purpose of this article is to review some of the highlights of
systems thinking. My
focus will be on practical applications and rules of thumb, rather
than trying to develop a scholarly article, which would only be of
interest to … well, scholars! I will make every effort to do you
no intellectual harm, and leave you with an appreciation for what
systems and systems thinking are all about.
background in systems management dates to 1991 when I began my
graduate studies in the University of Southern California’s
Systems Management Program, which had developed in the 60s as a way
to respond to the difficulties in managing large manufacturing
programs, which required managers and engineers from many different
disciplines to coordinate their efforts to create complex weapons
systems like the Polaris class submarine and B-1 bomber.
These projects were so complex that no one discipline knew
how to go about building one, nor how to man a diverse project team
encompassing and managing finance, weapons, propulsion, safety,
automation, materials, electronics, and human factors.
Computers only seemed to complicate matters.
No one knew how to get the projects done on time and under
budget, or how to handle the myriad of changes and learning moments
that inevitably arose in a long-complex project.
turned out that the senior leader’s background had an undue
influence on the outcome of the project, with weapons engineers
building big guns with little-to-no living space for the crew, while
an accountant would bring the project in under budget but without
the capabilities sought in the original specification.
this problem, USC and the government developed a program that taught
managers the skills to act as the middlemen between disparate work
groups. These managers looked to develop optimal end-products by
integrating the efforts of the different disciplines. The program
quickly adapted much of the knowledge about systems that was
simultaneously emerging from the natural sciences, anthropology and
thinking as an approach to problem solving manifests in many
different fields these days. Hard
systems include mechanical and automation systems that are often
modeled in simulations to examine complex interactions and the
dynamics of change. Soft
systems include complex social organizations and can include many
qualitative components that are not easily modeled with cause and
effect rules and linear relationships. Evolutionary systems are
thought of as complex open systems that have the capacity of
learning, adapting and changing over time in response to
interactions with and feedback from other systems and the
general, systems are usually defined as a complex and dynamic whole,
which acts as an organized entity for a purpose, and which needs all
of its elements to function.
of the domain, there seem to be general considerations and
implications from systems thinking with broad applicability. Here
are a few:
Systems are more than the sum of their parts, and include the
relationships and interactions that are possible, which can combine
in many unforeseen ways to produce surprising results.
Complex behaviors and outcomes will often emerge from the
interactions of a few simple elements and processes in ways that are
Systems thinking almost always incorporates the building of a model
or a description of the system under study, during which
opportunities for learning, insight and communication emerge to the
amazement of participants who come from different points of view. In
fact, this learning moment can be the paradigm shift that enables
breakthrough thinking with lasting consequences.
best modeling efforts seem to be iterative, interactive, and
integrative. The group spirals around the issue or the system in
multiple loops, coming back to add details and insights that emerged
in the group’s travels around the systems boundaries and through
its depths. There is learning and feedback between participants and
the model. which we learn as we go. Finally,
points of view are incorporated
useful model for systems building treats the system as a collection
of inputs-processes-outputs that co-exist for a purpose and in an
environment that has both direct and indirect effects on the system
and which will provide feedback in different ways to the systems
system can be a seen as a sub-system of a larger system, and is itself
composed of smaller systems. For this reason, it is usually
important to specify scope and time constraints as boundaries lest
the effort never get out of the definition phase!
Feedback loops and mechanisms turn out to be crucial to
understanding processes of adaption and growth and for understanding
the phenomenon of 2nd and 3rd order effects.
Friction, timelags, resistance and non-linear relationships are
generally found in all complex systems, which helps to explain and
understand situations where simple cause and effect rules don’t
seem to work well.
practical terms, in my roles as a trader, an educator, a manager and
leader of large organizations, or as a member of a work team, I have
seen the systems thinking approach provide a way to get started with
the process of understanding, visualizing, describing and directing
efforts to achieve our goals in complex, uncertain environments. It
is an effective way to engage with complexity, when simple rational
analysis proves to be inadequate for the job at hand. But beware! As
my professor Dr. Jones (lead engineer in the B-1 bomber program)
often said, “Once you start down the path of systems thinking, you
will never be satisfied with simple answers again.”
these thoughts in mind, what can a trader do with systems thinking?
Where would one begin? Here
are 5 things to consider:
Start with a systems map
of your own trading process. Identify
those inputs-processes-outputs that are directly involved in your
strategy. Then identify
those environmental elements beyond your control that have the
greatest impact on your performance.
This formal systems definition process is sure to help you
focus on those areas you can control or change directly and those
that you must endure, and it is a great basecamp in your journey of
self-mastery and trading excellence.
Engage with a master mind
group to help you examine the assumptions and implications of your
beliefs and procedures. Adding
new perspectives and points of view will reveal blind spots and
insights that you might never find on your own.
Look for the feedback
loops from the trades you take and the trades you pass on in order
to examine what is being learned and what else might be learned
Look for dynamic
relationships in your trading that may not have direct causal
effects, but rather look for connections that bring your actions
home to roost. Try to
imagine how 2nd and 3rd order effects can arise from a chain of
events triggered by your trading decisions.
Look for ways that your
system can evolve and grow in your chosen environment. Seek for ways
you can adapt your systems to new environments.
About the Author: Ken
Long, a retired Lieutenant Colonel in the U.S. Army with a Master's
Degree in System Development, is currently a professor of tactics
and logistics at the Army's Command and General Staff College. He
has developed the Tortoise Method of mutual
fund switching, a trading system that takes about five minutes each
week with a goal of outperforming the S&P 500 Index.
Ken is the instructor of our upcoming
ETF 101 Techniques Workshop, our new ETF 202 Techniques
Workshop and a co-presenter with Van at our Blueprint for
Trading Success Workshop. Ken is founder of Tortoise Capital
He is a trader and writes a daily and
weekly market assessment for mutual funds and exchange traded funds.
He is a proud husband, dad, and ju jitsu practitioner.
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