We Live in an Era of Uncertainty and Risk

In the shadow of the boat house I re-read a book, I have not looked into for a while: M. Mitchell Waldrop's  Complexity and its first chapter linked me to Brian Arthur's work especially his understanding of economic behavior, in the opposite of the classical theory of economy (and this in the 1970ies!): Increasing Returns and Path Dependence in the Economy, also title of his book released 1994, a collection of papers.

The post title is inspired by an article in HBR, Jul/Aug-2011, Adaptability: The New Competitive Advantage. In a quick view, we might assume that massive information and greater transparency by new IT will drive effectiveness, stability and consistence. We may think little turbulences are smoothed by negative feedback loops. But we observe the opposite is true. And this is, because many can act on change information, experiment rapidly, manage interactions, ...

Brian Arthur spent much of his early career developing a theoretical framework of the dynamics of markets under increasing returns - in particular the role of positive feedback loops in locking in a single product, technology or company. Prototype example: Microsoft. Especially high technology and immaterial products (like financial instruments) operate under increasing returns, in principle.
Since the mid-1980ies BA and his group at the Santa Fe Institute developed a view of a complexity economics. In short, economy is not a stasis, but always forming, always evolving, always discovering fresh novelty. Actors react to outcomes they have created.

Complexity economy is not driven by products and prices, but patterns and contingencies. The key question, IMO, is: "what is out of equilibrium?". Complexity and uncertainty are twins.

This reminds me on Planning For The Unexpected. This might become even more delicate, when greater trading speed and fragmentation of liquidity can cause unexpected freefall of markets - as we have been observing over a year ago. Again, risk management need to quickly react and re-react to market dynamics. And that requires enormous technology power. And the adaptability of technology makers and the technologies.