We live in a dynamic economic and commercial world, surrounded by objects of remarkable complexity and power. In many industries, changes in products and technologies have brought with them new kinds of firms and forms of organization. We are discovering new ways of structuring work, of bringing buyers and sellers together, and of creating and using market information. Although our fast-moving economy often seems to be outside our influence and control, human beings create the things that create the market forces. Devices, software programs, production processes, contracts, firms, and markets are all the fruit of purposeful action they are designed.
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Economic Theory is Dead. Here's What Will Replace it.
Everyone seems to agree that the economics profession had a near death experience in 2008 and either needs to be or has been reborn in a different incarnation.The most optimistic assessments claim that a revolution is already underway based on two developments: 1) A greater emphasis on empirical research; and 20 a different conception of theory.
Guidence principles help create What is designed... In the world of Finance this needs to be ReExamined....
The Last Chapter....
10/27/1986 - 09/15/2008... From the Big Bang to the Fall of the House of Lehman
"It was the best of times, it was the worst of times" A Tale of Two Cities
The Modern World of Finance came to an end on 15 September 2008.....
"THE WORLD DID NOT END. Despite all the forebodings of disaster in the 2007 - 2008 financial crisis, the first decade of the twenty-first century passed rather uneventfully into the second. The riots, soup kitchens, and bankruptcies predicted by many of the world's most respected economists did not materialize - and no one any longer expects the global capitalist system to collapse, whatever that emotive word might mean.
Yet the capitalist system's survival does not mean the that the precrisis faith in the wisdom of financial markets and the efficiency of free enterprise will ever again be what it was before the bankruptcy of Lehman Brothers on September 15, 2008. A return to decent economic growth and normal financial conditions is likely by the middle of 2010, but will this imply a return to business as usual for politicians, economists and financiers? Although globalization will continue and many parts of the world will gradually regain their prosperity of the precrisis period, the traumatic events of 2007 - 2009 will not be quickly forgotten. And the economic costs will linger for decades in the debts squeezing taxpayers and government budgets, the disrupted lives of the jobless and the vanished dreams of homeowners and investors around the world.
For what collapsed on September 15, 2008, was not just a bank or a financial system. What fell apart that day was an entire political philosophy and economic system, a way of thinking about and living in the world.
From Capitalism 4.0 ~ Anatole Kaletsky
A Month later, Alan Greenspan, the former chairman of the Federal Reserve admitted to congress, "there was a flaw in the Model - The Rational Expectations Theory proved wrong - Markets don't always price things correctly - Behavior is not always rational". The Real World is more Complex than previously thought. In the World of Finance the Modern World is being re-examined.
Value, risk and return are relative, reflexive and emergent properties, not statistical absolutes. Life is fractal and chaotic, not linear and predictable. Blind faith in the "Rational Man" and efficient markets proved to be misplaced. Apparently, in the World of Finance, as in the World of Politics, The End of History and Last Man, is still a work in progress.
The Question now is what will replace the global capitalism that crumbled in the autumn of 2008.
"Capitalism has never been a static system that follows a fixed set of rules, characterized by a permanent division of responsibilities between private enterprise and governments. Contrary to the teachings of modern economic theory, no immutable laws govern the behavior of a capitalist economy. Instead, capitalism is an adaptive social system that mutates and evolves to a changing environment. When capitalism is seriously threatened by a systemic crisis a new version emerges that is better suited to the changing environment and replaces the previously dominant form.
Once we realize that capitalism is not a static set of institutions, but an evolutionary system that reinvents and reinvigorates itself through crisis we can see the events of 2007 - 2009 in another light."
Capitalism 4.0
Probably the Biggest Change is the Shift Away from the Rational Expectations Theory to Behavioral Psychology - No longer do we assume that all economic agents (Homo Economicus) are rational actors only interested in maximizing marginal utility. Instead they are just normal human beings with all of our cognitive foibles and faults, including overconfidence......
From Modern to Modular...Understanding Modular...
The Following ideas help illustrate the thinking behind this alternative approach to Finance and Financial Systems...
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Economics and Business - The Last Bastions of Modernism...
John Kay, Economist, fivebooks.com - interview
“Modernism in the twentieth century went through areas such as art, architecture and the humanities with the idea that we could rethink everything from the ground up and that we understood enough about the world to do that. I've come to believe that we don’t. But people still think they can analyse and structure economies as if they were a mechanical system and that they can do the same in business. So in the same way that Le Corbusier said - wrongly - that a house is a machine for living in, it exemplifies the idea that a business or an economy can be structured from first principles in the same way.”
Alan Greenspan, Former Chairman of The Federal Reserve
from The Map and the Territory
"The 2008 financial collapse has provided reams of new data on negative tail risk; the challenge will be to use the new data to develop a more realistic assessment of the range of probabilities of financial outcomes with an emphasis on those that pose the greatest dangers to the financial system and the economy. One can hope that in a future financial crisis - and there will surely be one - economists, investors and regulators will better understand how markets work. Doing so will require better models, ones that more accurately reflect predictable aspects human nature, including risk aversion, time preference, and herd behavior.
Forecasting will always be somewhat of a coin toss. But if economists better integrate animal spirits into our models, we can improve our forecasting accuracy. Economic models should when possible, measure and forecast systemic human behavior, and the tendencies of corporate culture. Modeling will always be constrained by a lack of historical precedents ( Laplace’s Demon). But analysts know a great deal more about how financial markets work - and fail - then we did before the 2008 crisis. ( Some men Stumble)
“The halcyon days of the 1960’s, when there was a great optimism that economic models offered new capabilities to accurately judge the future, are now gone. Having been mugged too often by reality, forecasters now express less confidence about our abilities to look beyond the immediate horizon. We will forever need to reach beyond our equations to apply economic judgment. Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past."
The Following ideas help illustrate the thinking behind this alternative approach to Finance and Financial Systems...
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Economics and Business - The Last Bastions of Modernism...
John Kay, Economist, fivebooks.com - interview
“Modernism in the twentieth century went through areas such as art, architecture and the humanities with the idea that we could rethink everything from the ground up and that we understood enough about the world to do that. I've come to believe that we don’t. But people still think they can analyse and structure economies as if they were a mechanical system and that they can do the same in business. So in the same way that Le Corbusier said - wrongly - that a house is a machine for living in, it exemplifies the idea that a business or an economy can be structured from first principles in the same way.”
“They are organic entities that evolve over time and operate within a social context. You can’t look at them independently of that.”
“You can’t understand how the financial crisis came about without understanding the politics of the relationship between the financial sector and government and the anthropology of the cultures of these organizations, or indeed without appreciating the history of bubbles and financial crises.”
“The way we understand economics, economies and financial markets is by learning from lots of sources and thinking about them in lots of different ways.”
John Kay on Economics in the Real World, five books
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Modern Finance - Mugged by Reality............................................................................................................
Alan Greenspan, Former Chairman of The Federal Reserve
from The Map and the Territory
"The 2008 financial collapse has provided reams of new data on negative tail risk; the challenge will be to use the new data to develop a more realistic assessment of the range of probabilities of financial outcomes with an emphasis on those that pose the greatest dangers to the financial system and the economy. One can hope that in a future financial crisis - and there will surely be one - economists, investors and regulators will better understand how markets work. Doing so will require better models, ones that more accurately reflect predictable aspects human nature, including risk aversion, time preference, and herd behavior.
Forecasting will always be somewhat of a coin toss. But if economists better integrate animal spirits into our models, we can improve our forecasting accuracy. Economic models should when possible, measure and forecast systemic human behavior, and the tendencies of corporate culture. Modeling will always be constrained by a lack of historical precedents ( Laplace’s Demon). But analysts know a great deal more about how financial markets work - and fail - then we did before the 2008 crisis. ( Some men Stumble)
“The halcyon days of the 1960’s, when there was a great optimism that economic models offered new capabilities to accurately judge the future, are now gone. Having been mugged too often by reality, forecasters now express less confidence about our abilities to look beyond the immediate horizon. We will forever need to reach beyond our equations to apply economic judgment. Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past."
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"The prevailing paradigm for financial markets - that markets tend toward equilibrium and deviations from it are random, is both false and misleading, and only by exploring a new conceptual framework for how markets really work can we avoid disaster and economic ruin.
George Soros, The New Paradigm for Financial Markets
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Thinking Emergently...
Emergent Systems
"We often try to understand problems by taking them apart and studying their constituent parts. But emergent systems can’t be understood this way. Emergent systems are one in which many element interact. The pattern of interaction then produces a new element which is greater than the sum of the parts, which then exercises a top down influence on the constituent elements.
Culture is an emergent system. A group of people establish a pattern of interaction, and once that culture exists, it influences how the people in it behave. An economy is an emergent system. So is political polarization, rising health care costs and a bad marriage. Financial markets are also systems that exhibit and reflect emergent behavior.*
Emergent systems are bottom-up and top-down simultaneously. They have to be studied differently, as wholes and nested networks of relationships. We still try to address problems like poverty, economic growth and job creation by trying to tease out individual causes. We might make more headway, if we thought emergently."
Hat tip, David Brooks, The Big Think
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"The prevailing paradigm for financial markets - that markets tend toward equilibrium and deviations from it are random, is both false and misleading, and only by exploring a new conceptual framework for how markets really work can we avoid disaster and economic ruin.
George Soros, The New Paradigm for Financial Markets
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Thinking Emergently...
Emergent Systems
"We often try to understand problems by taking them apart and studying their constituent parts. But emergent systems can’t be understood this way. Emergent systems are one in which many element interact. The pattern of interaction then produces a new element which is greater than the sum of the parts, which then exercises a top down influence on the constituent elements.
Culture is an emergent system. A group of people establish a pattern of interaction, and once that culture exists, it influences how the people in it behave. An economy is an emergent system. So is political polarization, rising health care costs and a bad marriage. Financial markets are also systems that exhibit and reflect emergent behavior.*
Emergent systems are bottom-up and top-down simultaneously. They have to be studied differently, as wholes and nested networks of relationships. We still try to address problems like poverty, economic growth and job creation by trying to tease out individual causes. We might make more headway, if we thought emergently."
Hat tip, David Brooks, The Big Think
IT’S THE CULTURE STUPID
Published on More Intelligent Life (http://moreintelligentlife.com)
By Robert Butler
Created 30/12/2011 - 12:15
~ Posted by Robert Butler, December 30th 2011
In 1992, Bill Clinton beat George Bush to the presidency with the slogan “It’s the economy, stupid”. Twenty years later, this phrase looks even more of a simplification than when it first surfaced. The current financial crisis has shown us the economy is part of something much wider: it’s the culture, stupid.
Readers of Michael Lewis’s new book “Boomerang” have been taken on a hair-raising tour of Germany, Greece, Iceland and America during the financial crisis, “Boomerang” shows how the economies are very different because the countries themselves - and their attitudes toward finance - are very different.
But this is a crisis for financial experts too. Gillian Tett, US managing editor at the Financial Times, told the BBC this week that for the last twenty or 30 years people had been trained to think that if they had a computer spread sheet and lots of numbers and equations they could not only predict the future but also control the economic environment.
"The great wake-up call of the last year is that it’s actually about the social and political fabric and the question of what’s going to happen to the Eurozone or the UK or the US really depends on politics and the culture and the way that societies behave and people just aren’t trained to understand that or analyse it."
Tett, tipped as a failure editor of the FT, may have a head start: she has a PhD in social anthropology.
Robert Butler is online editor of intelligent Life...
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"Laplace's Demon"
~ Marquis Pierre Simon de Laplace
“Laplace’s Demon” concerns the idea of determinism, namely the belief that the past completely determines the future. Clearly, one can see why determinism was so attractive to scientists (and Philosophers - determinism has roots that can be traced back to Socrates). Indeed, this passage had a strong influence on setting the course of science for years to come, and by the early 1800’s determinism had become firmly entrenched among scientists. In Laplace’s world everything would be predetermined - no chance, no choice, and no uncertainty.
Nature, however, is much more clever than this - (i.e.Orgels’s Rules) - Towards the end of the 1800’s, mathematicians and scientists began encountering some very difficult equations to solve ~ some in fact were completely unsolvable. A particularly troublesome set of mathematical equations were non-linear differential equations. Much in the same vein, there existed the horribly difficult and outstanding problem of three mutually gravitational attracted bodies - the so called "three body problem".
At first, problems such as these were cast off as special cases and largely ignored. It would turn out that these so-called "special cases" would bring the birth of a new way of thinking. When these equations were finally studied in detail, a fundamental change, which would ultimately overthrow the ideas of determinism, began to occur in mathematics and science. Inklings of the science that would become to be known as "Chaos" began to appear.
Niels Bohr (and later Yogi Berra) said it best. ~ "Prediction is difficult, especially about the future"
~ Hat tip ~ Larry Bradley, Chaos & Fractals
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Modular-Finance like Competition came be a difficult concept to grasp...
Competition is a surprisingly difficult concept even to define. Modern lexicographers have failed repeatedly to improve on the definition given by Samual Johnson in his 1755 work Dictionary of the English Language. In it he declares "competition" to be a noun meaning "the act of endeavoring to gain what another endeavors to gain at the same time; rivalry; contest."
It was not until 1944 that John von Neumann and Oskar Morgenstern developed a truly workable definition of competition. It took them an entire chapter of their groundbreaking Theory of Games and Economic Behavior to explain what they had done.From the realization that a game is - for analytical purposes - nothing more than a book of rules, they distilled a concise (if forbiddingly technical) definition of a game.
Competition is a Game - and thus the Science of Competition is found in Game Theory and Behavioral Economics...... ...
From, COMPETITION, The Birth of a New Science, James Case
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It was not until 1944 that John von Neumann and Oskar Morgenstern developed a truly workable definition of competition. It took them an entire chapter of their groundbreaking Theory of Games and Economic Behavior to explain what they had done.From the realization that a game is - for analytical purposes - nothing more than a book of rules, they distilled a concise (if forbiddingly technical) definition of a game.
Competition is a Game - and thus the Science of Competition is found in Game Theory and Behavioral Economics...... ...
From, COMPETITION, The Birth of a New Science, James Case
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Einstein once expressed the opinion that the development of Western Science is based on two great achievements; the invention of the formal logical system (in Euclidean geometry) by the Greek philosophers, and the discovery of the possibility to find out causal relationships by systemic experiment (during the Renaissance). Only after combining the two did Western Science initiate the four centuries of ever-accelerating material progress that history now records. See - Letter to J.S. Switzer, April 23, 1953
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Multiple Markets, Multiple Strategies, Multiple Time Frames and Multiple Models...
CONTEXT MATTERS...
There is more than one theory of the universe...and so in economics, business and financial markets..... Modern finance is a theory but that theory is dogmatic... it's not useless, it's just incomplete....Our approach, called Modular-Finance is about learning from lots of sources and thinking about finance in lots of different ways and combining these ideas to create new solutions....Design Thinking, if you will, applied to Financial Systems and The World of Finance....In the ModularWorld - you learn from the past - you live in the present - and you plan for the future...~ Orgel's Rules in Play....
Modulatity is the design principle of complex dynamic systems....
Hence the Term The ModularWorld*...
CONTEXT MATTERS...
There is more than one theory of the universe...and so in economics, business and financial markets..... Modern finance is a theory but that theory is dogmatic... it's not useless, it's just incomplete....Our approach, called Modular-Finance is about learning from lots of sources and thinking about finance in lots of different ways and combining these ideas to create new solutions....Design Thinking, if you will, applied to Financial Systems and The World of Finance....In the ModularWorld - you learn from the past - you live in the present - and you plan for the future...~ Orgel's Rules in Play....
Modulatity is the design principle of complex dynamic systems....
Hence the Term The ModularWorld*...
Because Modular-Finance draws from Complexity Science, it can be a difficult concept to grasp.....
It has been said that the Science of Complexity and Chaos begin where traditional science ends...
Hence we think of Modular-Finance as - The Application of Complexity Science - Systems Thinking and Orgel's Rules to: Business - Economics- Financial Planning - Investment Strategy and Capital Management
Evolution is Modular....and the Band Plays On.......
