02 October 2008

Complexity: a reason to target outcomes

Writing about the current financial turmoil, James G Rickards says:
But beyond chaos lies complexity that truly is unpredictable and cannot be modeled with even the most powerful computers. Capital markets are an example of such complex dynamic systems. A Mountain, Overlooked: How Risk Models Failed Wall St. and Washington
A more technical explanation of the same phenomenon, by Nassim Taleb appears here. Confronted with such systems, how should we make policy? I suggest: target outcomes rather than the supposed means of reaching them. Our failure to do so assumes that government knows or can always identify cause and effect - a feat whose impossibility when applied to social and environmental systems is obscured by the ever-increasing quantities of data and information about them.

The Social Policy Bond approach contracts out the responsibility for achieving targeted outcomes to the private sector. It gives investors in the bonds incentives to adopt diverse, adaptive projects and to terminate the ones that fail. It recognises our epistemological limitations by substituting adaptability and evolution for central planning and over- our under- regulation.

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