chapter
4 Pages

Epilogue

Financial Markets and the Law of Requisite Variety
WithErik Hollnagel, Gunilla Sundström

Economics has a history that is replete with examples of system descriptions and, in modern times, elaborate hypotheses about how financial markets work. The range of hypotheses and models goes from Adam Smith's 'invisible hand', over Bachelier's 'random walk' and Mandelbrot's fractals, to Fama's 'Efficient Market Hypothesis' and the contemporary system models à la econophysics. Models, in economy, finance and elsewhere, typically describe a system's components and how they are organised, that is, the structure. Resilience engineering, however, takes a slightly different stance. Models, in economy, finance and elsewhere, typically describe a system's components and how they are organised, that is, the structure. When the variety of the regulator cannot be increased, the Law of Requisite Variety actually suggests another solution, namely to reduce the variety of the process. One way of doing that is to impose more regulation, or more constraints, on the markets in the hope that this will make them more predictable.