Next time you encounter a calm pond or lake with a nice, smooth surface, pick up a rock and toss it into the water. The result will be very predictable: concentric rings will expand out from where the mass disrupts the calm surface.

This is how models depict the economy.

Once the surface settles down, repeat the exercise. Only this time, have 10 of your friends grab big scoops of rocks of various sizes, from pebbles to boulders, and randomly throw them into the water over minutes, hours, and days.

This is how the economy actually behaves.

Each stone’s effect creates waves, which then interact with other waves and ripples until the complexity reaches a point where you cannot tell where each wave came from or where it is going. Boulders can disrupt the system, and smaller rocks get subsumed by what appears to be random motion.

I think about

Keep reading this article on Barry Ritholtz - The Big Picture.

Leave a Reply