Unsupervised markets always crash.That is not a particularly shocking observation to my mind. The implication might be that supervised markets don't crash. My thought is that they just take longer to get to a point of criticality. Complex systems tend to exhibit a behavior called self-organized criticality.
Ming the Mechanic offers this:
We might over-simplify things for our purposes and say that there are three kinds of states of a system:Technically, the region between equilibrium(very simple order) and chaos is called complexity and a point just before a major change is called critical, otherwise not a bad take.
If you poke at a system that is in equilibrium, nothing much happens. Or, if something happens to it, it would tend to go back to the same state as before.
If you poke at a system that is in chaos, something random will happen. If you poke at a system that's bordering on chaos, obviously something very random and chaotic might happen.
If you poke at a system that is complex, in particular one that is self-organized criticality, something is likely to happen. Probably something small, but maybe something big.
Despite that we've talked about avalanches and earthquakes, it should be stressed that the critical state is not chaos. It is not just some random catastrophe. It is ordered, although not in a way that's very transparent to us humans.
The critical state is also robust. It is always on the edge, but the edge is stable, although changing.
That might be hard to wrap one's mind around. Think about a wave in the ocean. It is neither in equilibrium nor is it chaotic. It is critical. It is the edge. There are small waves and big waves. They're all connected. If you watch a particular wave, it is moving, but it remains coherent as a wave, at least until it eventually crashes on the beach. If you're a surfer, you can catch a good wave and ride on it. When you're done with it, you can catch another. Waves are not random, they don't just come out of nowhere. You might not understand exactly how a wave came about, but you can learn to have a sense of whether one is coming, and you can catch it.
Social networks seem to self-organize towards criticality. They follow power laws. There are many small events and few big events. All sorts of frequencies are mixed together. There's a relatively pleasing pink noise. The network dynamically self-organizes itself into the most efficient state it could, without anybody being in charge. Many relationships have formed. The many actions of many individuals have woven a web of complexity. The network has over time become wound up in many ways.
So, in a complex social network, if you do something, something might happen. Something is more likely to happen than if all connections were random, or if it was neatly ordered in some very balanced way. Mostly small things happen, but there's an opportunity for big things to happen. You drop a message to somebody else, and if it is the right kind of message at the right time, the network is ready to allow a chain reaction to happen. Millions of people might be talking about it tomorrow. No guarantees, but the network is ready for you.
We ought to understand all of this better, of course. It seems to be a human tendency to try to fight against it. Central banks try to keep the economy in a perpetual equilibrium. Industrialized farming tries to grow just the crops we think we want, and nothing else. We try to organize things so that nothing bad ever happens. But we might at the same time be sabotaging the mechanisms that allow great things to happen.
We might need to learn to surf on the edge of the wave of complex change, rather than seek in vain the safety between the waves.
Per Bak gives us this
There are reasons to suggest that socio-economic systems might organise themselves into a critical state with avalanches of change at all sizes via which dissipation mostly works itself out. This is a proposition to be tested but already statistical data like that found by Mandelbrot, Moss and Lux suggest that some variables change via avalanches of all sizes and that the power law distribution describes behaviour for some of these variables. Avalanches may serve, for instance, as a means of dissipation for the internal forces in markets.A socio-economic system might become catastrophically unstable if the system were manipulated and forced to attain a certain optimal state interfering with its natural dissipation process. This has been observed in centrally controlled economies like that in Russia. However, it does not mean that any external control or influence generates this kind of 'negative' consequence. If an economy were a critically self-organised system, it might be controlled in such a way as to take advantages of its SOC properties. For example, it might be the case that in a weak economy (highly dependent on foreign markets), such as those in developing countries, some controls to protect the country from variations in the markets would help in changing towards or remaining on a 'good' development path. Better understanding of the dynamics of self-organised systems might allow to enhance those factors that minimise the number of large avalanches by channelling system dissipation through more frequent avalanches of small size.
FYI, Mandelbrot on finance , more and a good interview plus John Tierney gives mention.
We are quite likely dealing with an evolved system of fractal dimension in financial markets, the economy and the broader society. If so, rules, regulations and institutions oriented towards resilience and adaptation might serve better than those focused so intently just upon stability and they will need changes to keep up with an evolving world.