Figuring out why financial crises emerge in seemingly stable economies is tough. Widespread collapses are notoriously difficult to predict - to do so requires a comprehensive view of a complex, interconnected system. But help may be at hand: experts in finance are now looking to certain fields of ecology to help provide this viewpoint.
We investigate the failure mechanisms of load sharing complex systems. The system is composed of multiple nodes or components whose failures are determined based on the interaction of their respective strengths and loads (or capacity and demand respectively) as well as the ability of a component to share its load with its neighbors when needed. We focus on two distinct mechanisms to model the interaction between components' strengths and loads. The failure mechanisms of these two models demonstrate temporal scaling phenomena, phase transitions and multiple distinct failure modes excited by extremal dynamics. For critical ranges of parameters the models demonstrate power law and exponential failure patterns. We identify the similarities and differences between the two mechanisms and the implications of our results to the failure mechanisms of complex systems in the real world.
What makes a system complex? It is a perplexing problem--both its description and its quantification. One might think that the description of a system as complex would suggest it has many subsystems each acting in accordance with its own rules, and interacting with each of the other subsystems in ways that we find difficult to describe. But there are systems involving very few "parts" which exhibit the kind of behaviour we call complex.
Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen win the 2013 Nobel Prize in Economic Sciences. “The Laureates have laid the foundation for the current understanding of asset prices. It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.” stated the Royal Swedish Academy of Sciences.
The financial crisis clearly illustrated the importance of characterizing the level of ‘systemic’ risk associated with an entire credit network, rather than with single institutions. However, the interplay between financial distress and topological changes is still poorly understood. Here we analyze the quarterly interbank exposures among Dutch banks over the period 1998–2008, ending with the crisis. After controlling for the link density, many topological properties display an abrupt change in 2008, providing a clear – but unpredictable – signature of the crisis. By contrast, if the heterogeneity of banks' connectivity is controlled for, the same properties show a gradual transition to the crisis, starting in 2005 and preceded by an even earlier period during which anomalous debt loops could have led to the underestimation of counter-party risk. These early-warning signals are undetectable if the network is reconstructed from partial bank-specific data, as routinely done. We discuss important implications for bank regulatory policies.
Collective, especially group-based, managerial decision making is crucial in organizations. Using an evolutionary theory approach to collective decision making, agent-based simulations were conducted to investigate how collective decision making would be affected by the agents' diversity in problem understanding and/or behavior in discussion, as well as by their social network structure. Simulation results indicated that groups with consistent problem understanding tended to produce higher utility values of ideas and displayed better decision convergence, but only if there was no group-level bias in collective problem understanding.
Maximizing returns on financial investments depends on accurately understanding and effectively accounting for weather and climate risks, according to a new study by the American Meteorological Society (AMS) Policy Program.
Consider an image: hubs and spokes sprawling across a map. At the Bank, we work in many fields that could be portrayed this way – finance, trade, transportation, infrastructure or urban and regional development.
Digital technologies have made networks ubiquitous. A growing body of research is examining these networks to gain a better understanding of how firms interact with their consumers, how people interact with each other, and how current and future digital artifacts will continue to alter business and society. The increasing availability of massive networked data has led to several streams of inquiry across fields as diverse as computer science, economics, information systems, marketing, physics, and sociology. Each of these research streams asks questions that at their core involve “information in networks”—its distribution, its diffusion, its inferential value, and its influence on social and economic outcomes. We suggest a broad direction for research into social and economic networks. Our analysis describes four kinds of investigation that seem most promising. The first studies how information technologies create and reveal networks whose connections represent social and economic relationships. The second examines the content that flows through networks and its economic, social, and organizational implications. A third develops theories and methods to understand and utilize the rich predictive information contained in networked data. A final area of inquiry focuses on network dynamics and how information technology affects network evolution. We conclude by discussing several important cross-cutting issues with implications for all four research streams, which must be addressed if the ensuing research is to be both rigorous and relevant. We also describe how these directions of inquiry are interconnected: results and ideas will pollinate across them, leading to a new cumulative research tradition.
Information in Digital, Economic, and Social Networks Arun Sundararajan, Foster Provost, Gal Oestreicher-Singer and Sinan Aral
There is much enthusiasm currently about the possibilities created by new and more extensive sources of data to better understand and manage cities. Here, I explore how big data can be useful in urban planning by formalizing the planning process as a general computational problem. I show that, under general conditions, new sources of data coordinated with urban policy can be applied following fundamental principles of engineering to achieve new solutions to important age-old urban problems. I also show, that comprehensive urban planning is computationally intractable (i.e. practically impossible) in large cities, regardless of the amounts of data available. This dilemma between the need for planning and coordination and its impossibility in detail is resolved by the recognition that cities are first and foremost self-organizing social networks embedded in space and enabled by urban infrastructure and services. As such the primary role of big data in cities is to facilitate information flows and mechanisms of learning and coordination by heterogeneous individuals. However, processes of self-organization in cities, as well as of service improvement and expansion, must rely on general principles that enforce necessary conditions for cities to operate and evolve. Such ideas are the core a developing scientific theory of cities, which is itself enabled by the growing availability of quantitative data on thousands of cities worldwide, across different geographies and levels of development. These three uses of data and information technologies in cities constitute then the necessary pillars for more successful urban policy and management that encourages, and does not stifle, the fundamental role of cities as engines of development and innovation in human societies.
The Uses of Big Data in Cities Luís M. A. Bettencourt
How did human societies evolve from small groups, integrated by face-to-face cooperation, to huge anonymous societies of today? Why is there so much variation in the ability of different human populations to construct viable states? We developed a model that uses cultural evolution mechanisms to predict where and when the largest-scale complex societies should have arisen in human history. The model was simulated within a realistic landscape of the Afroeurasian landmass, and its predictions were tested against real data. Overall, the model did an excellent job predicting empirical patterns. Our results suggest a possible explanation as to why a long history of statehood is positively correlated with political stability, institutional quality, and income per capita.
War, space, and the evolution of Old World complex societies Peter Turchin, Thomas E. Currie, Edward A. L. Turner, and Sergey Gavrilets