- financial markets exhibit tipping points & regime shifts, sudden and unforeseen collapses
- Reinforcing Feedback Loops contribute to speculation-driven bubbles, crashes and herd behavior
- Rich get richer dynamics
- Stability breeds instability
- markets satisfy same essential elements of evolution
- trend following and excessive leverage cause clustered volatility in markets
- financial risks are often correlated but assumed to be independed
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
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- 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
**the real genius of markets is not necessarily efficiency and allocation, but, rather, creating an evolutionary competition for solving human problems. The primary job of business is to solve human problems, and the primary job of the state, then, is to create the conditions for large-scale cooperation to allow that process to happen. ** - Eric D. Beinhocker
Resources
Related: economics | Ecological Economics | social-ecological systems (SES) | complex adaptive systems #academic