Currency Wars_ The Making of the Next Global Crisis - James Rickards [105]
Complex systems begin with individual components called autonomous agents, which make decisions and produce results in the system. These agents can be marine species in the oceanic food chain or individual investors in currency markets; the dynamics are the same. To be complex, a system first requires diversity in the types of agents. If the agents are alike, nothing very interesting will happen. If they are diverse, they will respond differently to various inputs, producing more varied results.
The second element is connectedness. The idea is that the agents are connected to one another through some channel. This can consist of electrical lines in the case of a power grid or Twitter feeds in the case of a social network, but somehow the agents must have a way to contact one another.
The third element is interdependence, which means that the agents influence one another. If someone is not sure how cold it is outside and she looks out the window to see everyone wearing down coats, she might choose to wear one too. The decision is not automatic—she might choose to wear only a sweater—but in this case a decision to wear a warm coat is partly dependent on others’ decisions.
The last element is adaptation. In complex systems, adaptation means more than change; rather it refers specifically to learning. Investors who repeatedly lose money on Wall Street themes such as “buy and hold” may learn over time that they need to consider alternative strategies. This learning can be collective in the sense that lessons are shared quickly with others without each agent having to experience them directly. Agents that are diverse, connected, interdependent and adaptive are the foundation of a complex system.
To understand how a complex system operates, it is necessary to think about the strength of each of these four elements. Imagine each one has a dial that can be turned from settings of zero to ten. At a setting of one, the system is uninteresting. It may have the elements of complexity, but nothing much is going on. Diversity is low, connectedness and interdependence are weak and there is almost no learning or adaptation taking place. At a setting of ten, the system is chaotic. Agents receive too much information from too many sources and are stymied in their decision making by conflicting and overwhelming signals.
Where complexity is most intriguing is in what Scott Page of the University of Michigan calls the “interesting in-between.” This means the dials are set somewhere between three and seven, with each dial different from the others. This allows a good flow of information, interaction and learning among diverse agents, but not so much that the system becomes chaotic. This is the heart of complexity—a system that continuously produces surprising results without breaking down.
Two further characteristics of complex systems are of the utmost importance in our consideration of their application to currency markets and the dollar. These are emergent properties and phase transitions.
Saying a system has an emergent property is like saying the whole is more than the sum of its parts. Tasting a delicious, warm apple pie is more interesting than looking at the dough, sugar, apples and butter that went into it. When systems are highly complex, emergent properties are far more powerful and unexpected. Climate is one of the most complex systems ever studied. It is extremely difficult to model, and reliable weather forecasts can be made only about four days in advance. Hurricanes are emergent properties of climate. Their ingredients, such as low air pressure, warm water, convection and the like, are all easily observed, but the exact timing and location at which hurricanes will emerge is impossible to predict. We know them when we see them.
The best example of an emergent property is probably human consciousness. The human body