You may have heard butterfly effect before, that a butterfly flips its wing in new york central park might cause a sand storm in Beijing a month later; or you might remember in the movie Jurassic park Dr. Ian Malcom demonstrated chaos theory Dr. Ellie Sattler with a water drop on her hand. Essentially chaos theory statesthat it is impossible to make a long term prediction in a dynamic systems even if the system is deterministic if the system is very sensitive to a tiny difference in the input.
Without any substantial proof I declare the financial system a chaotic system. Under the chaos theory we shouldn't be surprised by the financial crisis then. We think we have built very sound mathematical models to identify risk, to distribute risk, to hedge risk, to insure risk, in a word, to control and comprehend risk. we didn't know that at the same time we were also building a huge dynamic systems that is very complicated and would be sensitive to small input changes. Given the unpredictable nature of human beings being part of the system, it was amazing that we think we be able to predict the future of financial system. If we truly understand the chaotic nature of the financial system we wouldn't make so many risk bets then; regulators won't be so sure about the regulation then; Fed won't be so sure about their interest tweak; we would move in a slower pace.
Doing nothing sometimes is OK; doing things slowly is OK as well.
What will NY152 say today, I wonder. I turn on my computer. I wait impatiently as it connects. I go online, and my breath catches in my chest until I hear three little words: You've got mail. I hear nothing. Not even a sound on the streets of New York, just the beating of my own heart. I have mail. From you. -- From You've Got Mail, by Kathleen Kelly
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