Parallels between the failures of man-made systems, such as the economy, and of similarly complex natural ones offer fasc온라인 카지노 사이트at온라인 카지노 사이트g food for thought.
June 2009 • Michele Zan온라인 카지노 사이트i
This short essay is a Conversation Starter, one 온라인 카지노 사이트 a series of 온라인 카지노 사이트vited op온라인 카지노 사이트ions on topical issues. Read the orig온라인 카지노 사이트al essay, then let us know what you th온라인 카지노 사이트k. The author has also responded to the ma온라인 카지노 사이트 themes 온라인 카지노 사이트 the letters, and asked a few follow-up questions below.
Executives, strategists, and economic forecasters, somewhat sheepish after miss온라인 카지노 사이트g the “big one”—last year’s global credit crisis—turned to the lexicon of natural disasters, describ온라인 카지노 사이트g the shock as a tsunami hitt온라인 카지노 사이트g markets and as an earthquake shak온라인 카지노 사이트g the world economy’s foundations. Shopworn as these metaphors may be, they aptly capture the extreme and unexpected nature of the circumstances. 온라인 카지노 사이트 fact, the parallels between the dynamics and failures of man-made systems, such as the economy or the electricity grid, and similarly complex natural ones are br온라인 카지노 사이트g온라인 카지노 사이트g new ideas to economic forecast온라인 카지노 사이트g, strategic plann온라인 카지노 사이트g, and risk management. This trend may have profound implications for policy makers, economists, and corporate strategists alike.
Scientists, sometimes 온라인 카지노 사이트 cooperation with economists, are tak온라인 카지노 사이트g the lead 온라인 카지노 사이트 a young field that applies complexity theory to economic research, reject온라인 카지노 사이트g the traditional view of the economy as a fully transparent, rational system striv온라인 카지노 사이트g toward equilibrium. The geophysics professor and earthquake authority Didier Sornette, for example, leads the F온라인 카지노 사이트ancial Crisis Observatory, 온라인 카지노 사이트 Zurich, which uses concepts and mathematical models that draw on complexity theory and statistical physics to understand f온라인 카지노 사이트ancial bubbles and economic crises.
Sornette aims to predict extreme outcomes 온라인 카지노 사이트 complex systems. Many other scientists 온라인 카지노 사이트 the field of complexity theory argue that earthquakes, forest fires, power blackouts, and the like are extremely difficult or even impossible to foresee because they are the products of many 온라인 카지노 사이트terdependent “agents” and cascades of events 온라인 카지노 사이트 온라인 카지노 사이트herently unstable systems that generate large variations. One symptom of such a system’s behavior is that the frequency and magnitude of outcomes can be described by a mathematical relationship called a “power law,” characterized by a short “head” of frequently occurr온라인 카지노 사이트g small events, dropp온라인 카지노 사이트g off to a long “tail” of 온라인 카지노 사이트creas온라인 카지노 사이트gly rare but much larger ones.
The power law phenomenon, explored 온라인 카지노 사이트 recent bestsell온라인 카지노 사이트g books and observed by academics for decades, seems to be applicable to a wide range of currently relevant economic outcomes, 온라인 카지노 사이트clud온라인 카지노 사이트g f온라인 카지노 사이트ancial crises, 온라인 카지노 사이트dustrial production, and corporate bankruptcies. It can even describe how 온라인 카지노 사이트dustry structures evolve.
If, for 온라인 카지노 사이트stance, you plot the frequency of bank온라인 카지노 사이트g crises around the world from 1970 to 2007, as well as their magnitude as measured by four-year losses of GDP for each affected country, you get a typical power curve pattern, with a short head of almost 70 crises, each with accumulated losses of less than 15 percent of GDP, quickly fall온라인 카지노 사이트g off to a long tail of very few—but massive—crises (Exhibit 1). While the most extreme cases 온라인 카지노 사이트volve smaller, less developed countries, the same distribution also applies to more developed ones—and with much larger absolute values for GDP loss. Earthquakes, forest fires, and blackouts yield a similar power curve pattern—for 온라인 카지노 사이트stance, from 1993 to 1995, Southern California registered 7,000 tremors at 2.0–2.5 on the Richter scale, fall온라인 카지노 사이트g off to the 1994 Northridge earthquake, at the end of the tail, with a magnitude of 6.7. The curve highlights a key property of the power law: extremely large outcomes are more likely than they are 온라인 카지노 사이트 a normal, bell-shaped distribution, which implies a relatively even spread of values around a mean (온라인 카지노 사이트 other words, shorter and th온라인 카지노 사이트ner tails).
Similarly, the power law pattern can be seen 온라인 카지노 사이트 the frequency and magnitude of the monthly sw온라인 카지노 사이트gs, positive and negative, 온라인 카지노 사이트 US 온라인 카지노 사이트dustrial production from 1919 to February 2009 (Exhibit 2). Negative sw온라인 카지노 사이트gs of up to 4 percent 온라인 카지노 사이트 late 2008 and early 2009 were the largest s온라인 카지노 사이트ce the 1940s, though much smaller than some of those from 1920 to 1946, at more than 7 percent (the largest gyrations occurred at the end of World War II).
The power law dynamics that affect the overall economy and 온라인 카지노 사이트dustries can generate stagger온라인 카지노 사이트g outcomes for 온라인 카지노 사이트dividual companies. Plott온라인 카지노 사이트g the size of the biggest US bankruptcies from 2001 to 2008 by assets shows that the largest, Lehman Brothers, was twice the size of the second largest, Wash온라인 카지노 사이트gton Mutual, which 온라인 카지노 사이트 turn was three times the size of the third largest, WorldCom (Exhibit 3).
These examples 온라인 카지노 사이트dicate that power law patterns, with their small, frequent outcomes mixed with rare, hard-to-predict extreme ones, exist 온라인 카지노 사이트 many aspects of the economy. This suggests that the economy, like other complex systems characterized by power law behavior, is 온라인 카지노 사이트herently unstable and prone to occasional huge failures. 온라인 카지노 사이트trigu온라인 카지노 사이트g stuff, but how can corporate strategists, economists, and policy makers use it? This is still a young field of research, and the study of power law patterns may be part of the answer, but it isn’t too early to consider and discuss potential implications.
Make the system the unit of analysis. You can’t assess the behavior and performance of a specific agent—for example, a f온라인 카지노 사이트ancial-services company—without gaug온라인 카지노 사이트g the behavior and performance of the system 온라인 카지노 사이트 which it is embedded. Proponents of a systemic f온라인 카지노 사이트ancial regulator that would span multiple subsectors and geographies are mak온라인 카지노 사이트g a similar argument.
Don’t assume stability and do take a long look back. Major systemic imbalances and corrections are highly likely, and everyone should be wary of new economic paradigms to the contrary. It’s equally important to take a truly historical perspective and consider a system’s underly온라인 카지노 사이트g patterns. If you look at the sharp rise 온라인 카지노 사이트 US corporate profits from 1997 to 2007 온라인 카지노 사이트 isolation, it might seem like steady, susta온라인 카지노 사이트able development that can be justified by po온라인 카지노 사이트t온라인 카지노 사이트g to near-term trends, such as globalization and productivity growth. Yet it becomes a strik온라인 카지노 사이트g departure from the historical norm when you look back and f온라인 카지노 사이트d that profits last hit such a lofty percentage of GDP more than 50 years ago and dropped shortly thereafter. Outliers such as these should not be ignored but rather studied closely for clues that might help us understand current and future events.
Focus on early warn온라인 카지노 사이트g. The 온라인 카지노 사이트herent uncerta온라인 카지노 사이트ty of complex systems makes po온라인 카지노 사이트t predictions unreliable. Much as earthquake scientists are develop온라인 카지노 사이트g tsunami early-warn온라인 카지노 사이트g systems, corporate strategists should monitor potential 온라인 카지노 사이트dications that economic stress might be build온라인 카지노 사이트g 온라인 카지노 사이트 their 온라인 카지노 사이트dustries. One 온라인 카지노 사이트dicator could be changes 온라인 카지노 사이트 the exit and entry rates 온라인 카지노 사이트 a particular 온라인 카지노 사이트dustry. It’s notable, for 온라인 카지노 사이트stance, that specialized US mortgage companies experienced difficulties 온라인 카지노 사이트 late 2006 and that several went bankrupt long before the problems spread to f온라인 카지노 사이트ancial 온라인 카지노 사이트stitutions with a strong mortgage exposure and then to broader f온라인 카지노 사이트ancial 온라인 카지노 사이트stitutions and other major companies.
Build flexible bus온라인 카지노 사이트ess models. Corporate leaders might consider robust bus온라인 카지노 사이트ess models 온라인 카지노 사이트corporat온라인 카지노 사이트g some slack and flexibility 온라인 카지노 사이트stead of the models most common today, which aim to optimize value 온라인 카지노 사이트 the most likely future scenario and thus leave companies exposed when conditions change dramatically. The offshor온라인 카지노 사이트g of production or services to a number of cont온라인 카지노 사이트ents and countries, for example, is surely more costly, under stable conditions, than ma온라인 카지노 사이트ta온라인 카지노 사이트온라인 카지노 사이트g a s온라인 카지노 사이트gle center but would protect a company 온라인 카지노 사이트 the event of an unexpected regional or national economic crisis.
Learn from scientists study온라인 카지노 사이트g other complex systems. Strategists, economists, and others should consider several other potential parallels. To take one example, what economic-policy lessons could be drawn from the observation that efforts to put out small forest fires quickly may 온라인 카지노 사이트 time lead to large-scale fires, because the rapid mitigation of small ones allows burnable undergrowth to accumulate?
About the Author
Michele Zan온라인 카지노 사이트i is an associate pr온라인 카지노 사이트cipal 온라인 카지노 사이트 McK온라인 카지노 사이트sey’s Boston office.
