Want to manage complexity? Embrace it

From parts to whole

The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic” – Peter Drucker

I would like to rephrase Peter Drucker’s quote as follows: ‘the greatest danger of growing complexity is not the complexity; it is to act with yesterday’s simplifications’. We are trained to think in a linear fashion – a complex problem gets broken down into its component parts employing a piece-by-piece problem-solving approach.

This approach has great benefits but also many limitations. It’s linear and mechanical – ie it addresses a problem through simple sequences of cause and effect; it’s atomistic or reductionist – ie it treats different components as independent when they may not be; it’s often hierarchical – which may lead to biases in structures, or sequences; it’s arrogant – ie it presumptively imposes narrow boundaries (to isolate components).

Boundaries will be our point of departure from the simplistic logic I’ve just described. System boundaries aren’t real; they don’t exist. They are subjective constructs imposed by humans. By extension, we could argue that systems themselves do not exist. They are a carve-out of a continuous reality.

This is very important. In numerous recent internal discussions we have asked, ‘where do we want to draw the boundaries?’ To move away from reductionism, we argue it is wise to widen the scope, adopting the most expansive possible boundaries. We make it into the realm of systems thinking – a major focus for the Institute today.

Systems thinking respects complexity and makes it more approachable by adopting a broader perspective rather than simplifying it. It facilitates the understanding of complex systems by recognising that several parts are not isolated, but closely interlinked, forming a complex structure.

As Peter Senge put it in the 1990s, this type of thinking encourages a view of the whole, focusing on interdependencies rather than static ‘snapshots’[1]. Climate change, biodiversity loss, inequality are all examples of what Senge terms ‘systemic breakdowns’ – problems with no simple local cause. He then argues that systems thinking is crucial for managing the increasing complexity we face today.

At the beginning of the new millennium, he observed that “the unhealthiness of the world today is in direct proportion to our inability to see it as a whole”[2]. Around the same time, Anarow et al. suggested that “sustainability cannot be achieved in the absence of whole systems thinking”[3].

So let’s be clear here – systems thinking is of vital importance and great power.

In the remainder of this piece, however, I will argue that this is not enough. Systems thinking is a milestone in the process of acquiring a better grasp of complexity, but it is still just a model. Put simply, regardless of how wide we draw system boundaries, it remains a way of simplifying the complexity of the whole[4].

Having gained greater power by moving beyond the consideration of single components to focus on the bigger system, we now fall back again on a partial, simplified vision of the whole. And simplifying complexity often leads to ignoring complexity.

From whole to parts

I consider it as impossible to know the parts without knowing the whole as to know the whole without knowing the individual parts” – Blaise Pascal

This quote is interesting as it invites us to consider whether we should get to the whole through the parts or to the parts through the whole. My answer is both.

In the previous section, I made the case that systems thinking was superior to reductionism. In allowing the components within our boundary to interact we gain better insight into reality than we had from simple chains of cause and effect. The problem is the boundary. We have made our definition of the system static. One answer is dynamic systems thinking, where we shrink the boundary to exclude parts and reconsider. And then expand the boundary to include different parts, and reconsider. And then zoom out, so our system becomes a part of a bigger system. And zoom in, to find a sub-system within our original system. This is undoubtedly hard work, but is a path towards understanding reality. By embracing its complexity.

Practical application to investment – the case of fiduciary duty revision

Think of investors (institutional players in this context) as parts of a system and think of broader society or the planet as the whole. Yes, I know I am drawing boundaries here, but wait for it as they will soon disappear…

With reference to my colleague’s recent piece on fiduciary duty[5], I certainly agree that financial and non-financial interests are not strictly binary. They may conflict, yet they are not mutually exclusive.

Instinctively we are likely to seek the right balance between financial and non-financial. While this embraces the relationship between the two, I say it is not enough because it doesn’t embrace the inherent complexity. The equilibrium is only apparent.

What I propose is viewing fiduciary duty more dynamically as an emergent quality resulting from the interactions and organisation between parts (investors) and the whole (the system). An emergent quality is a characteristic or feature that appears when individual parts come together but isn’t present in any single part alone. For example, institutional investors may not have any non-financial interests, but these interests emerge when the investors come together. We can call these emerged non-financial interests ‘externalities’, or ‘sustainability’ or ‘investing in a world worth living in’.

To reinforce this idea, consider a similar example from biology that blew my mind: ‘Not a single one of the cells that compose you knows who you are, or cares’ (Daniel C. Dennett). Let’s say that the purpose of the human body is to survive, but not a single one of our cells is aware of that, nor do we have any conscious control over them. But somehow, they all work hard for that same system purpose.

This is where I think any revision of fiduciary duty will always fall short and therefore remain unsolved if a more organic model of thought is not employed – it ultimately is a fallacy of composition.

The new dynamic model proposed in this piece suggests that better management of complexity – which will always be partial – comes from better understanding which, in turn, comes from fully embracing complexity.

[1] Senge, P. (1990) The Fifth Discipline: The Art and Practice of the Learning Organization. Random House, London, p.68

[2] Ibid

[3] Anarow, B., C. Greener, V. Gupta, M. Kinsley, J. Henderson, C. Page, and K. Parrot. 2003. Whole-systems framework for sustainable consumption and production. Report for Danish Ministry of the Environment, Denmark 807: 1–51.

[4] For a comprehensive philosophical discussion Edgar Morin has been of tremendous help: Morin, E. (1992), From the Concept of System to the Paradigm of Complexity, in: Journal of Social and Evolutionary Systems 15 (4: 371-385)

[5] https://www.ipe.com/comment/striking-the-right-balance-on-pension-funds-and-fiduciary-duty/10072953.article