Sunday, 25 August 2013

Complexity Monitoring - A Formidable Early-Warning Tool

Complexity technology establishes a radically innovative means of anticipating crises. Systems under severe stress or on a path to collapse undergo either rapid complexity fluctuations or exhibit a consistent growth of complexity. If complexity is not measured, these precious  crisis precursors will go unnoticed. Conventional methods are unable to identify such precursors. The current planetary economy meltdown is eloquent proof.

A system enters in a state of pre-crisis as it approaches its critical complexity. Tracking the evolution of the distance of a system from its critical complexity yields a measure of the system’s vulnerability. As increasingly high thresholds of complexity are crossed, warning of increasing exposure may be issued. Systems that are kept at a safe distance from criticality are robust and therefore enjoy a lower risk exposure than near-critical systems. This may be said of corporations, markets or societies, or the World as a whole. The enormous value of this approach stems from a fundamental issue. Sufficiently complex systems often collapse due to endogenous, or internal, causes. Traumas induced from the outside are not necessary in order to destroy a very complex system. The sheer complexity of certain systems makes them vulnerable from within. History is full of examples. The US sub-prime bubble is one. Before the market collapsed, complexity has suddenly started to grown and has been rising steeply for over 18 months prior to the August 2007 implosion.

How does complexity-based crisis anticipation work? You simply measure and track complexity (yours or that of your clients), and look out for any sudden changes or even slow but consistent drifts (more or less like doctors would do when analyzing blood test results). In both cases, these point to the accumulation of entropy and/or the emergence of new structures within the system. Since entropy cannot grow indefinitely without being dumped by the system, one can be assured of an approaching crisis. The gradients of complexity give an idea of how intense the crisis will be and, most importantly, when it will hit. Coupled with past experience and the knowledge of previous crises, this technique provides the basis for a rational and holistic crisis-anticipation system for decision-makers, investors, managers, and policy-makers.

Complexity-based crisis anticipation functions in real-time and may be applied to:

  •     Corporations
  •     Banks (in this case we indicate clients who may be defaulting)
  •     Asset portfolios
  •     Customer-retention
  •     Process plants
  •     Traffic systems
  •     IT systems
Crisis anticipation in a turbulent economy is not just a strategic tool for decision-makers. It means survival.