Mauboussin on Complex Adaptive Systems

Mauboussin was recently invited to seat at the Santa Fe Institute board, a research and education center which praises diversity to solve complex problems (by the way, there are tons of top notch materials and events to be checked out there). I found this interview with Mauboussin via compoundingmyinterests. Below, I highlighted and commented on some quotes:

#1. “The problem is that modeling complex adaptive systems is a lot messier than those other approaches.” 

Although, financial analysts focus on modelling EPS and finding out if it’s going to be . I’d argue the best research practice is understand capital allocators incentives & agenda.

#2. “This work showed that under some conditions returns actually move sharply away from the mean. This is counter to classic microeconomic thinking that assumes returns are mean-reverting.”

This reinforces the previous post on quality investing. 54% of companies tend to remain in the 1st quartile after a long period of time, assuring their moat is wide and deep enough to bear multiple attacks.

#3. “Diversity is essential, both in nature and in markets, and the system has to be able to take advantage of that diversity. On the flip side, when you lose diversity the system can become very inefficient. And that’s also what we see in markets—diversity loss leads to booms and crashes.”

Now let’s frame the diversity in investment teams. Or even in Santa Fe Institute, which is exactly how it’s done by the way. Different backgrounds working on the same problem is the knowledge leap.

#4. “Many businesses are being defined less by their specific market segment and more by the ecosystem they create. And it is often the case that in a battle of ecosystems, one will come out on top. So this set of steps provides a mental model to understand the process of increasing returns and, as important, how to identify them in real time.”

The concept is beautiful, but applying it is tough. When it comes to the environment/value chain businesses are in, the spectrum is too wide for a quick research project. Actually, it can be the work of a lifetime. The “knowable” facts are scattered in open field and the “unknown unknowns” are also out there. For those interested, critical thinking might be an useful vertical for you to dive in.

#5. “First, it’s essential to provide your mind with good raw material. That means exposing yourself to a lot of disciplines and learning the key tenets. It also means spending time with people who think differently than you do. Second, you have to be willing and able to make connections.”

I liked this quote because it uses plain language. Nothing better than that.

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