If you peer deep enough into a ‘thing’ you come to understand that it is not a ‘thing’ at all, but rather an interaction or an event associated with a network of relationships that exist within a broader context of events. Welcome to the world of complex systems.
Despite our awareness that almost everywhere we look, we observe a system at work, our understanding of complex systems has unfortunately been left wanting, partly due to the confounding intractability of interrogating complexity but largely attributed to the simplistic reductionist methods of enquiry we have traditionally used in attempting to understand them. It is this reductionist process that simply fails to account for the reasons for system complexity, namely the inter-relationships and dependencies created between constituent parts as opposed to the constituent parts themselves.
What is common to all these processes in a very understandable universe (a covariant universe) is that these processes are all correlated. The degree of correlation however varies in ‘strength’ dependent on their degree of autonomy…..but there is no system process that is actually independent within this single universe.
Unfortunately, our traditional microscopic methods of enquiry have repeatedly failed to observe the central characteristics of complex systems which relate to how new and different emergent characteristics arise through the dynamic interplay between constituent system elements over time.
The co-ordination of this interplay is a result of dissipative force laws that exist in any complex system that provides a gradient (whether that be an energy gradient, wealth gradient, risk gradient or any other resource gradient) to allow for causative structure to unfold within a complex system over time.
We often talk about closed systems or open systems, but the reality we face in our universe is that aside from the universe itself, all sub-systems within that context are co-dependent on each other and borrow resources from and return back systemic outputs to each other ……but are all subject over time to progressive universal decay attributed to an entropic arrow of time that provides a causative temporal arrow to emerge.
According to our best current models of our universe this uni-directional arrow of time towards a future of higher entropy (or disorder) can be attributed to the result of a progressive evolution of a complex system state from one of low entropy (maximum order) to that of a higher entropy state (maximum disorder) or system equilibrium.
However within that context of an unfolding state of our universe towards equilibrium, all is not equal or homogeneous throughout. Local variation in a global context allows for subsystems to evolve that can run counter at the local level to the general tendency of global overarching processes. For example, living systems can locally become more ordered over time by utilising thermodynamic ratchets (negentropy), that harvest energy from their surrounds to reduce their overall entropy and flout the physical laws of the universe that lead to equilibrium.
Other non-living systems such as gravitationally bound systems in this universe can also resist the overall tendency towards a higher entropy state….at least for a long time.
But…….the bottom line is that inevitably any subsystem of the greater universe ultimately loses the race as the resource gradient that provides the impetus for increasing system complexity ultimately dries up……such as our local sun and its ultimate demise when its nuclear fuel runs out. Before that happens it will be time to abandon ship from this little blue orb in the Cosmos.
So recognising that a complex system harvests locally available resources to fuel their development in a temporal sequence, you can start to see how order emerges from apparent dis-order in special cases where a sub-system is created within a greater system and that subsystem is lifted to a lower entropy condition than it’s surrounds. Having achieved this condition either by directly adding resource inputs into a system (e.g. money supply) or by harvesting energy from their surrounds (e.g. the sun), then you wind up the clockwork of a system and watch the drama evolve along a gradient of resource release and distribution (dissipation) throughout the system where order emerges from disorder such as emergent structures, nested sub-system hierarchies and system-wide emergent behaviours.
Now why do I say apparent disorder? The reality is that the rules of this universe demand order….however the nested heirarchy of sub systems within this universal state can appear to bear little resemblance or purpose to each other unless we take a holistic view to understand how it all connects and has ordered purpose.
So let’s examine how a sub system such as the financial markets operates in this nested hierarchy of systems. Think of what happens in our inter-connected financial systems when additional money supply is created and added to the mix from Central banks. This money is seeded from a wider but correlated economic system and then injected into a sub system called the markets. This money is distributed, reallocated and re-used throughout the market system allowing for new structures to emerge like additional financial intermediaries which makes a market more efficient in the way it utilises these finite resources. Critical to a complex systems development is how resources are transferred throughout the system as this leads to local sub-systems within systems that drive emergent structure and further relationships.
Given that a dynamo drives system development (a resource gradient), there is a cause and effect relationship between emergent structures that unfold over a systems evolution. But this dynamo is not simply restricted to the subsystem. The dynamo can be likened to many unwinding cogs of partially separated but correlated systems. For example where a prior state or structure is required to influence a new state. As a result, many complex systems have a memory. Furthermore, common to all complex systems are feedback relationships of damping or amplification where outputs of a system are recycled back as system inputs leading to self-sustaining cause and affect looped circuits.
You can start to see how complex systems start to self-organise and with a memory and feedback loops starts to emulate a living system. Well the bottom line is that it is the process driven nature of all systems, whether they be living or non-living that exhibit these features. Complex systems become self-sustaining entities in themselves with no ‘apparent’ master (but the reality of self-autonomy is a guise however) as a caveat is applied to this degree of self-autonomy. The universal covariant laws of the universe themselves dictate the realms of possible state that these ‘self-autonomous’ systems can take.
Common to all complex systems is a multiplicity of many parts in which there is an absence of a central control element, either internal or external. Rather it is the system itself that progressively becomes more self-sustaining and efficient through the exchange of internal resources via interactions between system participants, whether that be energy, information, perceived value/risk or other resource allowing for nested sub-systems and system structure to emerge that enhance system stability and robustness.
A key property that arises from complex systems is emergent structure and behaviour and a property of a system is ‘emergent’ if the emergent form itself appears to possess ‘self-autonomy’ or an apparent degree of separation from the system it is nested within. From a cursory examination of it’s detailed constituents the ’emergent form’ cannot be simply explained through a more detailed fundamental description of its constituent parts. The actual relationships that possess the correlation with the wider system appear to be hidden. This is where a new ‘thing’ in naive terms is constructed within a system context that can only be explained by the relationships that exist in the entire system as opposed to it’s constituent parts. A ship, an elephant, an artwork, a building, an organisation, a thought. The range of potential weakly emergent properties of a system are endless.
Also common to all complex systems is that the re-use of system elements for multi-functional purposes allows non-linear power laws to come into effect where relationships between things evolve from a one-to-one to a one-to many relationship. The result allows for progressive system efficiency and durability making the composite more resilient to perturbations…….however due to the strong coupling that arises between system elements, a failure in one or more relationships can lead to cascading failures making the entire system progressively more vulnerable to catastrophic risk.
For example, let’s assume that in a financial market we have a product that is distributed throughout the market bearing significant intrinsic risk. The emergent structures that arise from this supply of inputs therefore bear this risk in their structure and all other system components that have associated dependencies on this emergent structure also bear this intrinsic risk within. Now let’s burst the risk bubble through default events. Watch how a supposedly robust complex system cascades into critical failure. Does this ring a bell?
So let’s explore a common system and peer into its complexity. Having a broad knowledge of how a complex system operates has the unnerving ability to shatter some of the biases that have arisen from the traditional way we have traditionally broken apart systems to understand them. One of the greatest biases of all that prevents us from understanding the true nature of a system lies in the way we have historically addressed problem solving by reductionism. Once you come in contact with a complex system and examine it in its entirety, you quickly realise that everywhere you look, you are confronted with processes at work. It is the ‘process’ that matters not the ‘things’.
How is this relevant to the financial markets, life and the universe? That’s what we are here to explore. You may just find that with an altered mind-set, what were previous challenges or roadblocks suddenly vaporise when you realise that it is our biases that bind us.
Peering into a Complex System
Let’s begin by attempting to understand a well-known complex system, namely ourselves. You probably think that you are you, and I am me……well think again. You are not a ‘thing’ of enduring substance. When you dig a bit deeper you will find that you are a multi-cellular process with ephemeral qualities. Dig a bit deeper still into a constituent cell and you find that we are now in a nested system within a system. Within this system you see further sub-systems such as organelles surrounded by a permeable membrane. Dig a bit deeper into the atomic structure of an organelle and you see another nested system comprising a collection of atoms in a structured arrangement. Dig further into the fundamental constituents of an atom and you once again find a deeper system comprising a complex process of interactions within a probability configuration.
That’s the problem when you dig into a complex system. It’s systems within systems or processes within processes. Can you dig it?
While the creative mechanist in each of us likes to think in terms of assemblies of bits and pieces, the reality is that the bits and pieces do not exist. What gives rise to things even at the fundamental level are simply interactions between components in a bound configuration state. Don’t believe me? Well physicists started smelling a rat when they investigated the atom and found that the vast proportion of the volume of the atom is simply empty space. What kicked back at Samuel Johnson when he refuted Bishop Berkeley’s views on reality by kicking with force a large stone and declaring ‘I refute it thus’ was not a solid object or ‘thing’ but an electromagnetic repulsion between atoms. Not a thing at all.
Here is the rub. What gives mass to matter….and don’t say the Higgs Boson. It is not necessary to explain where 96% of the mass of ordinary matter comes from. What gives rise to the mass or stuff of matter is the binding energy between quarks. Namely how the quark triplets are constrained by vacuum space. Note that it is not the ‘stuff’ associated with the fundamental particles but the interrelationships that gives them material substance.
Even when you examine the fundamental particles themselves you quickly realise that they have no material substance but rather are the interactions or trace signatures that exist between an enquirer and a system. You may be aware of wave-particle duality associated with fundamental building blocks of our classical reality. What this means is that a fundamental particle can either be represented as a particle or as a wave but not both at the same time. Particles arise from an interaction, otherwise their representation state is a probabilistic wave function that is everywhere and everywhence.
If Observer A stands at a particular location and observes that an electron occupies a particular location in space-time, the same result is not agreed on by Observer B that stands at a different location and observes that same point in space-time. The reason for this disparity between observers regarding a fundamental building block of our classical reality is that gauge theory tells us that viewed from a different location, there is a phase shift applied to the wave function and thereby the signature interaction of an electron is not produced. If you do not objectify the electron as a ‘thing’ but rather as a process that arises from an interaction between an observer or detecting device and a system at a particular location in space-time, you can avoid the head scratching in attempting to resolve this conundrum. In essence to produce an electron, a classical instrument or observer needs to interact with a probability distribution (wave function). A passive observer which does not interact with that same system will not observe that a fundamental particle exists.
You start to realise that a reality in any sense of the word, is observer or interaction specific at the fundamental level. It is only through the fact that classical observers occupy nearby positions in space-time that a classical resolution to this quantum problem is resolved through an averaging effect across system processes.
“But hey, I think therefore I am. What you talkin’ about Willis?”…….Not so fast Descartes……..What makes you ‘think that you are you’ is that grey stuff in your skull that ascribes a sense of self-awareness to you. Once again we are talking about a brain, which in itself is also a complex sub-system in a greater system. Where does it end? Let’s dig a bit again.
What gives you that sense of ‘self’ is a lifetime of evolution starting from a single cell using their sensory receptors externally directed from their cell wall to detect a food source or predator. The simple measurement external to the receptor and an associated feedback loop with a behavioural response creates the rudimentary seed of a sense of that which is outside as opposed to that which is within. Hey presto, you have the asymmetrical relationship you need to separate a host from its environment and through evolutionary complexity and amplification out pops an emergent behaviour called ‘self-awareness’.
Have you ever wondered how the brain, as regulator of the colony resolves the millions of sensory inputs it receives each second? As powerful as the brain is, this magnificent organ needs to utilise heuristic shortcuts to analyse its inputs, otherwise it could not possibly provide a holistic response to coordinate the sections of the entire system in a sufficient response time. One of these heuristic shortcuts is a sense of ‘self’ associated with a catch all gross system statement as opposed to a detailed rendition of the state of its entire componentry. In the same way we can thermodynamically describe the vastly simplified gross state of a balloon by its volume and air pressure as opposed to a detailed account of the kinetic motion of its millions of individual air molecules.
“Hey….I have always been me. I still don’t understand?”……Well perhaps you need to consider a philosophical paradox referred to as ‘the Ship of Theseus’ where you are asked if it is the same ship after you have replaced all its components parts. To put this into context now consider that every one of your cells in your body, excluding perhaps your skeleton, have been replaced many times over the course of your lifetime. Are you really you? What keeps you you, the components of you or the process?
And what about the others in you?…”OMG this guy is nuts” …..If you drill down into the origin of your components you may quickly conclude that you are actually a symbiotic community of processes from within and without. Look at some of the things you take for granted as being you including your mitochondria and genotype. What you will find is that you have composite origin. Your mitochondria and possibly other organelles are of foreign origin as are long segments of your gene sequence which are of virus origin.
You need to remember that what has classified you as a multi-cellular organism is simply a simplified human categorisation scheme. It does not literally mean that we are ‘one’. The relationships between the cells in your entire body have been molded by evolutionary processes from amoebic disparate roots to a colonial form, then to a multi-cellular form in which you take form today.
You were not made by a creator from component parts, you have grown into your form from a single cell, the code of which has evolved over deep time. What has allowed that cell to divide and specialise into a fully grown ‘you’ is determined in part by your genetic code, but also importantly by epigenetic factors from the internal and external environment which have had a dominant role in ontogeny in deciding which genes to ‘switch on’ and ‘switch off’ to produce the phenotype called you. Move over Charles Darwin…… Lamarck still lives on. The interplay between environment and genotype is significant and we cannot simply assume that all our form has originated from ‘within’. It is only through critical thinking that we have a chance of dealing with behavioural bias and dogma.
You are also not a closed system. If you were we could relocate you out in deep space without a life support system and you could survive quite happily floating through space. You are actually a nested system existing within a greater living system called this universe.
So how could we have got it so wrong?
Our Western view of science has largely been driven by reductionism. Namely that theories about complex systems can effectively be reduced to a simpler basic form by a process of reduction whereby our aim is to understand the whole by its individual constituent parts.
We are used to a man-made world whereby we (as creators) construct complex machines from the assembly of parts and as a result adopt the notion that when attempting to understand how complex systems work such as our universe, ourselves, our natural environment and our financial systems, that we can understand the complexity from a myopic focus on the fundamental constituents.
The conventional western viewpoint of science which has infiltrated our culture, our ‘noun’ oriented language and the way we internally process information (e.g. our thoughts) has unfortunately blind-sided our ability to deal with complexity. This originally can be attributed to our Western autocratic religions but later can be largely attributed to the mechanistic age and industrialisation inspired by Isaac Newton in which we started viewing our universe as being deterministic and mechanistic in origin. Akin to a clockwork universe in which ‘things’ moved within a fixed arena according to specific rules. According to this mechanistic interpretation, if we had a knowledge of all the things in the universe and their motion, we could perfectly predict the future. You can probably understand how we became so ‘cocky’ in our outlook thinking that by the end of the 19th century that nearly all of our scientific queries were now resolved. How naive we were.
It is the relationships that unfold and not the mere contents of the container which lead to system complexity and these relationships dynamically evolve and produce an altered system state. Think of a container of H2O. As a collection of molecules it could either be in a solid, liquid or gaseous state. Focusing on the constituents alone will not lead you to this conclusion. It is the relationship between the constituents, namely the degree to which molecules interact and are agitated that determines how the gross structure of the arrangement unfolds.
It was only through Einstein that we started to appreciate the importance of the relationships between things (a relational view of the world). What we quickly realised, following the theories of special and general relativity, that put the mechanistic viewpoint of Newton to bed as a simplification of our narrow earthly domain, was that in assessing our universe as a system, there actually is no fixed arena in which things moved. What was important were not the ‘things’ themselves but the relationships that existed at one point in space-time and the rest of the system. In Einstein’s model, the fixed arena of space and time were merged into space-time and there was a dynamic interplay between space-time itself and the contents contained within whereby matter told space-time how to curve and space-time told matter how to move.
And then into quantum mechanics we delved. In this system context we further realise that even the ‘things’ we took for granted as the bedrocks in our classical world were only emergent artifacts of a probabilistic interaction arising in our 3D and 1T classical context from an abstract (Hilbert) space. Even more disturbing was the fact that different viewpoints of reality are produced dependent on the entire experimental setup as opposed to the supposed ‘thing’ that is being observed. This concludes with strong reason to believe that reality is a manifestation of an interaction or a two-way relationship between that which is doing the interaction (e.g. an observer or experimental device) and the state of a system. The emergence of system structure including space-time and its constituents is a consequence of how a classical participant or experiment maps a reality of a greater process into our narrow classical domain.
For complex systems, what is important is the relationship that exists between a component and the nested system heirarchy of the entire system. Rather than thinking a complex system is like a conventional jigsaw puzzle, think of a complex system as a Rubik’s cube. Under a reductionist mechanistic philosophy we would begin constructing a puzzle bit by bit by fitting pieces together to arrive at a total assembly. For example with a 26 piece puzzle you would have no problem quickly assembling your creation through a mechanistic approach that adds this block to that block and so on and so forth. Now under a relational viewpoint the puzzle creation process becomes more problematic as each piece is connected and the position of one piece is related to ALL other pieces of the puzzle. EVerything is correlated and has a ‘state’ place. The more complex rules associated with this holistic arrangement amplifies the possible permutations of this puzzle. So under a 26 cube Rubik’s puzzle we find that the solution becomes quickly intractable. For those who are wondering about the permutations of a Rubik’s cube…… there are actually approximately 43 quintillion possible permutations……don’t make me write this out. Unfortunately there are few shortcuts we can use in interrogating complexity as frequently the smallest relationship matters. The only way of addressing system complexity is through adopting heuristic shortcuts and in doing so we must accept a margin of error in our best estimations.
Clearly, in understanding complex systems, a simple reductionist philosophy with the adoption of simplified assumptions is a hopelessly inept way of understanding how a system works.
For complex systems, we need to adopt different tools and methods of enquiry to the mechanistic explorer for peering into system complexity. Fortunately all is not lost however as we have a blunt tool, namely statistical tools that within a margin of error at least, like the brain, can at least define the gross statistical properties of a system without having to rigorously examine all the detail.
In adopting this reductionist path to problem solving, we are progressively alienating ourselves from this great system and meeting incoherence head-on between our thoughts versus our actions. As a result, like schizophrenics, we wonder whether in fact we are losing our grip. The key to getting ourselves out of this rut is through altering our thought processes which have been hopelessly biased by progressive indoctrination. That requires all of us to start applying critical thinking.
Start questioning the supposed hallmarks of our civilisation as you may find that they are built on biased illusions which are taking us down obscure paths away from reality. It’s time we started facing up to complexity and taking heed of its grand structure. Sure, we have come a long way in our evolutionary path and are clever in our achievements such as our man-made creations, however now, like a destructive exploitative parasite, we are starting to infest and exploit this great planet having no heed to its magnificent self-sustaining nature and inter-related sub-systems. While we may never fully understand a complex system we better start to learn to at least appreciate them as our very livelihoods depend on it.
Do you think that we with our machines are a match for a natural complex system? Below is a video that may change your mind.
Trade well and prosper