Research Proposal Stefan Michal Wasilewski: Upgrade Report 2009 Student No: 361429 Keywords: Chaos, Complexity Economics, Emergence, Network Theory, CyberFilter Organisational Cybernetics, and Longitudinal
Research Question The background prompting the question: If current governance structures and investment processes are failing to manage an increasing frequency of boom/bust cycles how can organisational cybernetics, complexity economics and modern network theory assist investors in making better informed decisions and the market more self-regulated? More importantly if time is a variable within different reference frames of organisation how does this change the predictability and therefore pricing of risk? Question: How can we create innovative discriminatory frameworks based on complexity economics and viability theory that will allow more informed choices to be made by redefining data according to a decision based reference frame?
Research Aims & Objectives Aims Objectives is to build a more robust framework within which investors can build sustainable investment strategies and regulators optimise the capital requirements within the financial industries. Such a framework will treat the Economy as an ecosystem (Rothschild 1990) • is to better enable the decision-making abilities of investors and regulators that are currently being hampered by an inability to differentiate the performance of disparate organisational structures and capital risk exposures. The former being important to discern which ‘management horse to back’ and the latter the yields expected over time.
Complexity Economics, System Theory & Eco-systems Why an economic eco-system? Reviewing the literature
Literature Review • General Background • Economics: From Smith to Beinhocker and beyond • The Capital Markets • Insurance • Equity/Debt Capital Markets • Systems Theory • Organisational Cybernetics • CyberFilter • Complexity & Chaos Theory • Summary • The Topic’s Development • Current State of Knowledge • Perceived Gaps Network Theory Systems approach Complexity Sciences Complex Adaptive Systems Cellular Automata Non-Linear Thermodynamics Chaos Theory Other agent based approaches Other names: Frederic Vester Strogatz & Watts W Brian Arthur Stephen Wolfram John Holland Figure 7: A model of different influences that have shaped contemporary systems approaches: : Managing Complexity: A Systems Approach – OpenLearning AC
MODEL-BASED MANAGEMENTA Simple Business ? The objective here is to outline the essentials of building a business and how they relate to the some of the concepts behind the Viable System Model. Model-based management refers to a definite plan and structure as opposed to ad hoc creation with essential components. Audit Planning Management Production Platform A more conventional VSM representation
Viable System Model Brain of the Firm (1972) Based upon the functional structure of the Human Nervous system What is a system? “a group of elements dynamically related in time according to some coherent pattern” & “with a purpose” (Beer; 1979; Heart of Enterprise p7) Law of Recursive Systems etc “in a recursive organisational structure, any viable system contains, and is contained in, a viable systems” & “three axioms of management” (Beer; 1979; Heart of Enterprise p565-567)
Measuring Performance Performance in the Viable System model was measured by the CyberFilter (Beer, Heart of the Enterprise, 1994), a triple index structure which when taken together could measure the state of the business both internally and externally. But not all systems are designed like the VSM. actuality: "What we are managing to do now, with existing resources, under existing constraints." capability: "This is what we could be doing (still right now) with existing resources, under existing constraints, if we really worked at it." potentiality: "This is what we ought to be doing by developing our resources and removing constraints, although still operating within the bounds of what is already known to be feasible." Beer adds "It would help a lot to fix these definitions clearly in the mind." System 4's job is essentially to realize potential. He then defines productivity: is the ratio of actuality and capability; latency: is the ratio of capability and potentiality; performance: is the ratio of actuality and potentiality, and also the product of latency and productivity.
Other viable systems The objective is to illustrate how a natural system can evolve from component parts and achieve a closed resilient form. In organisational life these would be the functional business components and people. Rainbow Arch, 2001 / aluminum & stainless steel / 7 x 12.6 x 2.6 feet, by Kenneth Snelson The components in the ‘Arch’ are the ground, bars and the connecting wires that take the stresses. It is their organisation that enable the structure.
Complex Networks Tensegrity and Team Syntegrity not only can model the dynamics within a system but also within recursive layers. Whilst TSI (Beyond Dispute, Beer, 1994) shows a way in which to interrogate the management of a business I believe it also offers (along with Tensegrity) a method to discern the ultimate stability of a network by categorising them based upon their degree of closed structure (Autopoietic Form) and communication dependencies within recursive structures. When reviewing Tensegrity structures it is hard for me not to see ‘black boxes’ (Beer, 1994) linked by communication chains. Closure therefore distributes the forces and manages variety whilst other structures are dependent upon one or several rigid anchors thereby restricting control and sustainability. (See Arch)
Analysing the Model Frederic Vester’s Sensitivity Model provides an algorithmic approach to analysing the components of a model, their structure and necessary performance parameters/boundaries. The process of investigation itself can use the Syntegrity approach that not only divines the information but also distributes the knowledge across a wider base. The tools to analyse the models are available but determining how they are coupled is this objective but what is ‘coupling’? Source: The Art of Interconnected Thinking: F Vester 2008
Axiomatic Financial Framework Different types of investors have differing strategic objects correlated to risk, return, and time horizons
Application to Research? They all impact the measurement of performance, more specifically the elements of predictability and time boundaries
Conceptual Framework & Methodology • Introduction • My View of ‘the Economy’ • My View of ‘the Capital Markets’ • My contribution to knowledge • How I will approach my research? • Longitudinal study of reinsurance and capital markets based upon experience • Research the dominant logic of management in this period • Structure an alternate framework to inform financial decisions • Verify managements opinion of new framework
Research Philosophy & Approach? Philosophy Approach source: Walliman, Your Research Project, 2005 Adapted from Southampton University Research site I see myself as a constructivist searching for a better meaning of time and prediction horizons within the nested social systems that create the economy
‘Is the process of data collection for generating theory whereby the analyst jointly collects, codes, and analyses his data and decides what data to collect next and where to find them, in order to develop his theory as it emerges. The process of data collection is controlled by the emerging theory, whether substantive or formal.’ Research Strategy Ethnographic, qualitative, approach using Glaser, Strauss and Corbin (Bryman & Bell; Glaser & Strauss 1967; Strauss & Corbin 1998) Grounded theory, theoretical sampling technique. The longitudinal study and organisational structures allow me to compare events with the hypothesis and the interviews triangulate both with the observations of managers at the time.
Research Methodology Emergent theory determines the hypothesis and boundaries
Hypothesis 2 Current Position Create Recursion Framework & Write Recursive Study Organisational & Regulatory Framework Longitudinal Recursive Study Interviews Informs New Organisational & Regulatory Framework Change? Yes No Yes No Change? Change? Ethnographic Theoretical Sampling Ethnographic Theoretical Sampling No Yes Deductive Process, & Consolidate Findings? Theoretical Saturation Point Collect Data, Interviews Analyse Data and Framework Write & Present Thesis Saturation? New Framework? Yes Informs New Organisational & Regulatory Framework Informs No Thesis Adapted from Bryman & Bell (2008), Glaser & Strauss (1967: p45)
Research Design • Philosophy • Method & Tools • Data collection • Data Analysis • Organisational Cybernetics • Correlation • Network Maps • Hierarchy Maps
Longitudinal Study: Compare • Lloyd’s of London • Background • How insurance fits into the Economy • The 1977 – 1989 debacle • Global market dynamics • Pricing methodology used • Regulatory framework • The actions of ‘a few’ • The outcomes of the debacle • Leverage Crisis 2007/9 • Background • The axioms of finance • Data & an assumption too far • The rise of structured finance • The impact of reinsurance structures on structure finance • Regulation or the lack thereof • The coupling of financial centers • The repeal of the Glass-Stiegel Act • Greed overcomes Discretion • A recursive framework for capital • Economics & Nature
Interviews • Insurance/Reinsurance • Senior managers views of organisation • Actuarial developments – a practitioners view • An underwriters view of pricing • Regulation development • Capital Markets/Regulators • Structure and development • Economic developments • Senior managers views of organisational structure • Trading and structured finance – measuring risk • Opinions of failure • Regulation: Opinions of regulators and practitioners
Business Rules & Ethos? • How is Risk Priced? • Personal Network and Management Structures? • Opinion of Global Structure and Operational Status • Explaining Management Acuity Interview Details The interview process is designed to discover not only whether the hypothesis has validity but also the existing communication structure. This will allow a comparison between existing models and the hypothesis and define a path for other researchers to investigate the structure. The following are the initial ideas but may change as information becomes available.
Final Result?: Analysing the Risks for Investors This is a ‘swim-lane’ diagram showing the resources and algorithm linking the actors/activities to arrive at a better understanding of the risks inherent in the system and for the client.
Next Year? • Write longitudinal comparative report • Interview Lloyd’s & FSA to extract the relative information from archives • Start Interviews • Start the analysis and testing of hypothesis Interviewees: • Global financial institution manager: Senior Director of Warren Buffet’s Berkshire Hathaway • Bank Treasurer: Ex-Treasurer of Barclays plc • Senior Capital Markets Trader: Director of Morgan Stanley Trading Division • Manager of an Equity Investment Fund: A venture capital investment fund owner • Information Resource: A research coordinator at the Economist • Global Rating Agency: Senior managers of Moody’s and Standard and Poors • Global Regulators: Bank of England, Financial Services Authority (FSA)