Markets are pricing a world that may no longer exist. Democratic institutions, designed for slower cycles and contained economies, are struggling to govern the complexity they now face. That failure, argues economist Jeannette von Wolfersdorff, is already shaping the conditions under which capital is allocated and regulated.
Von Wolfersdorff, a Chilean systems thinker, former board member of the Chilean Stock Exchange and author of two Spanish-language books* on capitalism and complexity, sees two compounding failures. The first is capture: vested interests shaping rules in ways that protect existing positions and slow meaningful reform. The second is what she calls cognitive obsolescence: institutions operating with outdated assumptions about how markets function, even as those markets become faster, more interconnected and more opaque.
The distinction has become clearer particularly in the decades following the fall of the Berlin Wall. What was initially seen as a moment of systemic validation masked a deeper drift. As liberal democracies consolidated power, capture became more entrenched, while institutions failed to evolve alongside markets and societies that were becoming more complex and less predictable. The result is not simply policy failure, but a system increasingly misaligned with the environment it is meant to govern.
“The complexity of the 21st century has fundamentally changed, but our institutions are still built on an 18th-century framework.”
“This is a design flaw in the system. The complexity of the 21st century has fundamentally changed, but our institutions are still built on an 18th-century framework,” she told Investment Officer. “Humans are very good at holding on to ideas even when they no longer fit. But at this level of complexity, adaptation is no longer optional.”
Complexity gap
The mismatch is no longer theoretical. It is visible in the growing gap between how markets behave and how they are governed.
Von Wolfersdorff, who started her career as investment manager in Germany, draws on Ross Ashby’s law of requisite variety — the principle that a system must have at least as much flexibility in its responses as the challenges it faces, also known as cybernetics. Applied to financial markets, the implication is obvious: governance structures that cannot match the speed and diversity of market behaviour will fall behind.
“We have been watching that uneven duel in financial regulation for some time. This is not about competence. It is about architecture.”
“We have been watching that uneven duel in financial regulation for some time. This is not about competence. It is about architecture.”
In natural systems, complexity is a condition of evolution, and the reason why systems are more than the sum of its part. An ant colony coordinates behaviour without central control, generating collective intelligence from simple interactions, with an overall systemic intelligence from which engineers and logistic experts for example still are learning. Complexity tends to rise in all systems: in social systems and in natural systems. Financial markets have evolved in a similar direction; governance has not.
“Complexity is not something to avoid. It is the basis of how systems evolve. The question is whether we learn to work with it, or continue trying to simplify what can no longer be simplified.”
Regulation strain
The consequences are already visible in how financial systems are governed.
“Today we manage the worst of both worlds: under-regulation of systemic risks and over-bureaucratisation through unnecessary, wrong or outdated rules that slow and distort the economy,” Von Wolfersdorff said.
The debate remains framed as a choice between more regulation and less. “The real question is not more or less regulation, but whether regulation can become adaptive, purpose-driven and iterative.”
“The real question is not more or less regulation, but whether regulation can become adaptive, purpose-driven and iterative.”
At the same time, rules and incentives should evolve dynamically and iteratively, she argues, because systems do not simply comply with rules, but they adapt to them.
“All systems adapt to rules and try to bypass them. You can achieve formal compliance, but the underlying behaviour shifts, and the original objective is lost.”
For investors, the result is familiar. Regulation expands, reporting requirements increase, and yet systemic vulnerabilities remain.
Transparency limits
Efforts to improve transparency address part of the problem, but not its core. Transparency is just one part of systems thinking. “What’s more, very important information regarding firms, markets and governments cannot be made transparent because they do not exist,” Von Wolfersdorff said.
Basic questions about market structure remain unresolved. Who ultimately controls large organisations? How is capital interconnected across firms that appear to compete? To what extent do shared financing, shared providers, or incentives align behaviour across the system?
“Our microeconomic statistics are terribly poor at showing entanglement and capture risk.”
Markets cannot price risks that are not properly observed or measured.
Investor exposure
This gap extends directly to how asset owners assess risk.
Governance fragility — structural rather than cyclical — is not yet reflected in asset prices, leaving portfolios implicitly anchored to institutional assumptions that are becoming less reliable. The expectation that systems will adapt and self-correct remains embedded in market pricing.
Incentives reinforce the problem. “You cannot expect one enterprise to make the change. The system prevents it. Firms respond to the incentives they are given, and today those incentives still reward short-term financial returns rather than long-term value creation.”
The result is a widening gap between stated objectives and actual outcomes.
Sustainability narratives proliferate, but the underlying system continues to reward behaviour that runs counter to long-term resilience.
Redesign in flight
Addressing the mismatch requires more than incremental reform. Von Wolfersdorff argues for institutional structures that can adapt in real time, combining long-term political direction with specialised bodies capable of adjusting rules as systems evolve.
“Regulating AI may force us to build exactly this kind of architecture,” she said, pointing to the growing challenge of governing economic systems that evolve faster than traditional legislative processes can follow.
The decade ahead, she expects, will bring episodes of instability across markets, democratic systems and natural environments. The constraint is not only political will, but timing.
Institutional reform is unlikely to be completed before systems are tested more severely. In that context, she argues for a different form of preparation: developing a “seed bank” of institutional ideas: frameworks, case studies and models grounded in systems thinking that could be deployed when existing structures are forced to adapt or rebuild.
“We don’t need to fix complexity. We need to learn from it to be able to manage it.”
* ‘Capitalismo‘ (2022; Penguin Random House): On the raison d’être of capitalism, from the perspective of evolutionary biology, and ‘La fascinante complejidad de nuestros sistemas’ (2025), Penguin Random House): On the concept of complexity in systems, and what it implies for the regulation of markets and democracies.