Episode 123 Complexity Theory and Systemic Risk in Financial Markets

Episode 123

Complexity Theory and Systemic Risk in Financial Markets

An interview with Francesco Filia

April 4, 2019

In this episode, Angie talked with Francesco Filia, CEO of Fasanara Capital, an unconventional asset management company which focuses on niche investment strategies and researches systemic risk. Filia shared his perspective on the way financial markets are conventionally analyzed. He also described financial markets as ecosystems and continued to bring many different insights from complexity into the conversation, including how feedback loops in markets can create instability and lead to tipping points.

 Show Notes

Quotes from this episode:

“The conventional analysis that is typically performed on financial markets in my opinion is quite outdated. It is still the same that we have seen in the last several decades. It has not evolved and could learn so much from nearby fields such as complexity theory.” — Francesco Filia

“The human brain, especially when it comes to financial markets, is used to linear causality, so it’s used to thinking in terms of cause and effect. So they are used to seeing the financial crisis and look out for triggers or specific motives that lead to that financial crisis. Complexity theory to me is a number of teachings and tools that can help you hack your brain to see things more nonlinearly and to see things as a system and not as the sum of its elements.” — Francesco Filia

“You can learn from complexity theory the importance of feedback loops, which is an important part of the ecosystem and financial system that can create diversions from equilibrium. They can create financial instability.” — Francesco Filia

“Through the lens of complexity theory, if the system cannot expand any further than probably it has hit a tipping point. And if the system cannot expand any further, it will act weirdly. It will start to behave very strangely. It will do weird things, such as going into a tailspin and potentially into trouble. Tipping point analysis tells you ‘This is it, the system has become inherently fragile and vulnerable’. It is at that point where a small preservation can create a large adjustment in that transition. It is at that point where it has lost the capacity/ability to reassert itself to a neutral state after a preservation.” — Francesco Filia

“At Fasanara we spend a lot of time building system-level resilience indicators so these quantitative indicators can shed some light on where you stand in the cycle, where you stand in terms of your proximity to a potential cliff. And they [the indicators] should lead people to change things in a way which is more respectful of systems theory and the teachings you can get from nearby fields and disciplines.” — Francesco Filia