“COMPLEX SYSTEMS ARE NOT CONFINED TO HISTORICAL EXPERIENCE.”

“COMPLEX SYSTEMS ARE NOT CONFINED TO HISTORICAL EXPERIENCE.” Howard Johnson sent me a link to this article about the financial crisis by James Rickards, a former general counsel of Long Term Capital Management (who would have been involved with cleaning up after the most famous previous debacle with computer models). He points out that: “The problem is that Wall Street and regulators relied on complex mathematical models that told financial institutions how much risk they were taking at any given time.” The models analyzed all of these risks in terms of historical experience. Later he identifies what I think is a key problem: “Complex systems are not confined to historical experience.” I posted over a year ago on a fundamental problem of using computer models based on historical experience:“Nature doesn’t run very good experiments.” Computer models aren’t going to be a guide to risks that haven’t happened before.