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Randomness and Complexity

If the tone of this book seems steeped in the culture of Darwinism and evolutionary thinking, it does not come from any remotely formal training in the natural sciences, but from the evolutionary way of thinking taught by my Monte Carlo simulators.

Nassim Taleb revised his book on the way humans deal with randomness; how we rationalize luck. It is worth a read. (Recommended by the likes of Tom Peters, and Peter Bernstein).

The part that grabbed my attention was Nassim’s use of Monte Carlo simulations, to test out scenarios. The simulator allows exploration of alternate paths, both past and future. Evolution is a search technique to find successful survival strategies for a particular scenario. In biology, we have only one scenario to investigate: ours. The Monte Carlo simulator allows testing strategies under different scenarios.

This is very similar to the work on complexity theory being done at the Santa Fe institute (as told in the Origin of Wealth). Nassim refers to their work later in the book:

The so-called complexity theorists came to the rescue. … Clearly these scientists are trying hard, and providing us with wonderful solutions in the physical sciences and better models in the social siblings (though nothing satisfactory there yet).

The key is the yet.

I’m holding out hope for complexity theory as applied to economics and finance. The classical equilibrium models don’t resonate strongly with my understanding of this world. Early research into the application of complexity theory rings very true.

Even if the numbers don’t hold out exactly, the model provided matches my understanding of people and markets much better. Nassim himself says it best:

Mathematics is principally a tool to meditate, rather than compute.

Lets hope it can deliver both.