I read the book of Nicholas Taleb 'The black swan', and I was thinking of stability.
There are 3 types of systems: with negative feed-back, open loop and with positive feed-back.
A system with negative feed-back it is the regulation of blood sugar. If the glucose concentration in blood exceeds a certain threshold, then the pancreas produces insulin and glucose level decreases.
If the glucose level decreases then glucagon hormone it is produced, and glucose level rises.
A negative feedback system tries to cancel the perturbations.
If the person have diabetes the regulation it is not possible and the disturbances like eating sugar, are not cancelled. In this case the system it is in open loop.
The system with positive feedback are not natural because they are unstable.
For example a nuclear fusion it is a positive feed back system: 4 neutron from fission of a nuclei trigger fission of another 4 nuclei, which produce 16 neutrons, which trigger fission of another 16, and so on, till the whole uranium is consumed.
Another system with positive feedback loop it is the stock exchange: some wise guys are buying some shares.The price of shares rise, others are noticing the rise and they are buying increasing the price. The price increase attracts other buyers till the buyers pool is exhausted and the share crashes.
The most dangerous positive feedback system it is the arms race. Russians are scared that USA will dominate them military, and boost the armament spending, USA feels threatened by this and boost also its military spending, which triggers another increase in Russia's arms spending. Till one cannot keep the pace of arms race it is scared that will lose and attacks first.
I think that t the open loop and positive feedback systems are producing the black swans.Their behaviour is similar to black swan appearance.
Nicolas Taleb says that are 2 regions Mediocristan and Extremistan.
In Mediocristan everything it is averaged, for example the weight of the population or the number of the patients treated by a doctor. In Mediocristan the systems are with negative feedback or in worst case open loop.
A man with 1000 kg it is not able to survive because the cardiovascular system doesn't allow it. So the cardiovascular system it is negative feed back system which limits the weight of a person.
In Extremistan we don't have such limits, the are few limits for the personal fortune, or for the number of readers for a book. A rich man will be richer, till he makes some bad decisions and losses his fortune.
In Extremistan we have positive feedback loops. Some loops are positive some are negative.
If you are in a positive feedback system expect to a black swan.
How we can stabilise the positive feedback system to prevent black swans?
We can search answers from nature, or we can look how people have dealt with positive feedback loops, after all we use nuclear power, and we have avoided some nuclear wars.
In nature the main positive feedback loop it is population growth, and for this nature has predators. You have a population that grows exponentially develop a population of predators that grows also exponentially.
Every predator uses it's own information and decision to control the target population.
The control is decentralized.
Engineers have found solution to control the fission chain reactions, using pumps to pump water for cooling reactors, for using graphite rods to absorb the neutrons. The positive feedback system was embedded in a negative feedback system.
In this case they used information from the process and energy from outside to control the variables of the process.
The nuclear war was prevented because it was mutual destruction assured , or there were negotiations who calmed things, or war effort was too much for economy, and the leaders of URSS and USA had to begin disarmament talks.
What we have here is negative feedback (mutual destruction,economy) and sharing of information. Information came from outside of the systems (via espionage,diplomacy) or from the inside (economic performance) but control it is within the system. URSS had better control but lower inside information.
Why we cannot stabilize the economy and prevent crashes?
The market is made of actors that don't share information because it is not in their interest.
The market it is not controlled by an outside force (this is against the principle of market economy) to stabilise it and all the actors have a limited impact.
Similar to elections the feed back comes late, and it is paid by others (see the bailout of banks in US). The difference is that in elections you see the big picture: after 4 years you want to have prosperity, or you don't want a certain politician in office,so you are deciding on the long run.
In market you are interested only in you,and the yearly balance sheet and you don't see the big picture.
For example the tobacco companies who now fight hard against electronic cigarettes: they thought only to their interest,only to their balance sheet, they didn't thought to their consumers, that they must provide them a healthier way to smoke.
There are 3 types of systems: with negative feed-back, open loop and with positive feed-back.
A system with negative feed-back it is the regulation of blood sugar. If the glucose concentration in blood exceeds a certain threshold, then the pancreas produces insulin and glucose level decreases.
If the glucose level decreases then glucagon hormone it is produced, and glucose level rises.
A negative feedback system tries to cancel the perturbations.
If the person have diabetes the regulation it is not possible and the disturbances like eating sugar, are not cancelled. In this case the system it is in open loop.
The system with positive feedback are not natural because they are unstable.
For example a nuclear fusion it is a positive feed back system: 4 neutron from fission of a nuclei trigger fission of another 4 nuclei, which produce 16 neutrons, which trigger fission of another 16, and so on, till the whole uranium is consumed.
Another system with positive feedback loop it is the stock exchange: some wise guys are buying some shares.The price of shares rise, others are noticing the rise and they are buying increasing the price. The price increase attracts other buyers till the buyers pool is exhausted and the share crashes.
The most dangerous positive feedback system it is the arms race. Russians are scared that USA will dominate them military, and boost the armament spending, USA feels threatened by this and boost also its military spending, which triggers another increase in Russia's arms spending. Till one cannot keep the pace of arms race it is scared that will lose and attacks first.
I think that t the open loop and positive feedback systems are producing the black swans.Their behaviour is similar to black swan appearance.
Nicolas Taleb says that are 2 regions Mediocristan and Extremistan.
In Mediocristan everything it is averaged, for example the weight of the population or the number of the patients treated by a doctor. In Mediocristan the systems are with negative feedback or in worst case open loop.
A man with 1000 kg it is not able to survive because the cardiovascular system doesn't allow it. So the cardiovascular system it is negative feed back system which limits the weight of a person.
In Extremistan we don't have such limits, the are few limits for the personal fortune, or for the number of readers for a book. A rich man will be richer, till he makes some bad decisions and losses his fortune.
In Extremistan we have positive feedback loops. Some loops are positive some are negative.
If you are in a positive feedback system expect to a black swan.
How we can stabilise the positive feedback system to prevent black swans?
We can search answers from nature, or we can look how people have dealt with positive feedback loops, after all we use nuclear power, and we have avoided some nuclear wars.
In nature the main positive feedback loop it is population growth, and for this nature has predators. You have a population that grows exponentially develop a population of predators that grows also exponentially.
Every predator uses it's own information and decision to control the target population.
The control is decentralized.
Engineers have found solution to control the fission chain reactions, using pumps to pump water for cooling reactors, for using graphite rods to absorb the neutrons. The positive feedback system was embedded in a negative feedback system.
In this case they used information from the process and energy from outside to control the variables of the process.
The nuclear war was prevented because it was mutual destruction assured , or there were negotiations who calmed things, or war effort was too much for economy, and the leaders of URSS and USA had to begin disarmament talks.
What we have here is negative feedback (mutual destruction,economy) and sharing of information. Information came from outside of the systems (via espionage,diplomacy) or from the inside (economic performance) but control it is within the system. URSS had better control but lower inside information.
Why we cannot stabilize the economy and prevent crashes?
The market is made of actors that don't share information because it is not in their interest.
The market it is not controlled by an outside force (this is against the principle of market economy) to stabilise it and all the actors have a limited impact.
Similar to elections the feed back comes late, and it is paid by others (see the bailout of banks in US). The difference is that in elections you see the big picture: after 4 years you want to have prosperity, or you don't want a certain politician in office,so you are deciding on the long run.
In market you are interested only in you,and the yearly balance sheet and you don't see the big picture.
For example the tobacco companies who now fight hard against electronic cigarettes: they thought only to their interest,only to their balance sheet, they didn't thought to their consumers, that they must provide them a healthier way to smoke.
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