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Low-Complexity Versus High-ComplexityPortfolios

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Ontonix QCM Blog

Financial Chart, Markets Go Up

Complexity is a fundamental physical characteristic of every system that may be found in Nature. Its importance is similar to that of energy. The first comprehensive measure of complexity for generic systems has been developed in 2003. The functionality of a given system is proportional to its complexity. More complex systems are able to perform more functions, a characteristic which is evident in our evolving biosphere. However, high complexity implies also an increase of management effort and energy. When taken to extremes, excessive complexity becomes a formidable source of exposure. This is because excessively complex systems are inherently fragile and capable of delivering surprising behaviour.

Structure is represented by means of graphs (maps) such as the one illustrated below. There exist numerous means of representing graphs or maps. A modern approach is illustrated below.

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The intensities of the relationships between pairs of nodes are determined by computing the corresponding generalized…

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