Posted by: Nicholas Davis | March 31, 2009

The danger’s in the complexity

If you haven’t read it yet, those who are interested in how global finance could lose so much money on structured derivatives so quickly should definitely read this article by Michael Osinski in the New York Magazine. Titled “My Manhattan Project: How I helped build the bomb that blew up Wall Street”, it tells the story of the guy who wrote one of the key piece of software that allowed mortgages to be structured and sold by the investment banks – a tool that led to other CDOs and squared versions of the same.

It’s a great piece, reminiscent (as well as invoking) Michael Lewis’ Liars Poker. But one sentence that jumped up on me is one of the paragraphs where the write tries to justify his feelings of semi-guilt in relation to the recent turmoil:

The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future. (emphasis added)

This gets to the heart of a few ideas that I’ve been discussing recently, and another insight from my boss on a different topic (facilitating scenarios) today. Foremost among these is that tempting as may be, it is supremely dangerous to design systems that hide complexity or smooth over uncertainty – for this increases our tendency towards an illusion of control, which in turn leads to a lower sensitivity to risk (known and unknown), increased leverage, metastability and, finally, crisis. Which, taken all together, is not cool at all.

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Responses

  1. In what will perhaps become a too standard feature of my commentaries here, it is easy to extend the metaphor of masking complexity to the human mind.

    Indeed, as much as the sciences of the mind have moved away from Freud (thankfully), the idea of the unconscious, the “iceberg” model of the mind, still remains alive. According to such perspectives, primary problem with viewing one-self as a one-dimensional being, a platonic conception of oneself, is that such an image proves fragile as soon as circumstances change- repression works only for a short while.

    Many therapists also contend that mental problems can be conceptualised as old solutions which no longer work, and/or are too rigidly applied, ensuring that solutions become the problems. In a sense, regulation cannot keep pace with the complexity of the system.

    So, what is the solution offered? First and foremost is the expansion of both the breadth and depth of the concept of self, increasing subtlety and ensuring a more refined and flexible approach to regulation – getting in touch with ourselves and acepting what we find there. In order to avoiding slipping into new age thinking, such advice can be reconceptualised as futures thinking: expand the range of what is possible, see the diversity and complexity of what there is, and check for early signals. It is continuous scanning instead of knowing. And, above all, avoid old solutions to new problems.

    • Darko,

      Thanks again, and I welcome you becoming a standard feature of this blog! I just had a call with an investor in NYC who was very much taken with the idea of “teaching people to think the unthinkable”. I think it’s time to spend some time investigating courses and techniques like “Theory U” that take people through a personal journey as well as providing futures techniques. Perhaps in the current environment, this approach will be particularly appreciated. New solutions to old problems is the catchcry, and understanding the self continuously rather than always playing catch up might be one (difficult) way to implement this…


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