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Michael Mauboussin describes the first of the three elements of “complexity” in this way: “the system consists of a number of heterogeneous agents, and each of those agents makes decisions about how to behave. The most important dimension here is that those decisions will evolve over time.” These heterogeneous agents might be ants, investors, businesses,  genes or neurons. Mauboussin makes a key point here for investors and business people about the significance of this element: “markets tend to be efficient when the agents operate in a truly heterogeneous fashion and the aggregation mechanism is working smoothly. Diversity is essential, both in nature and in markets, and the system has to be able to take advantage of that diversity.” When diversity breaks down, as was the case during the internet bubble or the lead up to the 2007 financial crisis, markets can get very inefficient. Collections of intelligent and diverse heterogeneous agents are capable of forming self-organizing, learning, adaptive collectives that can exhibit the “wisdom of crowds.”  The method that some people have pursued to study the interaction of heterogeneous agents is known as agent-based modeling.

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