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COMPLEXITY, CHAOS AND CHANCE
Karl Arnold Belser
14 May 2017




I am discussing the article Complexity, Chaos and Chance from Robert Seawright's Above the Market blog in this post. Seawright's ideas express some of my own views. I want to express the ideas in my own words to make sure I understand them. I recognize that my view may be confirmation bias.

He first part of the article points out that reality is constantly changing. In addition the world is complex and difficult to understand. By understanding I mean the making of a mental model that will in some way allow me to behave as effectively as I can. It is this UNCERTAIN FUTURE that I am grappling with in this blog.

Contrary to classical economic theory, complexity theory demonstrates that the economy is not a system in equilibrium, but rather a system in motion, perpetually constructing itself anew.

I designed control systems as an engineer that could tolerate many types of errors without the system as a whole failing.  I made simple linear models of the nonlinear systems which worked well within a certain dynamic range. However, for large changes my control systems might fail. One might take a large view and try to compensate for these system failures, but ultimately one cannot  predict or and correct for every eventuality. This is where I find myself as and engineer. Hence I want to keep my behavior simple and flexible to adapt quickly to unexpected events. taleb has called these unexpected events Black Swans.

What exactly is an unexpected event? One usually thinks that there has to be a "cause". Did something act upon the system that caused the failure? The answer in some cases is no, because catastrophe theory shows that sometimes the system itself changes to a critical point where a sudden jump occurs.

Scientists began examining sand piles and discovered that each tiny grain of sand added to the pile increased the overall risk of avalanche, but which grain of sand would make the difference and when the big avalanches would occur remained unknown and unknowable.

I discussed these type of phenomenon in my early post Avalanche-Like  Behavior. I did not understand then the idea  of black swans and how they might result in chaotic unpredictable behavior of large systems like society and the financial markets.

systems that can change suddenly are called fragile systems. I try to avoid circumstances that might make me fragile. Examples are lots of debt, or investing too much in one equity, or reading a social network that has a clear bias, or trying to do too much personally.

Luck (randomness) is a huge factor in investment returns, irrespective of manager. But we like to think that intelligence and effort can readily overcome the vagaries of the markets. That’s largely because we are addicted to certainty.

On the other hand one must take some risks to get ahead. Taleb points out that one might take a number of small risks in which one might be lucky and be successful on the average. However, one should never risk so much that one might "blow up". Taleb calls this antifragile behavior.

i aspire to be antifragile in my personal life.
    
Last updated mAY 14, 2017
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