Applying Complexity Theory to Markets

When you combine the laws of chaos with the laws of order, what do you get? The answer is complexity theory, award-winning science writer David Berreby explained. Here Jim Rickards, the author of Currency Wars: The Making of the Next Global Crisis explains why this theory is better than Traditional Forecasting Models. - Editor

- Jim Rickards

Mainstream economists have insisted for decades that markets are highly efficient, and they do a nearly perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information. In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient. Markets can be rational or irrational. Markets can be volatile, irrationally exuberant or in a complete state of panic depending upon the emotions of investors and herd behavior. You first have to understand that markets are highly complex systems.

At some point, systems flip from being complicated, which is a challenge to manage, to being complex. Complexity is more than a challenge because it opens the door to all kinds of unexpected crashes and events. Their behavior cannot be reduced to their component parts. It’s as if they take on a life of their own.