Focus of Frameworks

Need to focus on

- a preoccupation with the shift from incremental to transformational change is outdated. The new reality is constant change

- need to focus more on readiness for change and less on resistance to change

- more resources are required to handle change in turbulent times

- importance of the luck of timing, ie the market is ready for your idea, and discipline, ie do not chase fads

An example of an unacceptable level of reliance upon simplistic models is the mathematical type routinely used by financial experts and economists. The global financial crisis that started in late 2008 highlighted the inadequacies of these models in evaluating risk and associated matters, like uncertainty. They focused mainly on figures like expected returns, volatility and default risk of financial instruments. Furthermore, these frameworks are designed around an incorrect assumption that even though change will occur, people will only react according to past experience and knowledge, ie nothing new will happen. They don't take into account the real world, such as human/group behaviour, especially people acting in self-interest, the potential for widespread panic, and judgment which calls on a host of historical, psychological, character, social, political, etc factors. These models are necessarily limited in their use and value for prediction purposes. They are based on assumptions of perfect knowledge including rational behaviour, past performance, perfect markets and self-correcting, or equilibrating, for any disturbance, etc. But knowledge is inherently imperfect. Remember: models are only as good as their assumptions.

There has been recent analysis of online behaviour through social networks by tracking the spread of stories, ideas, videos, music, fads, etc. Can the knowledge gained from collective behaviour on the web be applied to other areas like financial markets? This field involves understanding the concepts of evolutionary biology and cognitive neuroscience and is called "adaptive markets hypothesis". This is a departure from the efficient market theory which assumes financial markets always get asset prices right, given the available information, and that people always behave rationally.

NB There is almost an inverse correlation between quality and popularity of frameworks

(sources: John Hewson, 2009; Steve Lohr, 2009; Glenn Mumford, 2010)


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