Diversified Trend Trading Approach

Cheers Bass. Great listing.

Becoming a Michelin Star Trader

For those of you that approach your trading enterprise in a systematic manner, there may come a time when that ahaa moment strikes and you suddenly metamorphose out of the state of a trader searching for a system, to a system designer searching for a process. As a diversified systematic trader, you begin to realise that the trading game under diversification is not in finding a single system blueprint, but to possess the infrastructure that allows you to turn your attention to continuous system production and application.

The best analogy I can come across in this game is that of a chef who deliberately engineers a menu and recognises that to stay in the game a long time and retain the Michelin star/s, it is essential that the menu continuously adapts to maintain a loyal patronage and to grow market share by attracting newcomers to the restaurant. Each meal on the menu is a system that may have it's time in the sun with only the very rare exceptional dish remaining on the menu that may have a chance to evolve into a signature dish of the restaurant. Most on the menu needs to continuously evolve to changing consumer tastes.

For a systematic trader, like a chef with menu creation and adaption, your efforts are dedicated to system building, research and testing as opposed to dedicating your efforts to the application of interpreting price action. You realise that it is the simplest most robust systems (good quality ingredients) that are essential pre-requisites and the skill lies in how you blend these systems to achieve an optimal outcome in terms of both market appeal and the highest quality standards.

Your excitement does not lie in trade perfection or execution, but rather in the pursuit of production methods that allow you to continuously produce new systems that respond to different market conditions and in producing a blend (a menu) that responds to the current market regimes.

What's this game about? It is not about what system makes the most money, it is about the production capacity and quality control of your kitchen.

Trade/Eat well

C

Like it... Sticking with the Chef analogy.... Different seasons reveal different produce so an *A* grade Chef adapts his Menu to the produce that he has on offer at any specific time..



Have a cool Weekend C..

Aveagoodone Ja :-)

Good evening Sir, our special of the week is the low volatility passive reversion garnished with the occassional false breakout. I strongly recomend our Sauvignon Blanc series to accompany this seasonal offering. We hope you enjoy our selection from the Hotel Costes.

It is on the very rare occassion that you refrain from cutting the ads short on Youtube. This one caught my attention......LOL :-)


..and now back to regular viewing. :-)

Food for Thought

Here is something to ponder and it is about using stops as a basis for producing negatively correlated systems.

This forum often enters into flame wars about whether or not to use hard stops in your trading strategy. Under a diversified portfolio where you blend strategies by virtue of their impact on portfolio correlation, and have only marginal exposure to any particular trade (say 0.25% of equity or less), the need for hard stops is averted. It does not mean that the need for an exit plan on an unfavourable trade is thwarted.....but it does mean that under a very diversified portfolio you can relax your exit conditions to be a performance based exit as opposed to a hard stop. One of the great bug bears for any trader in regards to hard stops is that by design, a hard stop introduces a drawdown to your strategy at a maximum tolerance excursion point. Have enough of them, and a large drawdown is introduced to the system by poor design.

Anyway, this post is not about a discussion on whether or not to use hard stops as irrespective of the mantras and rhetoric, like any science, you should always test every assumption you make in relation to your strategy and importantly stress test it under extreme market conditions. This post is about a deliberate design trick to create an asymmetrical blended strategy that possesses very low correlation in it's constituent elememts.

Ok so here goes. You may be familiar with a perfectly hedged strategy whereby you take a long and short position at the same time with a simple single strategy. What this is doing is blending an equity curve associated with the long position against an equity curve of a short position to produce a linear risk return equity curve which has a slight negative slope associated with the frictional costs opf trading such as spread, slippage and SWAP.

Now remember that principle as we want to achieve the same thing to produce a positively sloping linear equity curve that has a sufficient slope to more than compensate for the frictional costs of trading. So how do we do it?

Step one is to find a trading strategy that selectively trades in market conditions. Namely that it turns on when market conditions are favourable or turns off when market conditions are unfavourable. For example, let's assume a simple trend following strategy that utilises a simple retracement or breakout position in the context of a long term primary trend. To produce the equity curve from a blended result, what we are looking for is an asymmetrical risk to reward strategy. This is achieved by allowing profits to run and to cut losses short through a hard stop but the positioning of this stop must be made in the context of the alternate strategy you need to blend. The reason is to take advantage of combining asymmetrical risk to reward strategies as a blend.......but not for the purposes we would usually use a hard stop for.

If we can understand our system and identify within which market conditions it flourishes, then we are in a position, as a system designer, to identify another negatively correlated system (by design) that can be used to flatten the drawdown period of the former system.

So in the context of the trading strategy above we now need to think about a counter-trend strategy or mean reversion strategy that will enter a trade at or around the same time as the former system and will take profit at or around the time the former system if forced to accept a loss by it's hard stop. When one system is in profit, the other system is in loss. This principle relates to designing negatively correlated system components.

So we look for a counter-trend or a mean reversion strategy that achieves this condition in the context of the former (primary) strategy. The result may be a primary strategy with a 30% Pwin and a 1:3 risk to reward ratio and a secondary strategy with a max 60%-70% Pwin and a 1:1 risk to reward strategy or thereabouts. Both strategies have a positive expectancy but the combined result feeds off each other.

Now given that we ensure that both systems are turned on outside conditions of normal noise (when price clearly is outside normal volatility) we can avoid producing a perfectly hedged outcome and design negatively correlated system contributions that BOTH have a slight positive edge. When combining both system components we achieve a less volatile risk-reward dispersion of returns.

Anyway.....as mentioned some food for thought for the system designers out there. The discussion highlights how a system designer can deliberately configure an optimal weighted risk to return profile without having to accept the uncertain result that the market throws at you.

Cheers

C

Bass....that link you provided for 'Flirting with the Models' is a gem. Much obliged for the reference kind Sir. Great stuff. :-)

A Volatile Return Series is a Necessary Evil for those seeking Alpha through Trend Following

For traders seeking a ticket to riches, the search for Alpha (outperformance over the market) is the main game.....otherwise just plonk your dough into an ETF that mimics a market index and save yourself the hassle.

So what is alpha and how do we find it? In general terms, alpha is an exploitable opportunity that exists from an informational advantage or repeatable behaviour that is not enjoyed by the general market participant. In essence you are looking for those exploitable ephemeral anomalies that may or may not exist in an otherwise efficient market that is characterised by Brownian Motion (or simple random price movement).

These opportunities may exist for a fleeting moment such as a once off opportunity from a unique informational advantage, or alternatively a more durable opportunity arising from the possession of a particular technology or advantage or repeatable behaviour. Alpha of more long term duration may be of a sporadic and unpredictable nature (eg. relying on a particular participant behaviour during extreme events), or be a more permanent and predictable opportunity over a generally period of time (such as a new technology). The bottom line is that when you combine these moments of alpha, you frequently find that they occur in clusters with long periods of random walk in between making the game of finding alpha an elusive one.

You can never tell conclusively whether your result for a particular trade can be attributed to these anomalies but using the Law of Large numbers you can (within confidence intervals) conclude that you have exploited them. For example if you get a coin and toss it, the result will be heads or tails. You will not be able to deduce on a small sample of tosses whether your coin is biased or not...but as you sample size increases, you will be more able to conclude whether your coin was biased or not.

Anyway.....back to our discussion on Alpha......

Here are a few examples of how we obtain an informational advantage to other participants:

Inside information - Being able to advantage from available information that has not been made available to the market......this is what regulators step on as it provides a gross example of an unfair advantage being exploited by a particular participant at the clear expense of others who play the game fairly. Having inside information means you can throw away your crystal ball and take positions in the market that benefit in the future from the particular insight obtained.

This informational advantage may be a once-off which creates an ephemeral (short lived) alpha opportunity or a more enduring alpha moment (eg. in those instances where price manilupation of say the Bank Bill Swap Rate etc. can lead to a long-lived period of alpha for the unsrupulous out there).

Order Front Running - A game played in the world of High Frequency Trading whereby access to low latency through a heavy investment in technology and co-server location provides a class of HFT trader to step in front of orders already in the system and like Inside Information exploit information that through barriers to entry (eg. technology and cost) are made available to this class of participant that in general is not available to the market.......yet to be stepped on by the regulators.....but don't hold your breath on this one.

While regulators have been slow to act on this uneven playing field, fortunately intense competetition in this space is progressively and quickly harvesting this available alpha to a point where the rewards obtained are no longer sufficient to compensate for the costs of setting up such an arrangement. HFT is here to stay but this special class of HFT has had it's day in the sun over the last 5-6 years or so.

Ok so onto the more ethical types of exploiting Alpha..........stay with me guys......don't turn to the dark side Luke.

Ethical Alpha - Then there is the ethical alpha opportunity that can occur on any timescale relating to opportunities that exist for the mere mortals of the trading world like you and me. The skill in trading is a direct result of a traders ability to capture these alpha moments. These may relate to your knowledge of market makers antics in ripping us off with stop hunts, the ability to trade off supply and resistance etc, etc. etc.

While opportunities for Alpha do exist across any timeframe, I would like to focus on a particular type of Alpha opportunity that relates to trend following. Unlike other forms of Alpha, this opportunity is of a more durable nature and unlikely to be arbitraged away, namely because of the fact that it arises from our behaviour as humans. This alpha opportunity has been with us for as long as we can remember and certainly before we became a seperate species. It relates to the behaviour of participants from fear and greed. This behavioural symptom is perhaps the most durable alpha of them all.






Fear and Greed

We cannot really do anything about this behavioural phenomenon as it is hard wired into every one of us through evolution. Fear of uncertainty and greed of lost opportunity.

Let's take an example of the behaviour of fear from uncertainty (which I heard on a podcast recently). Let's assume that you are in a packed cinema. For some unexplained reason some patrons get up and run for the exits...it may be 1 or 2. Without a knowledge of the cause, you are left scratching your head and you may assume that this behaviour was a symptom of nature calling......now 10 more patrons get up and start running for the exit....you divert your attention from the screen and start digesting this behaviour.....why?.......and then another 20 get up and race for the exit.....ok, this is getting serious, do I stay or do I go?........and then 50 more race for the exits....this is becoming intolerable.......that's it.....I'm out...up you get and race towards the exit........for no other reason than the fear of uncertainty. No causative reason, just a phenomenon that is inbuilt into ourselves from a flight or fight principle of evolutionary development. Everyone has a diferent risk tolerance in relation to uncertainty but the progressive action of particpants across a time series creates a momentum and uni-directional price action.....in other words a true trend.

While algorithms do not possess this inbuilt bias, they are still human creations and deployed by humans with on-off swithces, so while in principle we can use automation to save us from our behavioural biases, it is not a total panacea. Inbuilt within theese algorithmic systems are protective measures that when triggerred lead the algorithms to the exits as well.

Recognising this principle as a human behaviour, what can we do about it? This is the hardest feature of trend following.....and to exploit alpha during these moments, you grit your teeth and hold on as this is where your bread and butter is made. It does not mean that you won't break, but rather you hold on for longer that other participants are willing to bare.....and thereby within this evacuated less competetive environment, you reap the bounty from available crisis alpha. The majority of market participants under fear will exit their stake at a very unfavourable price to them and this is where your alpha oportunity emerges.......very much like a value investor in their search for a deep discount to market. For greed, the majority of participants will participate in speculation for 'fear of missing out' and create an asset bubble. In fact the symptoms of fear and greed are largely co-dependent features that lead to variation around a normal mean. It is greed that leads to asset bubbles with uni-directional price movement from collective behaviour, and it is fear that bursts these bubbles through counteractive price action from collective behaviour that over extends price moves.

Something we as trend followers need to do is continuously remind ourselves why we are here. You have to learn to love drawdowns as the bottom line is that the reason that alpha is so persistent for trend followers is that the game is so tough and cannot be arbitraged away........ as it is the antithesis of human nature. It is because it is so hard that alpha from this type of strategy persists and cannot be arbitraged away. Even within trend following itself those without persistent faith wither on the vine allowing alpha to thrive.

If you are serious about trend following you need to stay the distance and recognise that the majority of your life will be in drawdown. To be able to capitalise on this special class of alpha, you must be available and present to that opportunity. To achieve this you must protect your capital at all costs. The way we do this is to cut losses short....cut losses short....cut losses short.....ad infinitum.

A volatile return series for trend following is a necessary fact of life for a trend follower, and the reason for it's success over the long term. Your ability to weather market volatility is your key to harvesting alpha.

The game has got even harder since 2002. Prior to this period, a large portion of alpha in the Managed Futures space was attributed to higher interest rates working on undeployed trade capital. Unfortunately this nice risk buffer has been eroded away. Also since 2008, the advent of HFT deploying mean reversion principles and central bank intervention has put a cap on volatility whereby there have been very few crisis alpha moments. This has raised the bar for the TF community resulting in nasty drawdowns over the last year or so from a death by a thousand cuts. Many CTA's have ben experiencing their worst drawdowns for the last 40 years.

Does it mean that trend following is dead? Does it mean that market volatility can now be contained by central banks? Does it mean that behaviour associated with fear and greed will no longer raise it's ugly head?

Hey....where is everyone going?....come back!!....what's wrong?.........this is unbearable.....I'm out :-)

Cheers

C

The weekend is drawing to a close. Hope you all had a good one. C :-)

This podcast (a best of series) from Mike Covel is an epic for trend followers out there. Three points of view from 3 different systematic trend followers: Chris Cruden (Insch Capital Management), Salem Abraham (Abraham Trading Company) and Brian Proctor (EMC Capital).

Enjoy

C

Informative video from Mark Ursell on how to apply Fixed Fractional Position Sizing with examples and free spreadsheet download. :-)

C

Full of trend following wisdom, another great episode :
http://trendfollowingradio.com/ep-51...-michael-covel

Time to load up the martini shakers......and adjust the cuff links. It's time to paint the town. :-)

A System Viewpoint An unwinding clockwork of processes.Not Things!



If you peer deep enough into a thing you come to understand that it is not a thing at all, but rather an interaction or an event associated with a network of relationships that exist within a broader context of events. Welcome to the world of complex systems.

Despite our awareness that almost everywhere we look, we observe a system at work, our understanding of complex systems has unfortunately been left wanting, partly due to the confounding intractability of interrogating complexity but largely attributed to the simplistic reductionary methods of enquiry we have traditionally used in attempting to understand them. It is this reductionary process that simply fails to account for the reasons for system complexity, namely the inter-relationships and dependencies created between constituent parts as opposed to the constituent parts themselves.

Unfortunately, our traditional microscopic methods of enquiry have repeatedly failed to observe the central characteristics of complex systems which relate to how new and different emergent characteristics arise through the dynamic interplay between constituent system elements over time.

The co-ordination of this interplay is a result of dissipative force laws that exist in any complex system that provides a gradient (whether that be an energy gradient, wealth gradient, risk gradient or any other resource gradient) to allow for causative structure to unfold within a complex system over time.

We often talk about closed systems or open systems, but the reality we face in our universe is that aside from the universe itself, all sub-systems within that context are subject over time to decay attributed to an entropic arrow of time that provides a causative temporal arrow to emerge.

According to our best current models of our universe this uni-directional arrow of time towards a future of higher entropy (or disorder) can be attributed to the result of a progressive evolution of a complex system state from one of low entropy (maximum order) to that of a higher entropy state (maximum disorder) or system equilibrium.

However within that context of an unfolding state of our universe towards equilibrium all is not equal or homogeneous throughout. Local variation in a global context allows for subsystems to evolve that can run counter at the local level to the general tendency of the global overarching system. For example, living systems can locally become more ordered over time by utilising thermodynamic ratchets (negentropy) that harvest energy from their surrounds to reduce their overall entropy and flout the physical laws of the universe that lead to equilibrium.

Other non-living systems such as gravitationally bound systems in this universe can also resist the overall tendency towards a higher entropy state.at least for a long time.

But.the bottom line is that inevitably any subsystem of the greater universe ultimately loses the race as the resource gradient that provides the impetus for increasing system complexity ultimately dries upsuch as our local sun and its ultimate demise when its nuclear fuel runs out. Before that happens it will be time to abandon ship from this little blue orb in the Cosmos.

So recognising that a complex system harvests locally available resources to fuel their development in a temporal sequence, you can start to see how order emerges from dis-order in special cases where a sub-system is created within a greater system and that subsystem is lifted to a lower entropy condition than its surrounds. Having achieved this condition either by directly adding resource inputs into a system (e.g. money supply) or by harvesting energy from their surrounds (e.g. the sun), then you wind up the clockwork of a system and watch the drama evolve along a gradient of resource release and distribution (dissipation) throughout the system where order emerges from disorder such as emergent structures, nested sub-system hierarchies and system-wide emergent behaviours.

Think of what happens in our inter-connected financial systems when additional money supply is added to the mix from Central banks. This money is distributed, reallocated and re-used throughout the system allowing for new structures to emerge like additional financial intermediaries which makes a market more efficient in the way it utilises these finite resources. Critical to a complex systems development is how resources are transferred throughout the system as this leads to local sub-systems within systems that drive emergent structure and further relationships.

Given that a dynamo drives system development (a resource gradient), there is a cause and effect relationship between emergent structures that unfold over a systems evolution. For example where a prior state or structure is required to influence a new state. As a result, many complex systems have a memory.

Furthermore, common to all complex systems are feedback relationships of damping or amplification where outputs of a system are recycled back as system inputs leading to self-sustaining cause and affect looped circuits.

You can start to see how complex systems start to self-organise and with a memory and feedback loops starts to emulate a living system. Well the bottom line is that it is the process driven nature of all systems, whether they be living or non-living that exhibit these features. Complex systems become self-sustaining entities in themselves with no master.

Common to all complex systems is a multiplicity of many parts in which there is an absence of a central control element, either internal or external. Rather it is the system itself that progressively becomes more self-sustaining and efficient through the exchange of internal resources via interactions between system participants, whether that be energy, information, wealth/risk or other resource allowing for nested sub-systems and system structure to emerge that enhance system stability and robustness.

A key property that arises from complex systems is emergent structure and behaviour and a property of a system is emergent only if we genuinely have a new feature that cannot be explained through a more detailed fundamental description of its constituent parts. This is where a new 'thing' in naive terms is constructed within a system context that can only be explained by the relationships that exist in the entire system as opposed to it's constituent parts. A ship, an elephant, an artwork, a building, an organisation, a thought. The range of potential emergent properties of a system are endless.

Also common to all complex systems is that the re-use of system elements for multifunctional purposes allows non-linear power laws to come into effect where relationships between things evolve from a one-to-one to a one-to many relationship. The result allows for progressive system efficiency and durability making the composite more resilient to perturbations.however due to the strong coupling that arises between system elements, a failure in one or more relationships can lead to cascading failures making the entire system progressively more vulnerable to catastrophic risk.

For example, lets assume that in a financial market we have a product that is distributed throughout the market bearing significant intrinsic risk. The emergent structures that arise from this supply of inputs therefore bear this risk in their structure and all other system components that have associated dependencies on this emergent structure also bear this intrinsic risk within. Now lets burst the risk bubble through default events. Watch how a supposedly robust complex system cascades into critical failure. Does this ring a bell?

So lets explore a common system and peer into its complexity. Having a broad knowledge of how a complex system operates has the unnerving ability to shatter some of the biases that have arisen from the traditional way we have traditionally broken apart systems to understand them. One of the greatest biases of all that prevents us from understanding the true nature of a system lies in the way we have historically addressed problem solving by reductionism. Once you come in contact with a complex system and examine it in its entirety, you quickly realise that everywhere you look, you are confronted with processes at work. It is the process that matters not the things.

How is this relevant to the financial markets, life and the universe? Thats what we are here to explore. You may just find that with an altered mind-set, what were previous challenges or roadblocks suddenly vaporise when you realise that it is our biases that bind us.

Peering into a Complex System
Lets begin by attempting to understand a well-known complex system, namely ourselves. You probably think that you are you and I am me, well think again. You are not a thing of enduring substance and you are actually a composite of processes. When you dig a bit deeper you will find that you are a multicellular process with ephemeral qualities. Dig a bit deeper still into a constituent cell and you find that we are now in a nested system within a system.

Within this smaller system you see further sub-systems such as organelles surrounded by a permeable membrane. Dig a bit deeper into the atomic structure of an organelle and you see another nested system comprising a collection of atoms in a structured arrangement. Dig further into the fundamental constituents of an atom and you once again find a deeper system comprising a complex process of interactions within a probability configuration.

Thats the problem when you dig into a complex system. Its systems within systems or processes within processes. Can you dig it?

While the creative mechanist in each of us likes to think in terms of assemblies of bits and pieces, the reality is that the bits and pieces do not exist. What gives rise to things even at the fundamental level are simply interactions between components in a bound configuration state. Dont believe me? Well physicists started smelling a rat when they investigated the atom and found that the vast proportion of the volume of the atom is simply empty space. What kicked back at Samuel Johnson when he refuted Bishop Berkeleys views on reality by kicking with force a large stone and declaring I refute it thus was not a solid object or thing but an electromagnetic repulsion between atoms. Not a thing at all.

Here is the rub. What gives mass to matter.and dont say the Higgs boson. It is not necessary to explain where 96% of the mass of ordinary matter comes from. What gives rise to this mass is the binding energy between quarks. Namely how the quark triplets are constrained by vacuum space. Note that it is not the stuff associated with the fundamental particles but the interrelationships that gives them material substance.

Even when you examine the fundamental particles themselves you quickly realise that they have no material substance but rather are the interactions or trace signatures that exist between an enquirer and a system. You may be aware of wave-particle duality associated with fundamental building blocks of our classical reality. What this means is that a fundamental particle can either be represented as a particle or as a wave but not both at the same time. Particles arise from an interaction, otherwise their representation state is a probabilistic wave function that is everywhere and everywhence.

If Observer A stands at a particular location and observes that an electron occupies a particular location in space-time, the same result is not agreed on by Observer B that stands at a different location and observes that same point in space-time. The reason for this disparity between observers regarding a fundamental building block of our classical reality is that gauge theory tells us that viewed from a different location, there is a phase shift applied to the wave function and thereby the signature interaction of an electron is not produced. If you do not objectify the electron as a thing but rather as a process that arises from an interaction between an observer or detecting device and a system at a particular location in space-time, you can avoid the head scratching in attempting to resolve this conundrum. In essence to produce an electron, a classical instrument or observer needs to interact with a probability distribution (wave function). A passive observer which does not interact with that same system will not observe that a fundamental particle exists.

You start to realise that a reality in any sense of the word is observer or interaction specific at the fundamental level. It is only through the fact that classical observers occupy nearby positions in space-time that a classical resolution to this quantum problem is resolved through an averaging effect across system processes.

But hey, I think therefore I am. What you talkin about Willis.Not so fast Descartes..What makes you think you are you is that grey stuff in your skull that ascribes a sense of self-awareness to you. Once again we are talking about a brain, which in itself is also a complex sub-system in a greater system. Where does it end? Lets dig a bit again.

What gives you that sense of self is a lifetime of evolution starting from a single cell using their sensory receptors externally directed from their cell wall to detect a food source or predator. The simple measurement external to the receptor and an associated feedback loop with a behavioural response creates the rudimentary seed of a sense of that which is outside as opposed to that which is within. Hey presto, you have the asymmetrical relationship you need to separate a host from its environment and through evolutionary complexity and amplification out pops an emergent behaviour called self-awareness.

Have you ever wondered how the brain, as regulator of the colony resolves the millions of sensory inputs it receives each second? As powerful as the brain is, this magnificent organ needs to utilise heuristic shortcuts to analyse its inputs, otherwise it could not possibly provide a holistic response to coordinate the sections of the entire system in a sufficient response time. One of these heuristic shortcuts is a sense of self associated with a catch all gross system statement as opposed to a detailed rendition of the state of its entire componentry. In the same way we can thermodynamically describe the vastly simplified gross state of a balloon by its volume and air pressure as opposed to a detailed account of the kinetic motion of its millions of individual air molecules.

Hey.I have always been me. I still dont understand?Well perhaps you need to consider a philosophical paradox referred to as the Ship of Theseus where you are asked if it is the same ship when you have replaced all its components parts. To put this into context now consider that every one of your cells excluding your skeleton have been replaced many over the course of your lifetime. Are you really you?

And what about the others in you?OMG Copernicus is nuts ..If you drill down into the origin of your components you may quickly conclude that you are actually a symbiotic community of processes from within and without. Look at some of the things you take for granted as being you including your mitochondria and genotype. What you will find is that you have composite origin. Your mitochondria and possibly other organelles are of foreign origin as are long segments of your gene sequence which are of virus origin.

You need to remember that what has classified you as a multicellular organism is simply a simplified human categorisation scheme. It does not literally mean that we are one. The relationships between the cells in your entire body have been moulded by evolutionary processes from amoebic disparate roots to a colonial form, then to a multi-cellular form in which you take form today.

You were not made by a creator from component parts, you have grown into your form from a single cell, the code of which has evolved over deep time. What has allowed that cell to divide and specialise into a fully grown you is determined in part by your genetic code, but also importantly by epigenetic factors from the internal and external environment which have had a dominant role in ontogeny in deciding which genes to switch on and switch off to produce the phenotype called you. Move over Charles Darwin Lamarck still lives on.

The interplay between environment and genotype is significant and we cannot simply assume that all our form has originated from within. It is only through critical thinking that we have a chance of dealing with behavioural bias and dogma.

You are also not a closed system. If you were we could relocate you out in deep space without a life support system and you could survive quite happily floating through space. You are actually a nested system existing within a greater living system called this universe.

So how could we have got it so wrong?
Our Western view of science has largely been driven by reductionism. Namely that theories about complex systems can effectively be reduced to a simpler basic form by a process of reduction whereby our aim is to understand the whole by its individual constituent parts.

We are used to a man-made world whereby we (as creators) construct complex machines from the assembly of parts and as a result adopt the notion that when attempting to understand how complex systems work such as our universe, ourselves, our natural environment and our financial systems, that we can understand the complexity from a myopic focus on the fundamental constituents.

The conventional western viewpoint of science which has infiltrated our culture, our ‘noun’ oriented language and the way we internally process information (e.g. our thoughts) has unfortunately blind-sided our ability to deal with complexity. This originally can be attributed to our Western autocratic religions but later can be largely attributed to the mechanistic age and industrialisation inspired by Isaac Newton in which we started viewing our universe as being deterministic and mechanistic in origin. Akin to a clockwork universe in which ‘things’ moved within a fixed arena according to specific rules. According to this mechanistic interpretation, if we had a knowledge of all the things in the universe and their motion, we could perfectly predict the future. You can probably understand how we became so ‘cocky’ in our outlook thinking that by the end of the 19th century that nearly all of our scientific queries were now resolved. How naive we were.

It is the relationships that unfold and not the mere contents of the container which lead to system complexity and these relationships dynamically evolve and produce an altered system state. Think of a container of H2O. As a collection of molecules it could either be in a solid, liquid or gaseous state. Focussing on the constituents alone will not lead you to this conclusion. It is the relationship between the constituents, namely the degree to which interact and are agitated that determines how the gross structure of the arrangement unfolds.

It was only through Einstein that we started to appreciate the importance of the relationships between things (a relational view of the world). What we quickly realised, following the theories of special and general relativity, that put the mechanistic viewpoint of Newton to bed as a simplification of our narrow earthly domain, was that in assessing our universe as a system, there actually is no fixed arena in which things moved. What was important were not the ‘things’ themselves but the relationships that existed at one point in space-time and the rest of the system. In Einstein’s model, the fixed arena of space and time were merged into space-time and there was a dynamic interplay between space-time itself and the contents contained within whereby matter told space-time how to curve and space-time told matter how to move.

And then into quantum mechanics we delved. In this system context we further realise that even the ‘things’ we took for granted as the bedrocks in our classical world were only emergent artefacts of a probabilistic interaction arising in our 3D and 1T classical context from an abstract (Hilbert) space. Even more disturbing was the fact that different viewpoints of reality are produced dependent on the entire experimental setup as opposed to the supposed ‘thing’ that is being observed. This concludes with strong reason to believe that reality is a manifestation of an interaction or a two-way relationship between that which is doing the interaction (e.g. an observer or experimental device) and the state of a system. The emergence of system structure including space-time and its constituents is a consequence of how a classical participant or experiment maps a reality of a greater process into our narrow classical domain.

For complex systems, what is important is the relationship that exists between a component and the entire system. Rather than thinking a complex system is like a conventional jigsaw puzzle, think of a complex system as a Rubik’s cube. Under a reductionist mechanistic philosophy we would begin constructing a puzzle bit by bit by fitting pieces together to arrive at a total assembly. For example with a 26 piece puzzle you would have no problem quickly assembling your creation through a mechanistic approach that adds this block to that block and so on and so forth. Now under a relational viewpoint the puzzle creation process becomes more problematic as each piece is connected and the position of one piece is related to ALL other pieces of the puzzle. The more complex rules associated with this holistic arrangement amplifies the possible permutations of this puzzle. So under a 26 cube Rubik’s puzzle we find that the solution becomes quickly intractable. For those who are wondering about the permutations of a Rubik’s cube…… there are actualy approximately 43 quintillion possible permutations……don’t make me write this out. Unfortunately there are few shortcuts we can use in interrogating complexity as frequently the smallest relationship matters. The only way of addressing system complexity is through adopting heuristic shortcuts and in doing so we must accept a margin of error in our best estimations.

Clearly, in understanding complex systems, a simple reductionist philosophy with the adoption of simplified assumptions is a hopelessly inept way of understanding how a system works.

For complex systems, we need to adopt different tools and methods of enquiry to the mechanistic explorer for peering into system complexity. Fortunately all is not lost however as we have a blunt tool, namely statistical tools that within a margin of error at least, like the brain, can at least define the gross statistical properties of a system without having to rigorously examine all the detail.

In adopting this reductionist path to problem solving, we are progressively alienating ourselves from this great system and meeting incoherence head-on between our thoughts versus our actions. As a result, like schizophrenics, we wonder whether in fact we are losing our grip. The key to getting ourselves out of this rut is through altering our thought processes which have been hopelessly biased by progressive indoctrination. That requires all of us to start applying critical thinking.

Start questioning the supposed hallmarks of our civilisation as you may find that they are built on biased illusions which are taking us down obscure paths away from reality. It’s time we started facing up to complexity and tasking heed of its grand structure. Sure, we have come a long way in our evolutionary path and are clever in our achievements such as our man-made creations, however now, like a destructive exploitative parasite, we are starting to infest and exploit this great planet having no heed to its magnificent self-sustaining nature. While we may never fully understand a complex system we better start to learn to at least appreciate them as our very livelihoods depend on it.

Do you think that we with our machines are a match for a natural complex system? Below is a video that may change your mind.




Cheers C

hats off mr copernicus, brilliant.

Cheers J. Glad you liked it. :-)

I second that Nick. Great stuff as always. I myself find the markets so fascinating that I hate Fridays and Saturdays.

Hehehe. I know what you mean J.:-)

Nice thread, very interesting to read and learn.

BP

Cheers BP. Nice to have you on board. :-)