Jim Rickards : Complex Systems Collide Markets Crash

At some point, systems flip from being complicated, which is a challenge to manage, to being complex. Complexity is more than a challenge because it opens the door to all kinds of unexpected crashes and events. Their behavior cannot be reduced to their component parts. It’s as if they take on a life of their own. Complexity theory has four main pillars. The first is the diversity of actors. You’ve got to account for all of the actors in the marketplace. When you consider the size of global markets, that number is obviously vast. The second pillar is interconnectedness. Today’s world is massively interconnected through the internet, through social media and other forms of communications technology. The third pillar of complexity theory is interaction. Markets interact on a massive scale. Trillions of dollars of financial transactions occur every single day. The fourth pillar, and this is the hardest for people to understand, is adaptive behavior. Adaptive behavior just means that your behavior affects my behavior and my behavior affects yours. That in turn affects someone else’s behavior, and so on. If you look out the window and see people bundled up in heavy jackets, for example, you’re probably not going to go out in a T-shirt. Applied to capital markets, adaptive behavior is sometimes called herding. Assume you have a room with 100 people. If two people suddenly sprinted out of the room, most of the others probably wouldn’t make much of it. But if half the people in the room suddenly ran outside, the other half will probably do the same thing.















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