How Individuals Fail to Understand Evolving Markets

December 4th, 2011
in Op Ed

by Guest Author Roger Erickson

I am a biologist by training, transitioned from thinking about evolving nervous systems to thinking about scalable community, business and market systems.   antColonyCoopMy goal as business columnist is not to comment on specific investing tactics, but rather to raise awareness of macro perspectives that enable individuals to better stage, link and sequence the many tactics and strategies they are using, or will.   In this role, I'm constantly asked by beginners to stick to tactical issues and jargon that people in the trenches will easily understand, yet to also educate them about valuable systemic and organizational perspectives.  Go figure!  How do you explain oxymoron if the topic is banned?  I will try to strike a happy medium in this article.  Click on picture for larger image of cooperative action in a social system.

Follow up:

Writings by Bill Black and Warren Mosler have contributed most to my own market education.  Bill Black's writings about white collar crime have placed many risk management topics into better perspective, and therefore allow an opportunity to apply well known lessons from biological model systems to a few concepts that seem to befuddle market players.  Perhaps the biggest lesson about real time human markets, for me, is that there is infinitely more hypocrisy in the world than I had imagined or can yet comprehend, and not just in banking.   Fraud in biological systems is typically ignored, as the systemic failures soon to disappear from interesting systems.  In real time, of course, that luxury isn't affordable, and it forces re-evaluation of what proportion of sustainable system resources must be dedicated to weeding out fraudulent practices, by trial & error self-regulation.  It's inescapable that some unknown, "x" % of people in any gender/profession/firm/agency/Congress or other sub-group - are simply pathologically fraudulent, in one form or another, and for a variety of reasons.   How much effort must we dedicate to safeguarding our own group operations from the bad habits of our own individuals and sub-groups?

On the other hand, Warren Mosler's articles have driven home the importance of not only developing logical, efficient market operations, but especially about the training of the operations staff posted to key maintenance posts.  That lesson is echoed in many other professions, where it is common to hear the phrase: "Long term, the highest cost is the cost of maintenance."  In markets, maintenance costs ultimately boil down to the quality of the people placed in key policy and regulatory posts, and - even more importantly - the activity of the user base or stockholder activists who are charged with both being informed, and also with demanding & maintaining professional standards among their policy and regulatory "officer" class.

For me, Bill Black's articles usefully review the propensity for markets to deliver frustratingly brief opportunities while also blindsiding us with seemingly unpredictable dangers, all of our own doing!   Bill has described, at length, how fraudulent activity, from the lowest to the highest levels of markets, is always present and only seems to be briefly forced elsewhere by whack-a-mole interactions with whistleblowers and criminologists, and their sometime partners consisting of regulating, enforcement, policy-making and lobby verticals.

I'll summarize Warren Mosler's vast writings on market & monetary operations in this, succinct if dense wording. “Why is state money better than gold?” Because the highest return is always the return-on-coordination. Scaling up ability to explore large-group options requires scalable large-group agility and scalable large-group intelligence & coherent alignment to emerging options. That's the same reason that species & armies are never resource constrained. The biggest constraint is always organizational ability.  That means that only state-money denominations are agile enough to keep up with the kinetic demands of uncontrollable public initiative. Commodity-money was thoroughly tested, and was found inadequate. Its valuation has to be constantly re-scaled, simply because populations & their options scale faster than the magnitude of any commodity store. If that’s the case, just simplify and cut the commodity out of the re-scaling loop that links organizational ability to group outcomes.

Those two writers, between them, summarize why we are now on a fully fiat, non-convertible, floating-Fx currency regime where our major tasks boil down to controlling inflation/deflation, scaling capabilities by distributing & maximizing productive Aggregate Demand, and minimizing the cost of regulating our own, self-fraudulent behaviors.

Now that we've at least simplified our paradigm and management parameters, how can we optimally fulfill our tasks?  Here's my version of every investors dilemma.  It boils down to a continuous, 2-stage optimization task.  First, keep the components - ourselves - alive, while, second, SIMULTANEOUSLY maximizing group capabilities.  It's never either in isolation.   The following is a useful analogy, the Traveling Entrepreneur Task:  How does an entrepreneurial nomad optimize the path traversing an escalating smorgasbord, when every table from which he takes a dish spawns at least one additional table ahead, with equal numbers of completely different offerings?  What's the optimal path through continually scaling options? Hint: Success = positioning for optimally expanding options, NOT briefly hoarding extra assets within a local dead end.

Here's where I'll first switch gears and challenge readers with concepts long known in biology, but seemingly rarely acknowledged in economics.  We've known for centuries that social species dominate the upper reaches of the phylogenetic scale.  In short, social species have invented the vast majority of what we think of as better/faster/cheaper tools and practices.  You may quibble with whatever local value-system fascinates you, but the fact is that few humans would voluntarily trade places with members of any other species, and the rest of us wouldn't miss any that did.

With that as a tease, let's just say that a direct link can be followed from a variety of research fields to the business truism well stated by the statistician Walter Shewhart, starting back in the 1920s.   Walter said "In any complex system, the highest cost, by far, is the cost of coordination. [So] Avoid investing in local processes until the aim of the system is clear.  Once local variance is defined and controlled, costs will safely fall."

That should remind investors to always help manage both known risks as well as systemic uncertainties - including "officer" training and regulation of frauds.  Without people who know the game and the goal, and who keep practicing, extending and refining the methods, most of your entrepreneurial team members will wander off and uselessly die of diabetes, leaving you stranded in an endless smorgasbord out of the Twilight Zone.

In the contexts described by Bill Black, why are we surprised that there are always opportunities to divert aggregate resources to narrow uses, i.e., "fraud" in the specific jargon of criminologists?   Furthermore, why do we so frequently let the amount of fraudulent activity get out of hand before members of an aggregate can be recruited to take effective, collective action?  This may mystify the average market investor, but it is very old hat to biologists used to studying countless model systems.  Well educated biologists, if asked, would be amused, and wonder why investors would be confused by such a simple topic.  [The joke is on us all, of course, because the majority of us never stray outside our silos long enough to share critically useful information that would overcome obviously rate-limiting local perspectives, ideologies and habits.  First lesson:  our collective market is captive to our collective isolation, and that inability to coordinate constitutes the bulk of what's killing our group returns!]

The simple truth is that all aggregates face very complex problems in scaling up existing methodologies for application to larger populations with more degrees of freedom.   Every day, we have more people entering more fields, and inventing more business processes.   As these people enter these new frontiers, they are by default the first ones exposed to and aware of any significant new resources.  Pioneers in any new context, whether geographically bounded or otherwise, may become privy to valuable information, yet may also be cut off from full group intelligence.  That is, they typically are not yet receiving full group feedback.  In system terms, the "edges" of an expanding system are not yet adequately instrumented.  The reason is obvious.  Investment in extensive instrumentation will always follow, not lead, appearance of reliable resource streams. The cost of coordination is still quite high, and it is embodied specifically as the inter-connectivity and interaction rates that keep explorers and populations fully aware of emerging context.   That's not a trivial task, so why would you ever be surprised that many people in those situations tend to subvert newly discovered resources to narrow uses vs. optimal aggregate benefit?  They don't yet know how to do otherwise. Optimal asset allocation requires instrumentation, access to the available information, analysis, and testing.   System feedback kinetics will always impose some affordable lag which a system will endure before selecting which band of explorers to fully re-integrate into the system.  Only the sustainable cowboys get reabsorbed, and even then groups reassess affordable error rates at a latency dependent upon their own capabilities as well as context demands.

This is not so different from the tasks faced millions of years ago by, say, slime molds and social insects, as they faced the task of scaling up the bigger population-aggregates which they used to make more successful mushrooms and colonies, respectfully.  Since this analogous task has been solved so many times, by so many species, how, you might ask, did these other, known model systems handle this universal task?  Let me first try to clarify things with a few questions.

Q1: Since aggregate coordination costs are always the highest costs, by far, then return on coordination is always the highest net group return, by far, and failure to coordinate always generates the highest loss opportunities, by far.  Given those facts, how, exactly, do populations & individuals invest in aggregate coordination?  And, is there an operations fund somewhere that invests directly, say, in some of the "more perfect union" strategies of the U.S. Constitution, and other brilliant extensions of it?  [If not, maybe we should make one?  Actually, we need a variety of them, to allow adequate rates of selection.]

Answer: To be an organized system, there have to be adequate interconnectivity patterns, and adequately selective interaction bandwidths, and adequate instrumentation to support determination and convergence to what’s “adequate.”

Q2: What’s adequate, for the long term purpose of markets?

Answer: Optimal scalability, which eventually supersedes any primitive political notions or ideology.

I like the USMC’s summary – which their Majors state but politics never allows their Generals to live up to. “Success depends on the quality of distributed decision-making.”

Q3: What defines “quality”?

Answer: Ultimately, we’re back to optimal scalability, which is unpredictable and has to be selected ex post, after exploring available options, and corresponds fairly well to optimally distributed Aggregate Demand [DAG, not just AG].

[PS: why do economists insist on using such arcane terms like ex ante and ex post?  It seems not just unnecessary, but distinctly unproductive, precisely because it inhibits the very coordination that would improve the quality of distributed decision-making!]

Q4: What, exactly, makes it so hard for unprepared groups to recognize coordination tasks, explore group options, and tune coordinated responses?

Aswer: Model systems solve this task via "selection".  Building-in, beforehand, the leanest possible form of all the unpredictable instrumentation that allows better/faster/leaner selection processes is what takes time.  Those systems that preserve the most coordination, and keep higher proportions of their diverse, pioneer "entrepreneurs" fully integrated with aggregate requirements, are exactly the systems that quickly widen the competitive gap separating their performance from the performance of other aggregates.  It's just a subtly different restatement of an old message.  An ounce of system preparation is worth far more than a pound of aggregate rehabilitation.  Any delay, any failure to execute better/faster/cheaper aggregate coordination is squandering the potential of the nation-state and the market your grandchildren will be left to live in.  And when winning systems cannot progress by further coordinating what they already have, they eventually find success by reorganizing to yet another, mutant form capable of coordinating on an even larger scale.

Q5: What should we be doing to make more market participants more prepared to solve the never ending list of coordination tasks which are very clearly rate limiting for the USA?

Answer: If you find out, tell everyone, ASAP! :)  Meanwhile, here are just a few suggestions to add to the mostly still adequate U.S. Constitution.

There will eventually be many, many options, from which we must select wisely, and the sooner the better.  So I'll issue a challenge for "coordination entrepreneurs" reading this column, and offer only three obvious hints.  1) What form of market catalysts might increase, without us even knowing, our proportional level of group interactions, especially among pioneer entrepreneurs?  2) What form of market catalysts might help us constantly converge and select the leanest possible interaction models sufficient for emerging contexts (so we don't waste valuable time NOW on redundant or irrelevant interactions, but can always QUICKLY recreate them later on, when needed)?  3) What form of market catalysts might increase the time such entrepreneurs spend practicing the leanest amount of aggregate coordination that proves to be adaptive?  If our older public servants and entrepreneurs cannot quickly orient to these tasks, let's hope the next generation of teenagers can!  We need coordination entrepreneurs holding every public servant office.

Walter Shewhart actually summarized the parameters that suggest the right questions.  Detailed answers will vary with specific contexts & sub-contexts.

Shewhart #1: If cost-of-coordination is always the highest cost, and return-on-coordination is always the highest return, then nirvana, again, is a 2-stage optimization task:  the combination of minimal coordination_costs PLUS maximal coordination_returns are likely to correspond to the most sustainable Entrepreneur’s Path.

Shewhart #2: If data is meaningless without context, then nirvana is a better/faster/leaner process for propagating adequate context awareness through a group.   Everything else falls into place via the quality of distributed decision-making if context is first adequately shared across the full group, no matter how large. Our biggest market shortcoming may be failing to scale group-wide context awareness at a rate that is adequately proportional to the rate of both population growth and individual distractions.

To summarize, when the details of regulatory problems seem insurmountable, expanding perspectives outside of existing silos has always delivered a solution, by phrasing more useful questions. The problems inherent in scaling will never go away, since growing aggregates must always struggle to efficiently evolve and refine new operations quickly enough.  Current practices always fail to scale up, in some subtle way, to meet the coordination demands facing larger populations equipped with more individual as well as group options. Luddite ignorance is always a memory of transient bliss, from a brief context that isn't coming back.

For investors exasperated with the lack of adequate regulation, look in the mirror.  An electorate - or any industry standards organization - which lacks adequate discourse and practice at coordination, .. well, that is an electorate unable to coordinate upon demand - i.e., unable to mobilize fast enough.  That is very obviously our greatest national security vulnerability.  Despite all current expenditures, is our republic dissolving, right before our eyes, via the dimensions of interconnectivity, interaction rates and coordination?  It's certainly possible, and always inevitable if we don't continuously accelerate our rate of adaptive coordination, because the target and competition never stop, not just moving, but accelerating.

Across all the model systems that we call biology, adequate practice goes on constantly, in what you might call "Survival Games" or "Selection Games".   In our markets, the group that does this most extensively is the DoD, through repeated War Games.   You might easily conclude that any industry sector that doesn't at least openly simulate "Industry Games", and any government that doesn't start doing periodic self-exams via "Civic Operations Games" will continue to be vulnerable to the dominant threats that Bill Black, Warren Mosler and Walter Shewhart alluded to.  Lack of vigilance on total-system coordination will continue to allow maximal losses from the very pinnacle of all organizations and industry segments, via inadequately restrained Control Fraud.   If those continuously recurring loopholes are not closed quickly enough, by an actively coordinated electorate, some other country may very quickly leapfrog our mobilization capabilities and execute strategies we won't be able to counter fast enough.  Those model systems that closed this scaling loophole, are still here.  Those that didn't, aren't.  End of story.

After all this, are you really still worried ONLY about your micro-economic personal investments, or about balancing our nominal currency budget?  To make sure your grandchildren, not just you, survive modern markets, you need to contuously divert at least some fraction of your efforts to aggregate coordination at local, state and national levels, or face the inevitable consequences of a dis-coordinated market that cannot mobilize fast enough to solve continuously scaling challenges.

Based on the testimony of all known model systems, our only chance is to stick together and explore aggregate options through vigilant coordination.   All aggregate population units constitute, by default and circumstance, a large, analog-computing system.  We need to get  back to acting like one, or we needn't bother investing at all.

Related Articles

Articles by Roger Erickson

About the Author

roger-erickson Roger Erickson is a systems entrepreneur based in Maryland. He worked for years in neurophysiology system research, at the Humboldt Stiftung, MIT, Yale, and NIMH before becoming more interested in community, business and market systems. Roger's newest interests are being pursued through several startups, as well as pilot agriculture commercialization projects with the USDA.


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  1. Derryl Hermanutz says :

    It dawned on me near the end of the article that Roger is describing the behavior of a self-consciously "cooperative" system whose members identify their individual interest with the group's/system's wellbeing. 

    Capitalism is a "competitive" system. Far from sharing information to optimize global outcomes, individuals hoard and exploit information to gain individual advantage. Players do not try to "coordinate" with one another to maximize aggregate outcomes.  Players "segregate" to maximize individual outcomes, often at the direct expense of other players and of the system as a whole. 

    The insects who collectively form a hive and the cells who collectively form my body or yours all cooperate towards a global optimization of "the organism". This is an "identity" issue. For human identity I would argue anthropologist Robert Dunbar's "Rule of 150".  Beyond a tribe or village or workplace of 150 people, the individuals can no longer know one another, so they are "strangers" rather than "one of us".  Strangers have no recognized bonds and thus no moral obligations to each other, so competitive rather than cooperative behavior defines their relationship. Leopold Kohr made the same argument in his Breakdown of Nations book, advocating breaking overlarge nations into manageable human scale societies. 

    Roger, I don't think humans are capable of scaling up our cooperative systems to the national or global scale you seem to be advocating. 

    In our national and global system a capitalist has no particular interest in optimizing the macro functioning of "the market".  He just wants to make money in whatever ways he sees possible. So do all the workers.  Supposedly an "invisible hand" of the marketplace does all the coordinating work to generate optimal outcomes, leaving individuals free to focus on their narrow self interest. The myth of the market is observably false, but widespread faith in the power of the magic hand is useful to players who benefit from minimal external governance of their behavior. The dominant power position of these players enables them to perpetuate the ruse of "market forces", while the real forces at work are the self-interested actions of these dominant players. Most politicians and other repositories of "the people's interests' are deceived by the illusion and believe in the myths, and most of the people believe in it too.  So individual power and narrowly defined self interest, not group optimization, drives the system. 

  2. Jerrit says :

    "I don't think humans are capable of scaling up our cooperative systems to the national or global scale you seem to be advocating."

    This opinion is central to Roger's point.

    Think of Steve Jobs' "bicycle for the mind" quote. Recognizing our limits and then inventing technology to push beyond them is what our history has been all about. If you doubt that this applies to social technologies, look no further than all the forms of governance that were invented and experimented with allowing us to create nations, imperfect as they are. And if you doubt that that technology has been a competitive advantage, consider how a 150 person strong family group would fare against a nation of millions in a life or death struggle.

    You're betting the future of your group, whichever that is, on the premise that no other group will be able to design and put in place a social technology that overcomes the innate human tendency to be reluctant to cooperate with "strangers".

    Roger may be optimistic that this change will happen soon, but it has to happen eventually whether the change is evolutionary in the traditional biological "meatspace" sense or is purely technological. Why not, then, make a conscious effort to invent this technology first?

  3. Roger Erickson Email says :

    "Roger, I don't think humans are capable of scaling up our cooperative systems to the national or global scale you seem to be advocating."

    Exactly my partial point. CURRENT human practices are never adequate for scaling up further. That's why CURRENT humans, and their practices, were always completely replaced - sooner or later, as humans scaled up past limits that none thought possible at the time. Do you want YOUR descendants to still be contributing? Or not?

    Question is not what you think humans are capable of. Only question that matters is how will you help make them even more scalable? What things do we have to start changing, today?

  4. Admin (Member) Email says :

    The thought occurred in reading Derryl's comment that the long "revered" invisible hand of Adam Smith needs to be replaced with a visible hand which represents the greater social good and counteracts/inhibits/prohibits the self-serving actions of individuals which have negative consequences for society.

    So now that I have come to that conclusion, what wisdom can guide the visible hand? What is wise action for some can be arbitrary repression for others.

    Should what is beneficial for 51% be accepted even though it is clearly a negative for 49%?

    Should a slight shift in circumstances change that which was beneficial to 50% to now be beneficial to 49%, does that mean the thing should be removed?

    How is a scalable process defined and implemented if it can be destructive to a minority? How do individual rights and benfits get rationalized aginst a majority benefit?

    John Lounsbury

  5. Roger Erickson says :

    John Lounsbury asks: "How do individual rights and benfits get rationalized aginst a majority benefit?"

    Context first, John. Take the example of every parent. When you have a child, the resources of the prior 100% get diluted. By the time you have two, 66.67% may feel it's an added resource, while 33.33% may feel it's destructive to a minority.

    Is everyone's judgement based on purely local/instantaneous calculations? Or is every value judgement effectively a new entry thrown into a moving spectrum?

    If you burn one finger on a hot stove, 10% of digits may feel it's a negative, while 90% may take it as a positive lesson overall.

    Conclusion? A system is defined by the coordination methods linking an auto-catalytic set of components. What is & isn't scalable refers to the unending survival path of that system. If the path is unending, so is the value calculation method. Definition of what is/isn't scalable is a running summary across the [variable] component set and it's variable toolkit, over time.

    This topic, combinatorial optimization [see "Combinatorial_optimization" in Wikipedia], is a formal section of math applied to defined sets in defined contexts. Yet the concept, in raw terms, is faced by all people, every day. It's what I was referring to as the Traveling Entrepreneurs Task.

    The suggested answer was to keep heading in whatever direction allowed continual scaling of group options. As contexts change, that obviously requires expanded scouting of self as well as context - while always re-averaging available options over both the territory you occupy and the time you're there.

    If that were easy, bacteria would have built the Space Shuttle before we did. (They might have done just that, just to get here! :) As long as 3.5 billion years ago. [see "Life_on_Earth#History_of_life" in Wikipedia)

  6. Admin (Member) Email says :

    Roger - - -

    I understand your position in theory and in principle. What I don't get is the implementation process. Hence my reference to the "visible hand."

    A further variable is time. In your example of the second child, which is viewed as positive by 2/3 of the "community" (the parents) and a negative by 1/3 (the first born, the situation you describe may be valid in some cases for the first year (or few years) following the second birth. But over 20, 30 or more years the entire community may view the second born as a positive. I think your example adds to the understanding that evolving changes have differing benefits (or detractions) when integrated over time.

    There may be some who would argue with your combinatorial optimization proposition. (I'm thinking of some Libertarians and some who believe the free market myth is actually reality.) However, I am not one of those who would debate you on principle. You keep pointing out that all things must be considered in context and, in this case, the context is implementation.

    John Lounsbury

  7. Roger Erickson says :

    Implementing tuning for any complex system requires installing instrumentation adequate for imposing coordination.

    In human networks, that means constantly re-optimizing the inter-connectivity patterns & interaction-rates to achieve optimal message passing.

    That requires constant experimentation & practice. Ask your local military, or your local biologist/sociologist/anthroplogist how systemic training scales up.

    They'll probably tell you it requires social instrumentation (internet, twitter, Linked-In, etc) - then LOTS of practice.

    Next question? :)



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