A day with SFI learning "Optimality vs Fragility"

Recently I had the privilege of attending Santa Fe Institute's latest joint conference with Morgan Stanley. This time, the topic was "Optimality vs Fragility: Are Optimality and Efficiency the Enemies of Robustness and Resilience?" The topic was both intriguing and timely, and the speakers were interesting, informative and a little bit more controversial than in years past. This made for an outstanding day. The audience in the room included some big names in finance and science alike, setting the stage for fascinating Q&As and stimulating conversations during the breaks.

This year, rather than writing one big post covering all of the lectures, I will break each down into its own entry. Here are the subsequent posts in order (and their respective links). Let this serve as your guide in navigating through the day:

Cris Moore--Optimization from Mt. Fuji to the Rockies

Nassim Taleb--Defining and Mapping Fragility

John Doyle--Universal Laws and Architectures for Robust Efficiency in Nets, Grids, Bugs, Hearts and Minds

Rob Park--Logic and Intent: Shaping Today's Financial Markets

Juan Enriquez--Are Humans Optimal?

Dan Geer--Optimality and Fragility of the Internet

I like to think about are how the lectures relate to what I do in markets and where there is overlap and dissention between the speakers. Further, I like to analyze how some of these lectures fit (or don't) with my preexisting views. I would love to hear what others think. Here are a few of my observations to get you all started:

  • Cris Moore's point that "best" is not necessarily optimal, and a confluence of models (what he calls data clusters) can yield better outcomes is extremely important in financial markets.
  • Nassim Taleb's suggestion that stress tests should focus on accelerating pain, rather than spot analysis is a powerful one that all risk managers should think about.
  • John Doyle's observation about the tradeoffs between robustness and efficiency is directly applicable to portfolio construction.
  • Rob Park's explanation of how algorithms are designed to express human intent, and the areas in which that can go has me rethinking my understanding of the risks from HFT.
  • Juan Enriquez opened everyone's eyes to how big the advances are in life science and the consequences this holds for the "secular stagnation" debate.
  • Dan Geer's explanation for why we have a choice between two of "security, convenience and freedom" online is both an enlightening and frightening call to action.

Again I will caution that these are my notes from the sessions. There is no guarantee of accuracy or completeness. I specifically focused on points that were intriguing to me, and purposely left out areas where the subject matter and terminology were too far removed from my competency.