Saturday, February 19, 2011

Complex systems illiteracy

Complex financial system

Complex weather system

I'm reading the financial papers to learn about the financial system. *

In his Yale lecture series about Financial Markets professor Robert Shiller states that we should do something about "financial illiteracy" and he sees this as one of the causes of the recent crisis. ** I agree with him. Financial illiteracy makes us powerless against the evil conspiracies of capital. ***

I feel very illiterate concerning the financial system. I can look at the graphs and numbers, but I don't see the causes and effects and I have no intuitive grasp of the dynamics of the system. I cannot draw conclusions and I can make no predictions.

For me the economy always was some king of "background noise" against which "real life" happened. The crisis put the economy in the foreground. Suddenly I saw that an elephant was standing in my living room, and this elephant had stood here for many years. But I had never noticed it.

The weather is also a kind of "background noise" against which "real life" happens. I was always more interested in the weather than in economics. I support the Cloud Appreciation Society and I know about wind patterns, storms and the "urban heat island". I have some understanding of non-linear equations, the butterfly effect, the Coriolis force and even Milankovitch cycles. But it is not enough.

I still feel illiterate concerning the weather system. I can look at lists of temperatures and the weather maps, but I don't see the causes and effects and I have no intuitive grasp of the dynamics of the system. I cannot draw conclusions and I can make no predictions.

Both systems shape our lives and can ruin us in an instant. Both systems can change history. What differences are there between these two systems with regard to these questions:
  • What influence do we humans have on these systems?
  • If we understand these systems better, does it give us more control over our lives?
I leave this as an exercise for the reader, because I don't have an answer. **** I have only two things to say:
  • The weather system is aesthetically more pleasing and satisfying.
  • Greed, fraud and corruption are no factors in the weather system.

* Don't laugh. I believe in reverse engineering and bottom up approaches. And there is a lot of doubt nowadays about top-down theoretical models. Both in economy and in string-theory.
** Or still ongoing crisis? That will get even worse?
*** I don't know if this is a silly joke or if I'm starting to believe this. - “There’s class warfare, all right,” Mr. Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”
**** Not yet. But maybe I'll find a simplified explanation to adhere to. Where is Slavoj Zizek when you need him?

1 comment:

  1. Yeah, good post. Who has the time, knowledge, and intellectual capacity to understand the financial system? Few of the top fund managers are able to beat the indices, and it is not clear if they are able to do it on a long-term basis. How is the common person supposed to allocate their 401(k) to ensure a secure retirement? That being said, it helps to understand that to analyse a complex system, adding additional variables to the analysis may not improve the analysis or its predictive power. The art is to identify the relevant variables, which describe the majority of the behavior of the system. This may lead to a (mostly) successful forecast.