by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Sunny Marche is a colleague of mine at Dalhousie, as well as one of the Associates at RSD Solutions. Dr. Marche is an incredibly thoughtful person, and combined with his interest in knowledge development and his breath of academic interests, it makes for a powerful intellect.
Sunny was explaining some of his work on models in database management, when he said something that embarrassingly I had not considered before. Namely, he said that models are devices for “hiding things”. In other words, models leave out details that are not believed to be germane to the problem at hand. In reading this here, it of course seems obvious, but does the implication?
It is generally acknowledged that we live in a complex world. (I will avoid the easy reference to my upcoming book on complexity theory). A complex world by definition (and by fact) means that you cannot separate the parts from the whole. In a complex world you need “systems thinking”. Studying the parts does not help you find solutions, and indeed is probably counterproductive.
In that context, thinking about models as devices “that leave parts out” seems to be a stupid thing to do. The implications of leaving things out are that you are ignoring the systems characteristic of all aspects of business.
What do the models that you use leave out? Is risk management immune from systems thinking, and thus it is ok to leave stuff out? I think not.
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