The Mathematics and Physics within Organizational Landscapes and Finance

Posted on August 21, 2017
Nilza I. Cruz Ruiz

939-644-7683


"Physics cannot predict the madness of men..."
Albert Einstein

I began thinking about studying Pure Mathematics in college at about the age of fourteen (14). First, I was passionate about numbers and what was behind them. Second, for as long as I can remember, I've always been inquisitive not only about understanding what I was reading or studying, but about "seeing" and giving life to each subject. That is, making the transfer from pure abstraction to physical matter.

I would "draw" my interpretations on paper as I could picture them. 

Interpretations of different subjects, most math related. But the most fascinating parts were interconnecting subjects that logically, or not, led to the other. And the most exciting part was relating topics I suddenly noticed made sense, but they were not all  within the "mathematical world".  As a child,I would observe and stare at objects at school, at different houses, in the street, and  save a "picture" in my memory. After, for days and sometimes months, 

these observed "things" (even with motion!) would  arise in my imagination. There was a deep sense of understanding what numbers were, what was behind them,why they existed, and how can they help the world be better. Even going to the beach, playing with the sand, observing my hand through the water would ignite many questions! At a very young age, there was  very much disposition to openness; that is creativeness, if you will.

And what a fascinating base to begin with in College! Little did I know at that point in time what a spectacular journey it would turn out to be, especially when later combining the field of Pure Mathematics with Statistics, Insurance, Risk Management, Physics, Business Administration, Marketing, Finance and Complexity Science (Fractals, Agent Based Modeling, Chaos). Learning is a lifelong experience.

I. Context

I've read much and have been directly exposed in my different work and study experiences of how ideas and concepts arising from math and physics have been used to understand the financial markets, for example. As we discussed last week, from the perspective of organizational landscapes, models can be built using tools as Agent Based Modeling which heavily rely on mathematics and computer science to simulate the interrelations between its (the organizations) agents/stakeholders and their environments. This, in order to research the existing organizational behavior, and the emergence of defined phenomena; for example, economic behavior.

But science isn't a body of knowledge. It's a way of thinking and learning about the world.It's a continuous process of discovery, testing, and revision. Learning about the would is equivalent to learning about moving targets, so models or simulations we would use as tools need to incorporate ongoing dynamics.Models used to predict financial sustainability or asses existing organizational structures are just models! They depend on assumptions and we should never mistake a good model for the "truth" of what the "Real World" (e.g.; financial sustainability, organizational structure, etc.) really represents.

Ilustration of Agent Based Model created to Simulate Emergency Room Patient Flow

If we think about the 2008 fall in the US, the financial meltdown, previously, there had been many ideas from mathematics and physics that had been used to understand financial markets, and there was a strong connection between the fields. It seems that no matter the level of influences within the fields, it was impossible to do science on Wall Street. But this is nothing new! When we think about Puerto Rico' s Government Fiscal and Economic Standing and Politics, can the fiscal/economic measures that need to be enforced be deployed within a Political environment? 

II. The Mathematics and Physics within Organizational Landscapes

The problem in the financial markets, as we all know is predicting the unpredictable. It is easy to make money when markets are rising. But predicting the "unpredictable" has been an excellent business for some, precisely because a market crash is a dramatic profit opportunity, if and only if you see it coming.

Organizational landscapes are no different than financial markets. They are composed of stakeholders, rules and regulations, norms, internal politics, governance, and operational structures. But let's reiterate the fact that a great portion of the stakeholders represent human capital, which make organization's behave as Complex Adaptive Systems in which the sociological and psychological components are critical. The Organization is a "Living Bubble" which possesses an Internal Stability within its State, which may be exposed 

to a change in Stability (i.e.; Instability, caused by different factors)  making it (the organization) Susceptible  to explode. The organization's state need to be unstabilized in order for the external cause to hold. Hence, if the bubble the organization is within bursts, it is not directly associated with one or various causes. In order for the external causes to trigger, there needs to be a change in state or instability within the bubble.

The bursting of an organization is one of a variety of a phenomena known as ruptures.  When organizations are put under significant amount of stress, small fractures begin to appear. Sometimes these fractures grow and combine into larger fractures. These larger fractures may grow into still-larger fractures, and so on, until you may get a very large fracture. These fractures follow patterns that are known as fractals, where the tiniest fractures are self-similar to the larger ones; scales only varying. The difficulty is that tiny fractures may not affect the stability and state of the system, but large ones can be catastrophic.

Sometimes, the different components within the system (organization, in this case) begin to Conspire against one another. They display a king of herding effect. When this occurs, it's almost as if the components within the system have unionized. A kick in one part of the system can significantly make it's state unstable and sensitive to certain causes of disruption. This kind of Conspiracy is sometimes referred to as Self-Organization.

For example, this is how a small labor strike differs from a catastrophic one. All strikes are caused by the same categories of sparks: unfair termination, cut wages, etc. A large strike is like a small strike that, for whatever reason didn't stop! The difference is that the biggest strikes require something more than just a spark: they require labor movement with a high degree of structure and a capacity of coordinated action.

They require a mechanism of system-wide feedback and amplification, something to transform an otherwise small event into a large event. This said, if you want to predict a major strike, forget about the grievances. Look for the Unions, the patterns of organization! This is exactly what we're after, when conducting research and constructing models to predict catastrophic events as earthquakes and hurricanes.

III. Mathematics, Physics, and Economics

I really couldn't answer the question regarding changing the sociology of the math, physics or economics departments. But what I can say is that there should be more focus at the highest levels of the government, institutional and the private sector pertaining to major interdisciplinary research initiatives. Commitment at the highest levels could hold the community together and keep it on track.

One of the most prominent arguments against mathematical modeling in finance might be thought of as an argument from psychology and human behavior. The idea is that ideas from physics are doomed to fail in finance because they treat markets as pulleys. As Newton said, physics cannot predict the madness of men. But men are part of the system, and so this reason , they too should be part of the solution.

Modeling represents one component of the macro system, and as we mentioned before, they rely on assumptions which are correlated with dynamic occurrences. States of systems can be measured with numerical standards, but changes in state are caused by influx and outflux flows. Considering that the emerging phenomena related to complex systems need not only be evaluated by their states or changes in states, agent/environment interactions should be interrelated with changes of states under different conditions.

This kind of criticism draws on ideas from a field known as behavioral economics. But using math or physics

 as a springboard for new ideas in finance does not include describing people as theorems or pendulums.

Physicists like Mandelbrot and Osborne, made progress in understanding markets by drawing on their familiarity with statistics to identify new ways of thinking about market and risk. Others, like Farmer and Packard, used their expertise at extracting information to identify local patterns that could be useful for trading.

We need to be more open to creativity in a holistic way connecting the fields of mathematics, physics, economics, social sciences, psychology and anthropology. Among the major personality traits, it is openness that best predicts performance on divergent thinking tasks. Openness also predicts real world creative achievements, as well as engagement in everyday creative pursuits. The curiosity many of us always have to examine things from all angles may lead others in high openness to "see" more than the average person, or to discover "complex possibilities laying dominant in so called "familiar" environments".

Change of mind, openness, new thinking opportunities begin at our homes. How we teach our children. How we lead them to see. The environment we create for them to think creatively. Schools. their structures, And Universities, their holistic, or not, approaches. It's just the beginning....

Familiar?

Next week we'll continue our discussion on Science, Research, and Real World Experiences