complexity and finance

• financial markets exhibit tipping points, sudden and unforeseen collapses
• [[ Reinforcing Feedback Loops ]] contribute to speculation-driven bubbles, crashes and [[ herd behavior ]]
• Rich get richer dynamics
• Stability breeds instability

Social Network View of Financial System

• [[ network effects ]] matter to financial stability because shocks get amplified through cascading effects
  • **too central to fail** issue
  • DebtRank - a novel measure of systemic impact inspired by feedback-centrality ( [[ social network analysis ]])
• banking network made of a small number of large, interconnected banks with very similar business models and risk profiles. Bank defaults are highly correlated
  • creates [[ moral hazard ]] problem as each bank knows that if it defaults, other banks likely will too and the gov is likely to intervene
  • • incentive for [[ herd behavior ]]
• few companies exerting significant control

  Our results show that, globally, top holders are at least in the position to exert considerable control, either formally (e.g., voting in shareholder and board meetings) or via informal negotiations. - The Network of Global Corporate Control Vitali et al 2011

Resources

• Complexity theory and financial regulation - [[ Stefano Battiston ]] et al 2016

Related: [[ economics ]] | [[ Ecological Economics ]] | [[ Social Ecological Systems (SES) ]] | complex adaptive systems