In chaos theory there is a thing called the butterfly effect.
Suppose you have a weather map that covers every single point on earth, every temperature, every humidity level, every pressure, wind direction and intensity, sunlight and more. You can now predict the future weather because the future is dependent on the present.
Just as you begin to predict, a butterfly in East Texas flaps his wings and everything becomes unpredictable again.
In complex systems the future depends on the present but as Edward Lorenz says,
“Chaos: When the present determines the future, but the approximate present does not approximately determine the future.”
We ignore chaos in our world to our peril. Here is an indicator that a mistake is in the works.
“All other things being equal, this change will make things better.”
We know that if you change anything, you do not have the same system any more. Our world is chaotic. “All other things being equal” is sloppy thinking.
When implementing decisions in a complex environment understand two things.
- What is the tendency that I hope to see?
- What will I measure and why that?
When you see the expected tendency, the right thing is to perfect it or make it more durable. If you don’t see it, then another course of action must evolve.
Financial planning has dozens of important variables and hundreds of minor ones. There is no practical way to get it right fresh out of the box. Do not give up.
You must implement, inspect and improvise. Evolution creates solutions in chaotic environments.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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