Butterfly Effect and Finances
The idea of the butterfly effect comes from the modeling of weather on early computer systems in the 1960s. In the process of doing just that, Edward Lorenz discovered that a minute change of a number in a system would ultimately have drastic effects on the outcomes. He had a model sequence which he attempted to replicate but the minor changes in numbers due to rounding began small and then diverged dramatically from the original sequence. In other words, a tiny change can have a big effect over time.
The butterfly effect accounts for the difficulty in predicting economic outcomes no matter how many factors we put in the computer program. This makes sense if we think about it; all economies and all aspects of any given economy are linked. An earthquake in one part of the web is going to have some kind of effect on other parts of the web, which in turn will have effects on still more parts of the web. We have seen how the American housing bubble and foreclosure crisis have been an earthquake on the world-wide financial web.
Small problems can grow into big ones. One foreclosure in a neighborhood leads to a slight drop in property values. The drop in values means that a couple of people cannot sell their houses because they owe more than the house is worth. They lose their houses to foreclosure. The problem becomes worse not just in that neighborhood but in the town. Town by town the problem grows into a national one and then an international one.
Youtube videos and other accoutrements of the internet become viral on this basis. One person likes something and sends a link to a couple of friends. Each one of those passes it along and soon the cultural artifact is on the national news.
The corollary would be that small advances or small positive actions can also grow into big ones. In a business, a small positive change towards creating workplaces that respond to people’s needs can mushroom into big changes in productivity. Experiments leading to the Hawthorne effect as a research concept are an example of this: researchers at the Hawthorne Works (near Chicago) found that as they changed conditions production went up, even if they changed conditions back from experimental to the original conditions (e.g., lighting, rest breaks, etc.). The idea is that people respond when attention is paid to them.
While the wheels of bureaucracy in any organization can turn at a glacial speed, the individual has the possibility of using the butterfly effect to advantage, whether by creating a better workspace or creating a product or service that becomes viral.
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