Complexity, Risk, and Financial Markets [Paperback]

Edgar E. Peters (Author)

Book Description

ISBN-10: 0471399817 | ISBN-13: 978-0471399810 | Publication Date: January 2, 2001 | Edition: 1

A groundbreaking look at complexity theory and its implications in the world of finance
Complexity theory tells us that processes with a large number of seemingly independent agents-such as free markets-can spontaneously organize themselves into a coherent system. In this fascinating book, Edgar Peters brings together scientific theory, the artistic process, and economics to show how the randomness and uncertainty of complexity theory can be applied to financial markets. Written in an engaging and accessible style, this is a thoughtful, conceptual look at the way free markets are, by their nature, continually evolving complex systems. Expanding on previous explorations of chaos theory, Peters draws on real-life examples ranging from the Asian crisis to America's love of conspiracy to show that complexity and randomness are necessary for the free markets to operate in a competitive manner.

Editorial Reviews

Review

Peters combines a chaos/complex systems framework with the Austrian school of economic thought to explain our lack of market understanding. He develops a strong case that the most pressing problem for investors is not a matter of specific models but of determining how to assess risk in a complex and uncertain world. Peters draws important distinctions between risk, uncertainty, ignorance, vagueness, and ambiguity, and in doing so, shows how the subtle meanings of words can provide immense value in explaining the market environment. He also resurrects the Austrian school's emphasis on subjectivism and makes it come alive within finance. (Financial Analyst's Journal)

From the Inside Flap

Patterns in the Dark is that rare book that offers an entirely new perspective on an issue of ongoing concern to investors: the unpredictability of financial markets. In this groundbreaking work, leading investment strategist and authority on chaos theory Edgar
Peters makes accessible ways of understanding market behavior that--until now--were
known only to specialists. In a lucid and engaging style, Peters explains how processes
with a large number of independent agents, such as free markets, can spontaneously
organize themselves into a coherent system. He draws on the work of the Austrian school
of economics and complexity theory to show how free markets are by their nature
continually evolving complex systems that require uncertainty to operate successfully.
Using everyday examples, Peters shows how complex systems use uncertainty to adapt to
changes in their environment and to absorb unexpected shocks. As proof, he cites
instructive examples of how rash or heavy-handed attempts to eliminate uncertainty in
markets have invariably led to disaster. Patterns in the Dark draws on a broad range of
human knowledge and experience to clarify the behavior of a system that now operates on
a global, 24-hour, and thoroughly interconnected basis. Peters illuminates the complex
operation of the marketplace by including keen observations drawn from science,
mathematics, and artistic creation as well as economics. His models include the social
vision of the Austrian economists, Darwinian ideas of evolution, the laws of physics, and
the creative risks of the artist. His meditations on financial markets weigh the effects of
limitations vs. rules, risk vs. uncertainty, and order vs. chaos. As a guide to a world
marketplace that has become increasingly complex anti uncertain, Patterns in the Dark
offers the investor a rich source of insight, illumination, and wisdom. --This text refers to the Hardcover edition.

See all Editorial Reviews

Product Details

• Paperback: 240 pages
• Publisher: Wiley; 1 edition (January 2, 2001)
• Language: English
• ISBN-10: 0471399817
• ISBN-13: 978-0471399810
• Product Dimensions: 6 x 0.6 x 9 inches
• Shipping Weight: 12.5 ounces (View shipping rates and policies)
• Average Customer Review: 3.0 out of 5 stars  See all reviews (5 customer reviews)
• Amazon Best Sellers Rank: #1,738,425 in Books (See Top 100 in Books)

More About the Author

Edgar Peters is a Partner and Co-Director of Global Macro at First Quadrant, LLP in Pasadena, CA. He is involved in all aspects of product development: model building, risk measurement, risk allocation, and portfolio optimization. Prior to joining First Quadrant he spent 23 years with PanAgora Asset Management where he was over time an equity portfolio manager, Director of Tactical Asset Allocation, CIO of Macro Investments, and CIO. Prior to joining PanAgora, Ed was Investment Technology Manager at Interactive Data Corporation and an equity analyst/trader at Mutual Benefit Life. He has lectured extensively in the classroom as well as in conference settings. The author of numerous articles in investment journals, Ed is also the author of three books: Chaos and Order in the Capital Markets (Wiley, 1991, 1996), Fractal Market Analysis (Wiley, 1994), and Patterns in the Dark (Wiley, 1999). Ed holds an MBA from Rutgers University.

Customer Reviews

Most Helpful Customer Reviews

28 of 31 people found the following review helpful:

1.0 out of 5 stars The dumbing down of market chaos (0 stars), July 21, 1999

By A Customer

This review is from: Patterns in the Dark: Understanding Risk and Financial Crisis with Complexity Theory (Hardcover)

Peters' earlier work, "Fractal Market Analysis", is an excellent introduction to chaos theory applied to financial markets. It's truly one of the most useful finance books I've ever read.

I was therefore shocked and extremely disappointed to find "Patterns in the Dark" to be a collection of vague, banal observations about risk and uncertainty. On the few occasions when Peters attempts to make actual statements of fact, he's wrong as often as he's right (see below). It's almost inconceivable that this book was written by the same person. I can only conclude that Mr. Peters deliberately dumbed down this book in an attempt to reach a broader audience. Unfortunately, he went way too far. That a firm like Wiley would publish a book like this is disturbing.

If you don't mind 200 large-print pages of simplistic generalities, factual errors, anecdotes devoid of insight, and cartoons (no joke), this book is for you. But if you'd like to actually learn something about the nonlinear nature of markets, read Peters' excellent "Fractal Market Analysis".

Finally, for those interested in some details of the factual errors I mentioned above, I'll provide two glaring examples.

First, the author dredges up that old chestnut of probability, the "Monte Hall Dilemma". This is an often-quoted probability question that, while trivial once understood, is counter-intuitive and hence widely misunderstood. Peters gives the correct solution, but he states that the question "has caused a great deal of debate in statistical circles" and that there is "not universal agreement" on the answer, as if it were some great unsolved problem of mathematics. This is absolute hogwash. While it has caused much confusion among the general public and the press, to someone with a basic knowledge of probability, or to anyone willing to make the effort to really think about it, it's a very simple problem.

Second, and much more disturbing, is the author's assertion that "Darwin was essentially wrong", that "the basic premise of Darwinian evolution has deep flaws". This conclusion is based on his profound misunderstanding of Darwin's theory. Peters' argument is essentially as follows: the number of possible combinations of genes in even the most simple organism is astronomical, so to "search through these combinations to find the best one" would take "longer than the age of the known universe". Of course, as any high school biology student should know, Darwinian natural selection has absolutely nothing to do with the absurd notion of exhaustively "trying out" every possible organism that could conceivably exist. If the author is interested in understanding what Darwin actually theorized, and why nearly all biologists now think he was essentially right, I would refer him to Darwin's own "The Origin of Species", and to the excellent books by Richard Dawkins.

18 of 22 people found the following review helpful:

1.0 out of 5 stars Disappointing and superficial content, questionable analysis, July 24, 1999

By 

"j_p_dewhurst" - See all my reviews

This review is from: Patterns in the Dark: Understanding Risk and Financial Crisis with Complexity Theory (Hardcover)

I found the discussions of complexity and risk as applied to financial crisis to be superficial and somewhat platitudinous. There are no in depth discussions of the factors involved in any recent financial crisis. There are various discussions of risk, complexity, evolution and Keynesian vs. Austrian schools of economics but no real depth or new perspectives on any of these issues are presented. The discussion of the pros and cons of socialism(collectivism) vs. capitalism(free market) societies was not much more substantive than an article you might see in the Business Section of USA Today. A graph showing(arguing) that the US is higher in on the scale of economic "uncertainty" than China or Russia is highly suspect. One of the defining features and advantages of the US capitalistic system is the relative sanctity of private property and enforceable contracts which provide a foundation of "certainty" upon which vibrant commerce can be enabled. Such institutions are completely lacking in communist states which is one of the major reasons for their collapse. I have to question the scholarship behind the presentation of such a comparison. This book is not worth your time or money.

3 of 3 people found the following review helpful:

4.0 out of 5 stars i loved this chaos theory intoduction, April 4, 2007

By 

C. M. Butler (United States) - See all my reviews
(REAL NAME)   

This review is from: Complexity, Risk, and Financial Markets (Paperback)

I'm not a math gueek, evolutionist, or statistician. What I wanted was someone to expalain, in as simple terms as possible, what "complexity" is in terms of systems analysis - be that social, economic or otherwise. Kudos to Peters for delivering just that. I read the negative reviews written before my own, considered them, and then I bought the book anyway.

Frankly, I'm glad Peters "dumbed down" this topic for me. That's what I wanted. Not knowing much about the subject, I was still able to sense where some errors of omission were being made. And there are a few. I wish he would have finished his thought on the Monte Hall problem, for example. Don't buy this book if you are thinking it's full of exciting mathematical equations or advanced theory. It isn't. It's just an introduction to complex/chaotic systems written for the average Joe/Jane.

For all the flap over "missing Keynes' contribution" or "misrepresenting Darwin," he may very well do that. I did not buy this book expecting Peters to be a Keynes scholar or a Darwinian evolutionist. If he has read 0 Keynes and 0 Darwin, I think we can still consider him an expert on complex and chaotic systems. Certainly, Keynes and Darwin were not. I expected that Peters might know a little bit about chaos theory and complexity as it relates to the realm of economics. And that he does. So, again, kudos to Mr. Peters for dumbing down this complex topic (pun intended) enough to create a starting point for me.