Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets

CHAPTER 39Financial System Resonance and Complexity

The wonder of financial crises is how events can move straight from impossible to inevitable, without ever passing through improbable.¹

—ANATOLE KALETSKY

Dynamical systems are a refinement of our hunter instincts. We focus on motion, and dynamical systems capture motion. In the most general setting, it is a space X equipped with a geometric structure called a topology and a function μ mapping across transformations of X called a measure. When X is of manageable size—it is compact—we can normalize μ(X) = 1, making it equivalent to a probability. Often in practical applications, μ(X) is iterated to model the passage of time.

Take, for example, a system composed of a huge number of small particles ...