Wall Street Has a Lesson for Sustainability

turmoil in the Dow.jpgIt's Saturday and the market gets a few days off before it can awaken again to the turmoil on Wall Street and Main Street. The media of all forms is full of news about bailouts, take-overs, debt acceptance, and many other arcane terms known only to those that have created the mess we are in. This blog is concerned with sustainability, not with financial security, so what's the connection between sustainability and Wall Street.

One of the central themes in my approach to sustainability is that we have to change our fundamental beliefs about how the world works. Once you start to look at worldly systems larger than the proverbial breadbox, it is critical to begin to understand them as complex systems, that is, systems that are not describable by normal scientific rules and, as a consequences, behave in unpredictable ways. As is the norm, however, we always think that we can predict the future, within some degree of certainty, by applying rules.

Much of the financial mischief has come about by using probabilistic models to predict the risk in assuming all kinds of debts, mortgages, insurance liabilities, and so on. In a complex system, rules can work for a while, but if the system is stressed beyond some [unpredictable] point, it can collapse or move onto a whole new regime. Nassim Nicholas Taleb, author of The Black Swan, writing on Edge, says

So knowledge (i.e., if some statement is "true" or "false") matters little, very little in many situations. In the real world, there are very few situations where what you do and your belief if some statement is true or false naively map into each other. Some decisions require vastly more caution than others...

All of this suggests that one cannot hope to manage any system as complex as the US financial system, and regulators who try should be very sensitive to their limits. Management always implies knowledge of how the system to be managed will respond to new rules or to Band-Aids. Governance is a bit more broad in that it assumes that adaptation and learning are part of the supervisory processes besides rules. Sustainability applies to a much larger system, the whole world, rather than merely the financial parts. One should use the tumult on Wall Street to warn us that trying to fix unsustainability in general with Band-Aids is not the "right" way.

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1 Comments

Rachel Van Emon said:

I don't claim to understand the complexity of the the US financial system or what remedies to enact, but it appears that the mess we are in stems from ignoring simple financial doctrine: don't spend (leverage, margin, risk) more than you have. If you do, sooner or later the consequences will arrive and the structure will collapse. It will come in a moment, but the inertia is visible to those who notice the ongoing disrespect for the underlying mechanisms. Unfortunately, many households also dismiss this basic principle and, I fear, will be shocked when the outcome arrives.