Black Swans & Non Linear Systems

[Sybil13]

Frequently on HPC I have quoted the President of European Central Bank when he said earlier this year:

“We live in non-linear times – the classic economic models and theories cannot be applied, and future development cannot be foreseenâ€, stated Jean-Claude Trichet, adding that the absence of a clear forecast complicates any restoration of trust in free market mechanisms.

.

I am, a bear of little brain but sense that if there is a "cup half full" view of the current economic crises it is one based on stepping out of our limited mechanistic self centred thinking and towards embracing the emerging paradigm ....

I wrote a few weeks back in the "Gilts Thread":

Bootstraps require us to move out of an egocentric view and realise the essential interconnectedness the relationshp between the part and the whole. This comes back to what the head of the European Bank was saying earlier this year about us "living in non-linear times", I think it is how we have ended up where we are. We are actually living in a different paradigm at one level but those in charge are still trying to use the system for profit and it doesn't work if you ignore essential feedback from that system, a system that has to be considered as a whole where nothing is more fundamental than anything else. I will let Capra finish this post for me:

"In the new paradigm, the relationship between the part and the whole is more symmetrical. We believe that while the properties of the parts certainly contribute to our understanding of the whole, at the same time the properties of the parts can only be fully understood through the dynamics of the whole. The whole is primary, and once you understand the dynamics of the whole, you can then derive, at least in principle, the properties and patterns of interactions of the parts. This change of the relationship between the part and the whole occurred in science first in physics, when quantum theory was developed."

"Gradually, physicists began to realize that nature, at the atomic level, does not appear as a mechanical universe composed of fundamental building blocks, but rather as a network of relations, and that ultimately, there are no parts at all in this interconnected web. Whatever we call a part is merely a pattern that has some stability and therefore captures our attention."

I have been asking periodically on HPC if others too feel that the current economic situation is a WAKE UP call because we have been trying to run with the old whilst attempting to use the new paradigm , trying to bend non-linear systems to suit our purposes whilst ignoring essential feedback .

This week there was an article in the FT about "Black Swans" TIME TO TACKLE THE REAL EVIL: TOO MUCH DEBT ( There was an article here at the weekend with the same message UK Lenders Need To Cut Lending by £500billion)

The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option. ...................

..........Our ability to forecast suffers due to this complexity and the occurrence of the occasional extreme event, or “black swanâ€. Such degradation in predictability should have made companies more conservative in their capital structure, not more aggressive – yet private equity, homeowners and others have been recklessly amassing debt. Such non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans†but they are unaware that we do not have any ability to deal with the mathematics of extreme events. The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “expertsâ€. Anyone relying on these models for conclusions is deluded...............

We believe that stimulus packages, in all their forms, make the same mistakes that got us here. They will lead to extreme overshooting or extreme undershooting. They lead to more borrowing, by socialising private debt. But running a government deficit is dangerous, as it is vulnerable to errors in projections of economic growth. These errors will be larger in the future, so central bank money creation will lead not to inflation but to hyper-inflation, as the system is set for bigger deviations than ever before.

Relying on standard models to build policies makes us all fragile and overconfident............

This is of course a quantum view where events depend on the observer and we are no longer dealing with absolute certainties instead creative possibilities .In the FT article it said:

The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary†– in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopersâ€, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers.

I am fumbling along here trying to find words to express what I feel , being a bear of little brain most of this stuff is way beyond my understanding. I guess what I am trying to say is something like:

1. How much of the current crisis has been and is being caused by people in the system still trying to use outdated mechanistic dualistic linear thinking unable to rise above self interest and egocentric concerns?

2. How much has been created by people trying to use the new paradigm whilst istill thinking in the old way , ingnoring necessary feedback because it did not fit with their old mechanistic world view or serve their interests?

3. Albert Einstein said, “We can't solve a problem on the level that it was created", what will it take for us to move beyond limited self centred thinking and to open to more non-linear creative thinking (being)?

So called new thinking such as chaos theory / quantum physics / probability theory etc have been around a long long time however, we are still being educated in the old mechanistic models, yet despite resistance to it there is a necessity , as signalled by the current crises , for us to shift beyond our limited beliefs and concepts . So what is the likelyhood that the human race can take this leap into the new paradigm when it requires such a revolution in consciousness?

Many believe that the economic collapse can bring about beneficial changes for the way we live, what we value etc but to be honest when I look around and listen to people who believe that things can change by getting Brown out and Cameron in , all I see is just more of the same, people just wanting more of what we had no matter what the cost.

What do you think?

[Deckard]

What do you think?

Sorry, but any post starting with a JCT quote and dragging on over 1,000 words is a bit too much for me

[Injin]

What do you think?

I think you have an interesting idea that's worth pursuing, but I also think the current crisis is in fact realy simple - thieves are stealing too much.

[Joey Buttafueco Jr]

Frequently on HPC I have quoted the President of European Central Bank when he said earlier this year:

I am, a bear of little brain but sense that if there is a "cup half full" view of the current economic crises it is one based on stepping out of our limited mechanistic self centred thinking and towards embracing the emerging paradigm ....

I wrote a few weeks back in the "Gilts Thread":

I have been asking periodically on HPC if others too feel that the current economic situation is a WAKE UP call because we have been trying to run with the old whilst attempting to use the new paradigm , trying to bend non-linear systems to suit our purposes whilst ignoring essential feedback .

This week there was an article in the FT about "Black Swans" TIME TO TACKLE THE REAL EVIL: TOO MUCH DEBT ( There was an article here at the weekend with the same message UK Lenders Need To Cut Lending by £500billion)

This is of course a quantum view where events depend on the observer and we are no longer dealing with absolute certainties instead creative possibilities .In the FT article it said:

I am fumbling along here trying to find words to express what I feel , being a bear of little brain most of this stuff is way beyond my understanding. I guess what I am trying to say is something like:

1. How much of the current crisis has been and is being caused by people in the system still trying to use outdated mechanistic dualistic linear thinking unable to rise above self interest and egocentric concerns?

2. How much has been created by people trying to use the new paradigm whilst istill thinking in the old way , ingnoring necessary feedback because it did not fit with their old mechanistic world view or serve their interests?

3. Albert Einstein said, “We can't solve a problem on the level that it was created", what will it take for us to move beyond limited self centred thinking and to open to more non-linear creative thinking (being)?

So called new thinking such as chaos theory / quantum physics / probability theory etc have been around a long long time however, we are still being educated in the old mechanistic models, yet despite resistance to it there is a necessity , as signalled by the current crises , for us to shift beyond our limited beliefs and concepts . So what is the likelyhood that the human race can take this leap into the new paradigm when it requires such a revolution in consciousness?

Many believe that the economic collapse can bring about beneficial changes for the way we live, what we value etc but to be honest when I look around and listen to people who believe that things can change by getting Brown out and Cameron in , all I see is just more of the same, people just wanting more of what we had no matter what the cost.

What do you think?

"and future development cannot be foreseen"

When could they be?

I've just finished an article in the latest Wilmott magazine and Merton was talking about people claiming that people (journos etc) claiming that people in the market did not appreciate flaws with MSM. Merton pointed out that he had written a paper about jump diffusion in 1974.

[Guest X-QUORK]

Frequently on HPC I have quoted the President of European Central Bank when he said earlier this year:

I am, a bear of little brain but sense that if there is a "cup half full" view of the current economic crises it is one based on stepping out of our limited mechanistic self centred thinking and towards embracing the emerging paradigm ....

I wrote a few weeks back in the "Gilts Thread":

I have been asking periodically on HPC if others too feel that the current economic situation is a WAKE UP call because we have been trying to run with the old whilst attempting to use the new paradigm , trying to bend non-linear systems to suit our purposes whilst ignoring essential feedback .

This week there was an article in the FT about "Black Swans" TIME TO TACKLE THE REAL EVIL: TOO MUCH DEBT ( There was an article here at the weekend with the same message UK Lenders Need To Cut Lending by £500billion)

This is of course a quantum view where events depend on the observer and we are no longer dealing with absolute certainties instead creative possibilities .In the FT article it said:

I am fumbling along here trying to find words to express what I feel , being a bear of little brain most of this stuff is way beyond my understanding. I guess what I am trying to say is something like:

1. How much of the current crisis has been and is being caused by people in the system still trying to use outdated mechanistic dualistic linear thinking unable to rise above self interest and egocentric concerns?

2. How much has been created by people trying to use the new paradigm whilst istill thinking in the old way , ingnoring necessary feedback because it did not fit with their old mechanistic world view or serve their interests?

3. Albert Einstein said, “We can't solve a problem on the level that it was created", what will it take for us to move beyond limited self centred thinking and to open to more non-linear creative thinking (being)?

So called new thinking such as chaos theory / quantum physics / probability theory etc have been around a long long time however, we are still being educated in the old mechanistic models, yet despite resistance to it there is a necessity , as signalled by the current crises , for us to shift beyond our limited beliefs and concepts . So what is the likelyhood that the human race can take this leap into the new paradigm when it requires such a revolution in consciousness?

Many believe that the economic collapse can bring about beneficial changes for the way we live, what we value etc but to be honest when I look around and listen to people who believe that things can change by getting Brown out and Cameron in , all I see is just more of the same, people just wanting more of what we had no matter what the cost.

What do you think?

Does all of the above = Thinking outside of the box?

IMO, things need to be simplified, not made ever more complicated - that's what got us into this mess in the first place.

[No Teacher - No Guru]

There are no quantum events at the level of the economy. People don't understand it because it is a complex system, subject to chaotic events and irrational behaviour by the participants, i.e. US.

To imagine the economy is an external system subject to 'natural' laws is a fallacy, it is the sum of all human actions and cannot be divorced from human agency. To pretend it is somehow 'natural' is to excuse power and fail to see how it is the result of different interests clashing and combining to maximise their own rewards.

As long as wealth is unevenly distributed the economy will continue to be a field of war.

[VeryMeanReversion]

What do you think?

I think debt and leverage got out of control making the system increasingly liable to implode.

Adding leverage upon leverage can be seen as going non-linear I suppose. The money supply has grown out of all proportion to the assets that underly everything. In the event of a major crash, the fight over the real assets will get interesting.

If there is a simple path from financial assets to real assets then the system can be controlled. Once you leverage up using CDS/CDO etc. the obscurity makes the system uncontrollable.

I see merit in conversion of the idea of converting debt to equity on a widescale basis but haven't thought it through.

VMR.

[R K]

Who is 'we'?

People buy stuff and they sell stuff. The banksters (and politicians) have simply created a whole different universe feeding themselves off of that.

Get rid of the banksters and politicians (and lawyers) and get back to people buying and selling stuff and it should be fine.

[CokeSnortingTory]

Sybil13 - I recommend you look at Charles Hugh Smith's site: http://www.oftwominds.com/blog.html

He seems to be looking at the issues you are describing.

[BubbleBlower]

What do you think?

What makes you think that non-linearity is a new property of the world economy? Can you point to a time in the past when the economy every behaved in a robust and predictable manner?

Your actual point is mostly correct. I would disagree that we've ever had a working world view in economics, or a time that the economy was robust and survived small perturbation without producing large effects. But I agree that we need a new way of looking at the economy. The current approach of leaving it in the hands of drunken sailors who maintain steadfastly that they know exactly where they are going, until they land us on the rocks, clearly doesn't work.

In fact, and I can't believe that I'm saying this, one of the most interesting ideas that I've seen in how to avoid large hidden systemic risks is to reduce them to small, distributed and highly visible risks. Eg Injin's ideas on removing the monopoly for currency issue and allowing everyone to define their own credit. If nothing else, it would remove the camouflage that we currently apply to risks of default.

[24gray24]

Changing the rules mid crisis just allows the insiders, those in the know, to make money from the change.

Just let those who are bankrupt go bankrupt, and sell their assets at auction on the open market. They can't say they didn't know the rules of the game they were playing.

[OffshoreAlert]

Email these guys

Or read some Manuel de Landa who has been banging on about this for at least 15 years.