My last column discussed specific actions our firm is taking as the economy and markets have become more challenging. Now it's clear that the economic situation is not the result of a single-point crisis that will quickly pass; my quick-response solutions won't suffice long term. Global economic woes will result in significant changes in the regulatory, financial and business landscapes of our industry.

So I started writing about the three steps firms must take to survive and thrive in the new landscape. While I was trying to write that column, though, I had a nagging feeling I was missing something. While reading and researching, I discovered something I must now confess: Most of the economics training I've used since graduate school is not valid—and wasn't in the first place. What's worse, I based my firm's integrated wealth management services, including investment management and financial planning, around ideas that were just plain wrong.

According to traditional economics, price swings like those the S&P 500 has experienced should occur every couple of hundred years, not six times in the past 100 years! I wasn't prepared for this latest downward swing, and it's clear our firm's approach to risk management was inadequate.

The rest of this column will focus on what I've found so far and what we're starting to do about it. The regulatory, financial and business issues will have to wait for future columns.

In the Real World

Econometric financial theory predicts a random walk for stock prices. It is at the heart of all traditional financial market models, including modern portfolio theory, stochastic modeling, options pricing and so forth. But real market behavior—domestic and global equity market price movements—has shattered any remaining pretense that the random walk and aforementioned theories work in the real world. What's going on?

Consultant Eric Beinhocker says it's a natural occurrence in the "evolutionary economic" system. Beinhocker proposed a new economic framework in his book The Origin of Wealth. He argues that economic growth, like biological evolution, is not a smooth linear process. Rather, it's part of a larger evolutionary system which, through a process of trial and error, discovers successful designs that are retained, replicated and built on, while discarding the unsuccessful ones. He makes a strong case for the economy as an open dynamic system, rather than the closed equilibrium system at the heart of traditional economics. Let me summarize Beinhocker's arguments as they apply to our industry:

* The prime engines of economic evolution—businesses—are complex adaptive systems using social and physical technologies. This different way of thinking about how our business interacts with the economy could be key to planning firms' growth going forward.

* Businesses (and as a result, markets) are part of an evolutionary process of differentiation, selection and amplification, and are rarely, if ever, in equilibrium. Just as evolution is the story of the survival of the fittest, the competitive ecosystem of business strategies and consumer behavior determines what will thrive or die.

* This evolutionary process is responsible for unstoppable growth in the complexity of business and markets. It also contributes to unpredictable, large-impact events. This is a key factor in our client interactions.

* Significant amounts of buying, selling and communicating happen outside formal markets; individual agents form networks that have significant economic impact. These networks evolve over time, becoming more complex and making it harder to predict what's coming next. (Think about the Internet and eBay. Mostly good. Think about shadow banking, collateralized debt obligations and credit default swaps. Mostly horrendous.)

Black Swans

Nassim Taleb, in his book The Black Swan: The Impact of the Highly Improbable, discusses why traditional economics has failed at forecasting and the impact of the highly improbable. He calls highly improbable events "Black Swans." Taleb asks readers to focus on the difference between extreme events, which can be modeled, and the true unknowns. His key ideas apply to planners in the following ways:

* Tinker as much as possible. Play with ideas. Try things. Evolve by looking for the vague, subtle and intangible.

* What you don't know is far more relevant than what you do. Sometimes, the unplanned, unpredicted and unappreciated becomes the Black Swan.

* Invest in preparedness, not predictions. Since you can't predict a Black Swan event, know that chance favors preparation—for the worst or the best.

* Maximize chance encounters. The more chances you have to interact, the more you'll know. Network. Party with others. Recognize the lucky break or impending danger and react quickly.