looking for them

LOS ANGELES, CA - AUGUST 30:  Big Bird arrives...

Image by Getty Images via @daylife

In the fine tradition of Sesame Street this blog is brought to you by the word APOPHENIA and the number 2 [two being the number of members from the Linkedin “Risk, Regulation & Reporting” Forum (on Linkedin) – Vladimir Seroff and Joe Erl – to whom I owe a debt of thanks, for inspiring this blog].

This Ontonix presentation illustrates, the limitations of conventional statistical analysis, when data does not conform to a linear fit…how inconvenient, misleading and downright dangerous! Read more of this post

“Disaster myopia”: Failing to learn the lessons of increased uncertainty

Financial or physical loss doesn’t only stem from “risk”! Risk we know a lot about. Dare I say that we understand, can quantify and influence (if not manage) risk? I would add one caveat though. Much of the accumulated data upon which probability and, therefore, rating is calculated, relates to a period which bears little resemblance to the world and civilisation as it is today…or will be in the future.

So what about the murky world of uncertainty that lies beyond risk? What do we know and what can we do to “deal with” that? Because that is what we are, increasingly, dealing with…

Today, there are fewer certainties.

Unfortunately, our habits of thought still make us look for linear trends and other simple patterns, and make us expect the future to be a recognizable version of the past. In many cases, we constrain our lives in an attempt to achieve such security, but in complex networks of competing businesses, in financial markets, in the world of emerging technology, and in politics, these expectations are out of place.

Organizations need to learn to distinguish between the kinds of problems that can be handled with traditional perspectives, where precise prediction and solution is possible, and the kinds of problems associated with unavoidable complexity.

Entrainment of thinking is an ever-present danger.

Mark Buchanan

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US Financial World War (Part 5): Nassim Taleb spells it out AGAIN…

Is Bernanke merely implementing a “Nick Leeson strategy” by gambling with the retirement funds of Pensioners and our future generations – socialising debt? I think so and so do plenty of other people better qualified to comment than I.

It is understandable that NNT cannot hide his frustration!

When US should be working toward ensuring robustness [resilience] they are, almost certainly, creating fragility.

Will this come to be known as the biggest self-serving act in economic history?

Fed don’t “recognise” the non-linearity [dynamic and complex] of global economy

On the off chance that someone taking the time to read this blog (thanks) doesn’t already know who NNT is these will give you some clues as to what he is about. He developed ten principles to help make societies more robust to Black Swan events:

1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.

2. No socialisation of losses and privatisation of gains.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

5. Counter-balance complexity with simplicity.

6. Do not give children sticks of dynamite, even if they come with a warning.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

10. Make an omelette with the broken eggs.