Complexity to the power of n

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

I used to like watching horror movies (among other genres).  It seems that each new horror movie has to be just a bit more horrific that the previous one.  If not, it would seem lame and disappointing. It’s great to watch the old original Frankenstein and Drakula movies, but they don’t seem particularly horrific nowadays.  I’m sure that when they were first released the audiences were gripped with terror.  I do remember that when movies like the Exorcist and Jaws came out, they were on the cutting edge of the genre and had audiences hiding their eyes.  In fact, to my embarrassment, the female companion who watched The Exorcist with me in the movie theatre managed a few blood curdling screams.  Nowadays, there are many more scary movies than those.

 

What is the relevance of this?  Well producers of financial products are no different from movie producers.  They need to constantly “improve upon” and outdo the last product that someone came out with.  Over time, complexity increases to such an extent that it becomes impossible for more and more people to tell if the products are useful or dangerous.  Unfortunately, too many people have been too successful at selling such things and too many buyers have been too keen to jump on the bandwagon.  The good news is that many companies have become much more cautious about using anything that is not plain vanilla.  However, bandwagons do have a habit of rolling on and human nature has not changed.  

Ecology for Bankers

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

As some of you may know, I am currently working on a book about the science of complexity and the lessons it has for us in business in general, and more specifically in risk management.  The book is loosely based on my RMA Journal article (available at the link on our website www.RSDsolutions.com) that was titled “It’s Not Complicated!”

 

One of the articles that I reference in the book is “Ecology for Bankers”, which was published in the February 21, 2008 issue of Nature by Robert May, Simon Levin, and George Sugihara.  This is a wonderful article that shows some of the similarities between financial systems and ecosystems, and points out how an understanding of ecosystems can help in risk management.  It is a wonderful article, and one that each and every risk manager, CEO, banker and perhaps most particularly, regulator should read.

 

Here is the issue.  This article is in a science magazine.  It is not in a business magazine (or a business research journal).  Thus, given the relatively narrow focus of most in the business community it will probably be totally ignored.  What a shame.  The biggest systemic risk of all is that we are all so focused on having the state of the art risk management system, that we lose sight of the forest as we all examine the same piece of bark from the same tree.

 

 

 

The Thirteenth Tale

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

“Human lives are not pieces of string that can be separated out from a knot of others and laid out straight.  Families are webs.  Impossible to touch one part of it without setting the rest vibrating.  Impossible to understand one part without having a sense of the whole.[1]

 

The above is a quote from the novel “The Thirteenth Tale”.   In my opinion a fascinating story that is extremely well written.  In this blog I do not want to expound any more on the book (although I will encourage everyone to read it), but instead I would like to focus on the passage written above.   This passage seems to be a perfectly obvious statement.  We all know how relationships can be, and more so how family relationships can be.  I think everyone can relate to the above passage in one way or another.

 

An additional moment’s thought however and one can also realize that the above passage applies to companies.  Companies – like families – are webs.  Furthermore it is impossible to understand one part of a company without having a sense of the whole.

 

But take an additional moment to ponder whether or not industries – like families – are webs, and the answer will almost assuredly come back “yes”.  Going a little further down the wormhole we can ask ourselves whether or not economies are webs of industries, and then whether or not the global economy is a web of economies.

 

This is the basis of the science of complexity.  It is a subject that I am very interested in and a subject that I believe needs to be understood and appreciated for a new and more powerful paradigm in risk management (and indeed in business as a whole) to come about.  With all due respect and apologies to Diane Setterfield;

 

Risk issues are not pieces of string that can be separated out from a knot of other corporate issues and laid out straight.  Corporations are webs.  Impossible to touch one part of it (i.e. risk) without setting the rest of the issues vibrating.

 

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[1] Diane Setterfield, The Thirteenth Tale, Anchor Canada, 2007

Rick Nason speaking at Professional Risk Managers International Association’s Chicago meeting

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

On May 2, Rick Nason (Partner, RSD Solutions) has been invited to speak at the Chicago meeting of PRMIA – a globally recognized and highly esteemed association in the field of risk management.  Rick's talk, “Have we lost the plot?” will look at financial risk management and how traditional risk management by algorithms has made the Street and others lose sight of the plot – or the greater story of the markets.  Rick will propose a more flexible and holistic way of thinking that is centered on the principles of emergent systems and complexity theory (see http://tinyurl.com/3bpdmr5). 

We at RSD are delighted that Rick has been recognized by PRMIA for his contributions to the area of risk thought and management and providing him with this opportunity to speak. 

 

For more information on Rick’s talk (free to PRMIA members and $10 to non-members) at PRIMA’s Chicago event, click on the link:

http://www.prmia.org/events/view_events.php?eventID=4450