Complexity Economics - Implications for Investors

The vast majority of investors make trading decisions based on their belief of how the economy will behave in the future. Changes in economic conditions have a significant impact on the price of financial instruments and those who believe conditions are likely to improve will buy (go long), while those who believe that conditions will deteriorate will sell (go short). However, while so many individuals make their investment decisions based on economic predictions derived either by themselves, or others, the fact of the matter is that most of these predictions turn out to be wrong. While there are certainly times when an individual will make a correct call relating to a specific time or part of the economy, to find an individual who consistently makes correct and timely predictions is extremely difficult, if not impossible. The majority of the predictions, or maybe a better word would be guesses, and especially those voiced through the mainstream media outlets are typically based on traditional economic theory and analysis models. However, a relatively new way of viewing the economy, known as complexity economics differs strongly from the views held by traditional economists and may help reveal why predictions based on traditional theory are so often incorrect, and as such also has significant implications for investors utilizing these methods.