Saturday, May 2, 2015

Jim Rickards Dallas Speech - Part II - A Passion for Complexity Theory

I was struck watching this speech in person at the almost missionary zeal Jim Rickards has for challenging the current paradigm in economic thinking. This is what sets Jim apart from many others to me. 

There are many voices out there warning about a coming crisis and imploring people to prepare for it. Some are clearly just merchants of fear looking to make money. Others are likely sincere, but don't necessarily have an academic foundation behind their predictions and warnings. An academic foundation is important to Jim Rickards and sets his work apart from most.


In his Dallas speech, Jim spent some time giving the background as to how his views have evolved over time. You realize when he talks about this that it took years for him to come to the position he holds today and that his direct involvement with situations where traditional models failed is what challenged him to explore new ideas. 

While most who listen to Jim Rickards will be interested in his predictions in order to use them to help make their own financial planning decisions, I think Jim sees this whole topic on a deeper level. He genuinely believes that the risk models used today by most economists and the key policy makers are in error and out dated. In this respect he kind of strikes me like the professor in his lab who has an exciting new theory he wants to test out in the real world. (Jim says early test results have been positive for him)

In his speech he used an example from cosmology. He noted that for a long time the brightest scientific minds believed that the earth was the center of the universe and everything else revolved around it. This viewed was held in esteem for a long time until someone challenged the paradigm and asked, what if the sun is the center of the solar system and the earth revolves around it instead? Of course, now we know the earlier model was wrong and the latter model is right.

In much the same way, Jim clearly believes that over time his new "complexity theory" of markets will replace the current equilibrium models based on the bell curve idea that extreme crisis events are so rare that you may never see one happen in your lifetime. A better model would produce better forecasts. Better forecasts mean improved end results.

When you see him talk about this, you can see it is important to him that his views be based on an academic foundation and not just idle speculation or the latest fad. Jim says he has been using this new complexity theory model now for several years and is convinced it is a superior model for making forecasts to the one now commonly used.

I think Jim sees this whole economic situation we find ourselves in today as a real world testing ground to see how his new theory holds up. If his predictions for the most part pan out, it will vindicate the underlying theory. A better model produces better forecasts.

Jim said he truly believes that 50 years from now the complexity theory applied to markets (see Part I for the 4 features of a complex system) will be the commonly accepted theory by most economists. While most of us just want to have some way to better prepare financially for whatever may be coming, it will also be interesting to see how this new theory holds up in the coming years. One thing we know from history is that new ideas are essential to progress. Jim has given us some new ideas we can watch play out in real time in the coming years.

Added note: After I wrote this blog article I saw where Jim has just written a new article on this Paradigm Shift he is waiting on. You can read his new article by clicking here. Here is a brief quote from this new article that refers to the cosmology example he used in his speech.

"What a small minority and I are doing is coming along saying, “no, the sun doesn’t revolve around the earth; the earth revolves around the sun.”
The best model for understanding capital markets is complexity theory, physics, phase transitions, network theory, graph theory and other applied mathematics that go along with those."
Additional added note: Thanks to a reader who sent me this link to an in depth Jim Rickards presentation on complexity theory for those interested.

Additional added note 5-5-15: Jim has now posted a link to his Glenn Beck TV interview he did while in Dallas. It has some of what he said in the speech, but is more apocalyptic in some respects than the speech was.


  1. So did he go into detail about his model? I assume it is a computer model, but it would be interesting to see its formulation. Just like derivatives, if it becomes too complex to easily understand, there may be consequences of its own when too much credence is placed on its predictions.

  2. Jim only had 30 minutes to speak so no details were given. The Q&A session focused on other topics. Jim had to speak at UT Dallas at a luncheon right after this speech so his time was very tight. You might email him a question on that. I am planning another article on complexity theory later (Can The 1% overpower complexity theory?).

  3. Someone tweeted this Youtube link for a more in depth discussion of complexity theory by Jim Rickards: