Benoit Mandelbrot and Nassim Taleb Discuss The Perilous State of Our Financial System

Excellent discussion about our current financial situation from the point of view of two people who really understand chaos theory, fractal geometry and the nonlinear basis our economy. According the late Mandelbrot “everything is possible.”

Toyota, Chaos Theory, and Crop Circles

For the last century or so, technology has been a great driving force behind many global economic growth. Businesses have seen technology as a pathway to success and profits. The recent unexplained behavior of some Toyota cars with electronic throttle controls calls this belief into question. While many of us see technology as something that brings predictability and comfort into our lives and have a great deal of faith in it, there is also another side to technology: that of unexpected consequences and uncertainty.

The sociologist Charles Perrow pointed out several decades ago that “tightly-coupled” systems were prone to unanticipated failures as the result of the close proximity of many sensitive and interactive parts. Examples include Chernobyl, Three-Mile Island, and the Space Shuttle Challenger disasters. Then, in the 80′s and 90′s, chaos theory and fractal geometry showed us that highly complex systems are likely to experience unintended consequences as a result of the non-linear interactions that erupt in many types of “non-equilibrium” systems (i.e., weather, living things). In certainly could be argued that modern automobiles, while not quite living things, are also tightly-coupled systems that are sometimes subject to non-linear behavior.

The Black Swan–Relevance of Fractals to Remote Viewing and Crop Circles

I’ve been reading Nassim Nicholas Taleb’s monumental work The Black Swan: the Impact of the Highly Improbable (2007).  It’s basically about how we are mistakenly wed to the idea of the Bell Curve, also known as the Gaussian Distribution, to describe the behavior of many modern social and cultural systems. While the Bell Curve is good at describing the approximate activity of physical systems, it totally fails when it comes to real-world scenarios and situations which are more characterized by fractal, non-linear statistical distributions. Think of the unexpected popularity of a movie or book, for example. Normalized Bell curves can’t account for these events. Their “tails” are not fat enough. In reality, extreme events happen more than our conventional models predict. Here is a passage I particularly liked:

“We are teaching people methods from Mediocristan and turning them loose in Extremistan. It is like developing a medicine for plants and applying it to humans. It is no wonder that we run the biggest risk of all: we handle matters that belong to Extremistan, but treated as if they belonged to Mediocristan, as an ‘approximation’.
Several hundred thousand students in business schools and social science department from Singapore to Urbana-Champaign, as well as people in the business world, continue to study ‘scientific’ methods, all grounded in the Gaussian . . .”