Thursday, October 30, 2014

Complexity and reductionism in finance

The love of complexity without reductionism makes art. The love of complexity with reductionism, makes science.  - E.O. Wilson Consilience 

Wilson makes a beautiful observation about complexity and reductionism. The world is filled with complexities and seemingly little connection. Celebrating this complexity gives us the uniqueness found in any art. Looking at complexity and being able to find commonality is the process of science. Science is the process of taking unique cases and observations and generalizing to find patterns.

Finance and economics attempts to find the primal parts in market complexity and reduce it to as simple terms as possible. This process of reductionism is the essence of good modeling. A good model should not focus on complexity but look for ways to find commonality and reduce the moving parts to as few as possible.

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