Saturday Serendipity
Quote,Mental Model, Interesting find.
Hi!
Reading time: About 5 minutes
Quote
“Nothing, nothing at all, matters as much as bringing the right people into your life. They will teach you everything you need to know.”
— Guy Spier
Mental Model
Complex Adaptive Systems
Look around you and try and see all the things which are complex. I find my laptop, my mobile, my air conditioner and most of the technology products to be very complex products which are made easy to use. These products have a lot of material which go into the production of the final result. There are a lot of variables to make the perfect phone.
Now these are complex systems.
What are complex adaptive systems then?
Complex adaptive systems are those complex systems which have the ability to adapt as the situation changes.
What are examples of complex adaptive systems?
Now when we think of cars. It is a complex product. There are a lot of variables involved a change in even one would make the product inferior. But it is easy to navigate as we can predict with ease what will happen as the product will not react to the change in an unexpected manner. For instance if we remove the seat belts the car won’t stop working. Just the safety will be less.
Now compare that to when you are driving a car. It is a complex system. There are a lot of things going on on the road. There is a person crossing the road, there is a car coming from the left, a truck from the right and a traffic inspector whistling at you. There is a lot going on.
But if there is a change in how any one of these react the outcome can be anything. You can get into an accident, get into a fight, get your license suspended, survive it, etc.
You can’t predict the outcome of that situation. The complex system adapts and changes.
It’s like your body. If you exercise a lot. You start seeing results. All the heavy weights increase your muscle mass letting your body adapt and react to the exercise.
Shane Parrish did a wonderful job of inverting and explaining what a complex adaptive system is not,
This understanding helps us understand some things that are not complex adaptive systems. Take the local weather. If the Doppler 3000 forecast on the local news predicts rain on Thursday, is the rain any less likely to occur? No. The act of predicting has not influenced the outcome. Although near-term weather is extremely complex, with many interacting parts leading to higher-order outcomes, it does have an element of predictability.
I believe sport is a complex adaptive system. It has many variables which cannot be predicted by anyone. For example, take the recent match of Australia vs Afghanistan. Everyone before the match expected Australia to win. Afghanistan put up a great total but it was still something Australia could chase. Then in the second innings Australia somehow ended up on 91-7 while they had to chase a total of 293. Everyone would have expected Afghanistan to win from here on. Maxwell was dropped twice as well. But what happened. Maxwell scored a 200 and won the match for Australia.
To me this is like a complex adaptive system.
In Investing
The stock market is a complex adaptive system. You have a ton of people who participate in the market everyday buying and selling pieces of businesses. Their behaviour impacts the market everyday. As new information comes out people adapt to it and react in different ways.
John Maynard Keynes wrote,
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degree
In my opinion any type of system which is very very hard to predict is more often than not a complex adaptive system.
There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d be millionaires by now…As far as I know, most of them are still gainfully employed, which ought to tell us something.”
Peter Lynch
“Economics involves too complex a system…economics should emulate physics’s basic ethos, but its search for precision in physics-like formulas is almost always wrong.”
Munger
We should always maintain a zoomed out perspective before we start forecasting the future or start thinking we can predict things in a world which is unpredictable. Complex adaptive systems teaches me anything is possible as you don’t know the result.
Interesting find
That’s it! Enjoy your weekend!
Thank you!
Samvit.