Patterns in the Dark: Understanding Risk and Financial Crisis with Complexity Theory

by Edgar E. Peters

Patterns in the Dark is that rare book that offers an entirely new perspective on an issue of ongoing concern to the unpredictability of financial markets. In this groundbreaking work, leading investment strategist and authority on chaos theory, Edgar Peters makes accessible ways of understanding market behavior that-until now-were known only to specialists.

Patterns in the Dark draws on a broad range of human knowledge and experience to clarify the behavior of a system that now operates on a global, 24-hour, and thoroughly interconnected basis. Peters illuminates the complex operation of the marketplace by including keen observations drawn from science, mathematics, and artistic creation as well as economics. His models include the social visions of the Austrian economists, Darwinian ideas of evolution, the laws of physics, and the creative risks of the artist. His meditations on financial markets weigh the effects of limitations vs. rules, risks vs. uncertainty, and order vs. chaos.

As a guide to a world marketplace that has become increasingly complex and uncertain, Patterns in the Dark offers the investor a rich source of insight, illumination, and wisdom.

243 pages, Hardcover

First published April 15, 1999

Reviews

[Hana · Rating 2 out of 5]

Edgar E. Peters is a hedge fund manager, trained initially as a mathematician, who has done some serious theoretical work on applications of chaos theory and fractile analysis to financial markets.

Patterns in the Dark is his attempt to explain complex mathematics without any math. It doesn't work. Partly that's because you really do need to crack your head on some equations to understand this stuff, but also because Peters' grasp of other subjects (history, political science, economics) seems strangely shallow and even shaky at times. Peters was also writing in 1998-99 at the height of the tech boom and in the after-glow of the Soviet Union's demise; the tone of capitalist triumphalism in the last chapters gets a bit wearing.

Still, he makes some interesting points, particularly on the role that competition plays in assuring an adaptable market.

During a crisis...Monetary policy enhances the conditions necessary for economic stability without imposing a particular solution on the free market. This assumes that other rules are in place to promote competition as well. Unfortunately there seems to be a misconception that the long-term outcome of an unregulated market is more competition. History has shown otherwise. Unregulated economies lead to monopolies.

Peters stresses that that government regulation is needed to maintain a healthy level of competition, but, alas, he says nothing about the history and impact of antitrust regulation in the U.S. and other developed nations; nor does his breezy, numbers-free style give the reader any clue as to how much competition is enough.

Another provocative comment "Crisis and competition go hand in hand....uncertainty is a necessary component. [Without it] there would be a potential for "riskless" profit, which the system will not allow..." set me thinking about rigged stock options, golden parachutes, insider-packed corporate directorates and other popular methods the corporate elite use to eliminate personal risk.

Will this suppression of marketplace risk leave capitalism more vulnerable to exogenous shocks, as Peters suggests? Clearly the answer is yes. Further, in yet another subversion, corporate risk has been repeatedly transferred to taxpayers around the world, weakening not just capitalism itself, but also nation states.

It was worth reading the book to find myself thinking about recent trends from a slightly new angle, but I'll have to go elsewhere for a more rigorous analysis.