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In order to better predict, understand and manage financial and economic crises, knowledge about complex systems must be brought together from a variety of fields of study. That is the conclusion of a publication in today’s issue of Science by a group of ten researchers, from universities and banks, including Utrecht ľ�ϸ���Ӱ�� epidemiologist Prof. Hans Heesterbeek. According to the authors, knowledge of complex systems from fields such as physics, epidemiology, ecology, computer science and sociology is sorely underutilised.

“Our knowledge of the spread of infections within a population can also provide insight into the dynamics of the trade in financial products in networks of banks and investors”, explains Hans Heesterbeek, Professor of Theoretical Epidemiology at Utrecht ľ�ϸ���Ӱ��. “Mathematical predictions of, for example, tipping points - the moment that a major shift takes place - and the importance of super-spreaders - individuals who infect many other people - have proven to be invaluable for understanding actual outbreaks of many infectious diseases.”

Stock market crash

A complex system consists of a very large number of parts or people, which interact with one another and are connected in networks. These could be electrons in a superconductor, but also opinions in a social network or the reactions of investors to financial markets. One of the characteristics of complex systems is that they are not linear, so minor changes can have unexpectedly major consequences. One example is a stock market crash. “In Science, we propose that it is possible to use theories that have been successfully developed in other fields of study to better model, predict and manage crises in socio-economic systems”, according to Prof. Heesterbeek.

Our knowledge of the spread of infections within a population can also provide insight into the dynamics of the trade in financial products in networks of banks and investors.

From experiment to policy

According to ľ�ϸ���Ӱ�� of Amsterdam Prof. Cars Hommes, the driving force behind the publication, empirical research into individual and group behaviour involving experiments with test subjects have shown that economic systems deviate significantly from the current rational balance model. “Policy geared towards inhibiting the positive feedback loop might therefore be able to stabilise macro-economic systems.”

Importance of network effect

Research into contagion in financial networks has shown that the banks’ networks and their position in the network plays a role. “It is essential to consider these effects in order to quantify the stress on individual banks and to examine the systematic risks for the network as a whole”, according to Prof. Stefano Battiston, network economist at ETH Zurich. Physicist Dr. Diego Garlaschelli from the ľ�ϸ���Ӱ�� of Leiden explains that complex network models can provide an early warning signal for an approaching crisis. “Research into the Dutch banking network, for example, shows that a heterogeneous network model could have provided an alarm signal up to three years before the emergency of the economic crisis of 2008.”

Ideal moment

Andy Haldane, chief economist of the Bank of England, says that now is the ideal moment for academic economists, complexity researchers, social scientists, ecologists, epidemiologists and researchers at financial institutions to join forces together. “It would be an ambitious challenge to develop a dashboard that we can use to monitor and stress-test the global socio-economic and financial systems based on data, methods and indicators, similar to the method used for weather systems or social networks.”

Publication

Complexity Theory and Financial Regulation: Economic policy needs interdisciplinary network analysis and behavioral modeling.
S. Battiston (ETH Zürich), J.D. Farmer (Oxford ľ�ϸ���Ӱ��), A. Flache (ľ�ϸ���Ӱ�� of Groningen), D. Garlaschelli (ľ�ϸ���Ӱ�� of Leiden), A. Haldane (Bank of England), H. Heesterbeek (Utrecht ľ�ϸ���Ӱ��), C. Hommes (UvA), C. Jaeger (Global Climate Forum), R. May (Santa Fe Institute), M. Scheffer (Wageningen UR)
Science 19 February 2016

Complex Systems Studies

This research is part of the focus area  of Utrecht ľ�ϸ���Ӱ��. Prof. Hans Heesterbeek leads this focus area together with theoretical physicist prof. Henk Stoof.