George Sugihara writes: At a closed meeting held in Boston in October 2009, the room was packed with high-flyers in foreign policy and finance: Henry Kissinger, Paul Volcker, Andy Haldane, and Joseph Stiglitz, among others, as well as representatives of sovereign wealth funds, pensions, and endowments worth more than a trillion dollars — a significant slice of the world’s wealth. The session opened with the following telling question: “Have the last couple of years shown that our traditional finance/risk models are irretrievably broken and that models and approaches from other fields (for example, ecology) may offer a better understanding of the interconnectedness and fragility of complex financial systems?”
Science is a creative human enterprise. Discoveries are made in the context of our creations: our models and hypotheses about how the world works. Big failures, however, can be a wake-up call about entrenched views, and nothing produces humility or gains attention faster than an event that blindsides so many so immediately.
Examples of catastrophic and systemic changes have been gathering in a variety of fields, typically in specialized contexts with little cross-connection. Only recently have we begun to look for generic patterns in the web of linked causes and effects that puts disparate events into a common framework — a framework that operates on a sufficiently high level to include geologic climate shifts, epileptic seizures, market and fishery crashes, and rapid shifts from healthy ecosystems to biological deserts.
The main themes of this framework are twofold: First, they are all complex systems of interconnected and interdependent parts. Second, they are nonlinear, non-equilibrium systems that can undergo rapid and drastic state changes.
Consider first the complex interconnections. Economics is not typically thought of as a global systems problem. Indeed, investment banks are famous for a brand of tunnel vision that focuses risk management at the individual firm level and ignores the difficult and costlier, albeit less frequent, systemic or financial-web problem. Monitoring the ecosystem-like network of firms with interlocking balance sheets is not in the risk manager’s job description. Even so, there is emerging agreement that ignoring the seemingly incomprehensible meshing of counterparty obligations and mutual interdependencies (an accountant’s nightmare, more recursive than Abbott and Costello’s “Who’s on first?”) prevented real pricing of risk premiums, which helped to propagate the current crisis.
A parallel situation exists in fisheries, where stocks are traditionally managed one species at a time. Alarm over collapsing fish stocks, however, is helping to create the current push for ecosystem-based ocean management. This is a step in the right direction, but the current ecosystem simulation models remain incapable of reproducing realistic population crashes. And the same is true of most climate simulation models: Though the geological record tells us that global temperatures can change very quickly, the models consistently underestimate that possibility. This is related to the next property, the nonlinear, non-equilibrium nature of systems. [Continue reading…]
