Econophysics: A New Field for Understanding Earthquakes and Financial Markets

 
The traditional notion that financial markets are efficient, self-regulating, self-correcting systems based on rational human decisions is eroding. But scientists don’t think market behavior is random or mysterious either. Proponents of a new field called econophysics view markets as complex systems much like earthquakes and hurricanes that are characterized by nonlinear dynamics.

One such scholar is Didier Sornette,  a professor of geophysics, physics and finance, who has studied earthquakes, epileptic seizures, and the popularity of YouTube videos.  A Wall Street Journal feature by Eleanor Laise describes Professor Sornette as man who enjoys personal and professional risk and has a passion for predicting events in complex systems. He likes to windsurf, water ski and ride motorcycles at frightening speed. He also likes to contemplate how similar principles might underlie such diverse phenomena as the rupture of rocket tanks and disruptions of financial crashes.  Last year he launched a controversial Financial Bubble Experiment to show that financial markets are not impenetrable and that reasonable forecasts are possible.

Sornette is director of the Financial Crisis Observatory at the Swiss Federal Institute of Technology in Zurich. In the experiment, he and colleagues predicted that four specific assets would form financial  bubbles within a six month period.

A PhysOrg.com story notes that to date, no one has a reliable method of saying whether a particular market or asset is in a bubble state, and further, no universal agreement exists on what a bubble is. Research by Sornette and his group, whose members view the question through the lenses of physics, math, geology, earth science, and economics, may change that.   Their experiment shows financial markets have an identifiable structure, and are subject to phases of growth that can change slowly or radically. They call the changes “regime shift,” and a crash is an extreme example.  The PhysOrg story reports all four of the selected assets experienced regime shift as Sornette and colleagues predicted, and two were in bubble state.  A bubble is said to occur when the price of any commodity rises far above its actual value.

Greater understanding of markets and bubbles can help prepare for economic upheavals, these scientists believe. Financial and geological earthquakes change environments. In a New York Times story “A Richter Scale for Markets” by Eric Dash, Sornette is quoted as saying: “Great earthquakes shape landscapes. Great crashes shape regulation, the perception of risk, and the psychology of people.”

But forecasting is still ambiguous and the impact of a major event can have extraordinary reach. The Times story notes that a group of  econophysicists wrote to billionaire philanthropist George Soros urging his support for a multidisciplinary approach to economics.

Recent financial crises, they wrote, have “damaged the economic system to the extent that several countries are on the verge of bankruptcy,  and social systems have become  dangerously vulnerable. The problem we have seen may be just the beginning of a larger crisis. The situation may get totally out of control, endangering social peace and cultural achievements.” They urged support for FuturIcT,  a trans-disciplinary initiative in which scholars from all over the world will attempt to build computer simulations to develop new understanding of economic and social systems.

The Axis of Edible

 Would people have a more empathetic understanding of the Middle East if they ate more delicious honey, nut, and cinnamon flavored baclava? Could kubideh provide some enlightenment about Iran?

 A group of artists who started the Conflict  Kitchen, a restaurant in Pittsburgh, take that question seriously.  “We’re using food as an entry point to help people explore cultures that aren’t talked about in the mainstream media,” Jon Rubin, an assistant professor of art at Carnegie Mellon University explains in a story in Salon. The Conflict Kitchen serves only food from countries Americans think of as enemies. Rubin and colleagues aren’t after controversy or a political agenda. They think food can help us look beyond politics and government policies to the human interests we share.

 The Salon story reports that the Conflict Kitchen recently held a meal simultaneously in Pittsburgh and Tehran, with diners, joined by web cams, eating the same food and conversing with each other by way of microphones and speakers. Discussion that began with food, buying it and growing it, veered into edgier issues  such as dating, social customs and job hunting.

 Right next door to the Conflict Kitchen is the Waffle Shop, another project by Rubin and friends, that features home made waffles and lets diners participate in a talk show broadcast over the Internet. Digestive diplomacy can foster interesting questions and explorations among people whose cultures differ starkly.  Diners soothed by comfort food included a young black man and an elderly Jewish woman who engaged in a frank discussion about race.

 An NPR interview by Robert Smith expands on the idea. He chats with Chris Fair, author of the book Cuisines of the Axis of Evil: A Dinner Party Approach to International Relations.  Fair is a foreign policy analyst and former political affairs officer for the United Nations.  She is also a self-described food nut, who thinks food is  one of the most interesting symbols of nationalism. Smith says her book embodies “a kind of Martha Stewart meets Henry Kissinger” point of view. Fair has made a practice of sampling food and collecting recipes in every country she has visited.

Infectious Play and Contagious Diseases

Want to save the human race from being wiped out by deadly diseases?

 Pandemic is a new multi-player cooperative board game that that lets up to five players test their kills at halting the global spread of fatal afflictions and absorb some science at the same time.  Play the Game, a story by Richard Grant in TheScientist.com  explains how it works. You start at a CDC research lab in Atlanta. Four deadly diseases are represented by 96 wooden cubes. Other pieces include 59 player cards, 48 infection cards, reference cards, a stack of city cards, and some special circumstance cards. An epidemic card—and there are six of them—can cause a chain reaction of disease outbreaks in cities all over the world.

 An interesting thing about this game is that the players all win or lose together, and they have to work really hard collaborate against the spread of disease.  If all the cities in this global game become infected, which can happen fast with adverse circumstances and inopportune timing and strategies, everyone loses. There are no dice, and players have to respond to random events created by shuffled decks of cards, and they have to consider the strengths and weaknesses of their colleagues. Players are assigned roles with differing abilities.  A medic, for instance, may be able to treat infected cities more effectively than other players, but the researcher can change cards with greater ease than other players. A dispatcher can mover other players around, an operations manager can build research labs in any city, and scientist needs only four cards of the same color to “cure” a disease. Other players need five. Several reviewers say it’s addicting for adults. Elaborate rules could make it frustrating for young children.   Watch a demonstration onYouTube,  Click here for the story and read reviews by game geeks and scroll down on the Amazon site to read reviews by other players.

  96 wooden cubes (for diseases)

•   5 pawns
•   6 wooden research stations
•   6 markers: 1 outbreak marker, 1 infection rate marker, and 4 cure markers
•   115 Cards
•   48 infection cards
•   59 player cards
•   4 role cards
•   4 quick reference cards

 Reviews – http://www.boardgamegeek.com/thread/531895/pandemic-a-board-game-odyssey-review

 http://www.boardgamegeek.com/thread/295883/whats-up-with-pandemic

 http://www.plexusinstitute.org/ontheedge/

Innovate and Enjoy with Liberating Structures

Can the most productive meeting  be one that starts without an agenda?

Can one minute of silent reflection change the outcome of a meeting?

Can the majority of people in an organization be willing and able to contribute something that will make a significant difference?

Can meetings be fun?

 With Liberating Structures, answers to all those questions can be an enthusiastic “Yes.”

 Henri Lipmanowicz and Keith McCandless tell how Liberating Structures work in their article in Performance, a quarterly business publication of the Global Business Thinktank of Ernst & Young.  Liberating Structures are a growing collection of processes and methods that make it quick and easy for a group of any size  to change how its members interact and collaborate. They are designed to tap into  collective intelligence,  liberate energy and stimulate creativity. You have probably heard of Open Space Technology, Conversation Cafes, and Storytelling.  There are many more, and some may surprise you. They interesting to learn, productive to use,  and engaging for participants who discover that their own ideas are significant, and that people in conversation together can produce solutions for all kinds of thorny issues.  

 In the experience of these authors, both Liberating Structure pioneers,  including and unleashing everyone brings  hope and trust to organizational life.  Henri Lipmanowicz is a founder of Plexus Institute and chairs its Board of Trustees. He retired in 1998 after a30 career at Merck, where he was president of  International Region and Japan division. Keith McCandless, a founding partner of the Social Invention Group, is a consultant with expertise in  strategis planning, leadership and organizational development.  Lipmanowicz and McCandless both served as coaches for healthcare organizations in in  the Positive Deviance MRSA  Prevention Partnership, an initiative  to halt the spread of  MRSA in healthcare.

 Read their article here and learn  how these innovative practices can bring about positive change in large and small organizations of all kinds.

Computer Simulations and Collective Intelligence May Help Mitigate Emerging Challenges

 Scientists are working to  establish a “knowledge accelerator” using modern computational, communication and information technologies to  help understand enormous environmental, economic and human  challenges that exceed the capacities of even the best individual minds.

 The effort is led by Dirk Helbing, a physicist, traffic scientists and sociologist at Swiss Federal Institute of Technology in Zurich.  Many economists called the world wide financial troubles  a scientific and moral failure, and several have recommended large scale research initiatives to be able to understand,  predict and mitigate emerging crises.

The FuturIcT website (IcT stands for Information and Communication Technologies) describes projects and provided access to informative articles. Mark Buchanan’s  piece on economic meltdown modeling is especially interesting. As he explains, no war room  analysis presently exists that will indicate trouble brewing in the joint economic activities of the banks, governments and hedge funds that makeup the world’s biggest financial players.

 “The need is clearly intense in the social and economic sphere if we want to successfully avoid or mitigate similar crises in the future,” Helbing says in a ScienceDaily story. But he also says many problems result from our inability to understand and manage human systems, especially as they relate to interactions with the complex global environment. He adds that out understanding of social ills and human conflict is also surprisingly inadequate.

Joshua Epstein, a scholar of agent based modeling and a sociologist at the Brookings Institution,  says in the story, “This is an experiment we cannot afford NOT do to.”  The European Commission’s Flagship Programme will support the effort with one billlion Euros over  10 year period. Epstein says today’s social, economic and environmental issues “dwarf the capacity of any individual’s comprehension”, and that only a “collective  mind”  enabled by unprecedented modern technical resources can provide  “credible and actionable forecasts” to policy makers.

 Virtual social experiments, in which scientists build computer models of human systems that let computer agents behave like people, are becoming increasingly sophisticated.  Helbing has developed physics-based models that offer insights into human morality and other elements of human behavior.

 Some goals for the FuturIcT Knowledge Accelerator are: A Living Earth Simulator, in which as many as 10 billion agents can provide an experimental model of  environmental interactions;  Crisis Observatories, in which massive data will be mined to human and natural crises, and model for Global System Dynamics and Policy, which will focus on assembling expertise from all branches of science for contributions to future policies. Click here for more information

Volcanic Clouds, Black Swans and Other Disruptions

The cloud of ice and rock that hovered over much of Europe after the  spectacular April 14 eruption of the Eyjafjallajokull volcano in Iceland stalled air travel,disrupted markets and caused immediate losses for those in the business producing, transporting and selling perishable products and flowers.  NATO  and U.S. troop departures for Afghanistan were delayed. Scientists are pondering future effects on global agriculture and plant growth, and possible impact on the oceans.

A Bloomberg Business Week story by Sabine Pirone explains what volcanic ash can do to air planes. The ash plumes contain abrasive silica-based materials that can clog engines and sandblast windscreens.  Planes flying through these clouds can spark an electrical discharge known as St. Elmo’s fire, and speed sensors and power can be disrupted. A researcher quoted in Pirone’s story reports 80 incidents of adverse events and near-disasters when planes flew into ash clouds.   But nothing on the scale of the Iceland eruption has been recorded in recent times.

So what does this mean, and what should we learn? John Brockman, publisher and editor of  Edge.org, invited scientists, philosophers, psychologists, economists, artists and theoreticians from diverse fields to contribute their thoughts to The Ash Cloud- An Edge Special Event.

Here’s a sampling of comments from the essays 32 scholars and thinkers have contributed so far to make sense of an unexpected event of world-wide importance.

Haim Harari, physicist, says the ash crisis and the financial crisis have much in common:  Most decision makers don’t understand math and science, he says, and most mathematicians and scientists “have no feel for the real implications of their calculations.”  He says we need scientifically trained political decisions makers.

Peter Schwartz, futurist and cofounder of the Global Business Network,  is among those who say the consequences of the eruption are “a true Black Swan.”  He also says the event may not be over. If the volcano continues to erupt, or the even bigger adjacent volcano erupts, the ash cloud could be bigger, spread further, and have even greater consequences.

Emanuel Derman,  professor of financial engineering, contributed two pithy lines.  “Old technology-propeller driven planes-would not have been grounded by ash. More efficient, more vulnerable.”

Joel Gold, MD, clinical assistant professor of psychiatry,  says, “The world, shrunken by smart phones, red-eyes and the Web, is once again immense.” The illusion that we can conquer the earth is dissolved.

Eduardo Salcedo-Albaran, social scientist: “Uncontrollable forces of nature outside ourselves are similar to those inside us: Geological phenomena are similar to strong emotions…” which can also be uncontrollable.  He goes on to say, “we easily forget that nature is a continuum that transcends humanity: from star dust to genes to neurons.”

Lawrence Krauss, physicist: The ash cloud demonstrates that with major events there is no such thing as local or regional  He says a nuclear conflict between India and Pakistan could disrupt global climate for a decade. He adds, “If a simple volcano in Iceland  can immobilize much of the world, even a small scale nuclear conflict has the capacity to affect all of humanity so profoundly that mere airline flight cancellations would be the least of our worries.”

J. Doyne Farmer, physicist, sees the volcanic cloud as a reminder of the earth’s power. “Volcanic eruptions are something we have to live with in order to enjoy the benefits of the nuclear power that keeps the earth’s core hot.” He goes on to explains that life on earth seemed doomed 700 million years ago in a phase when the entire surface of the earth was covered with ice.  This period ended because volcanic action continued.  So the volcanoes saved us. 

Roger C. Schank, psychologist and computer scientist, says: “We are confused, as we should be.”

Other contributors wrote about our need to understand risk, the trouble with risk aversion, the fallibility of models, and our relationship with chaos.  Click here to read all of these  provocative essays.

Professional Success or Personal Relationships: What Would You Do If You Had to Choose?

The supermarket tabloids featured Sandra Bullock this week, as did many mainstream media outlets.  She won the Academy Award for Best Actress and was publicly tormented by disclosures about her philandering husband.

 New York Times columnist David Brooks raises a philosophical issue:  “Would you exchange a tremendous professional triumph for a severe personal blow?” No evidence suggests Ms. Bullock traded her marriage for the award, but the question still resonates.  Which matters most—worldly success or personal relationships?

 “If you had to take more than three seconds to think about this question, You are absolutely crazy,” writes Brooks, decisively favoring relationships. He alludes to research by Canadian scientists showing Oscar winners can be expected to outlive their non-winning colleagues by four to six years. But he goes on to say teams of researchers have consistently found that good personal relationships bring greater happiness than monetary or professional success, and that harmonious and trusting relationships in societies are related to better overall health and economic growth.    Brooks says being married “produces a psychic gain equivalent to more than $100,000 a year, ” and research does show that married people live longer than unmarried people.   Research by Nicholas Christakos and James Fowles, authors of Connected:  The Surprising Power of Social Networks and How They Shape Our Lives, has documented the vital importance of connections and relationships to the quality of our lives. They’ve even shown that happiness is contagious.

Still, the outpouring of responses to Brooks’s column, including a Wall Street Journal blog, letters to the editor and hundreds of answers on line, show this complex issue touches a nerve.  Readers observed that hard driving executives and entrepreneurs who sacrificed personal lives for careers have created institutions and inventions that benefit the rest of us; that both love and work are crucial; and that happiness is a mysterious condition that some find in spirituality and others find in wealth. One writer wondered whether Brooks pondered the either/or question when Sean Penn won an Oscar as his 20 year relationship with Robin Wright was dissolving.

 Some readers can’t buy a downgraded importance for money. “Trust me, David,”  wrote one, the guys who made billions selling the worthless mortgage backed securities that wrecked the economy are happier than the working stiffs who lost their pensions, jobs, and homes. Another observed that money is the source of many a marital fight.  

  While the relationship between happiness and income is complicated and ambiguous, as Brooks notes, studies do show interesting, creative work makes people happy, that autonomy matters, and that conscientiousness and career success are linked to longevity. 

Brooks says government should pay attention to trust and well-being, not just material growth. To which one readers replied,  “By all accounts Hamlet wasn’t hurting financially, and look what happened to him.” So money won’t buy happiness, but she worries about turning that idea into public policy: “Depending on your perspective, you could use it to regulate banks and the salaries of CEO’s or work to get rid of the minimum wage. “ If governments created fair, stable societies, she wrote, all citizens would have a chance to pursue happiness.

 Brooks glosses over  America’s growing economic inequality by asserting  it “doesn’t seem to have reduced national happiness.”  If columnists didn’t gloss over things, they’d  never finish their columns.  However, centuries of history display traumatic upheavals rooted in economic and social inequality.  And many studies have explored the sense fairness that seems to drive both people and animals. It’s not insignificant that a monkey can get pretty steamed when a peer gets grapes for a task that only got him a cucumber slice.   

 Would that this challenge were both/and, not either/or. But not all life situations are in our control, so the question remains: If you had to choose, would you take professional and financial success or happy well-tended personal relationships?

Crisis Tracking Capacity Born in Kenya Helped Washingtonians Dig Out After Blizzard

As a New York Times story by Anand Giridharadas points out, the work of this small Kenyan-born organization may have much to tell us about the future of humanitarianism,  journalism,  and the aggregate of information that becomes what we believe about history.

Experiments With Complexity Science in a City of Mythical Granduer and Grit

“A place of healing, since tuberculosis sufferers started coming over a century ago. A spiritual mini-mecca for a godless age. A sumptuous adobe haven for a few super rich. A land of hope for thousands of illegal immigrants. A hothouse of talent and IQ, with  an extraordinary concentration of PhDs, and more artist than any other American city its size.”

That’s how the writer Henry Shukman describes Santa Fe in his wonderfully enticing New York Times feature story. He speaks of an arrival almost mythical in its grandeur, as he approaches the Sangre de Cristo Mountains on a highway that is “like a long drawbridge into a castle.”

The City of Santa Fe was first occupied in the eleventh century by Pueblo Indians. Early Spanish settlers called it La Villa Real de la Santa Fé de San Francisco de Asís, the Royal Town of the Holy Faith of Saint Francis of Assisi. It’s the third oldest city settled by European colonists. Its Palace of Governors, built in the early sixteenth century as the seat of Spain’s regional government, is the oldest continually occupied municipal building in the nation. Its history has seen flux of the traditions and disruptions and Shukman’s story notes that a century ago city elders celebrated that tension by adopting a building code requiring ancient adobe style for new buildings.  Preservation has been a passion. In 1880, the first train of the Acheson, Topeka and Santa Fe Railway arrived with great fanfare at the Santa Fe station. Today The Railyard is a community gathering place. 

Diane Karp, director of the Santa Fe Art Institute, calls the institute a “center of exploration, education, experimentation and conversation. “  The famed Santa Fe Institute was founded in 1984 to enable multi-disciplinary collaborations in natural, physical and social sciences. It has wide-ranging practical programs as well as scholars seeking to “uncover the mechanisms that underlie the deep simplicity present in our complex world.” Luminaries at the Institute range from such scholars as particle scientist Murray Gell-Mann to the writer Cormak McCarthy. The Times story describes a Hungarian born engineer and inventor, Alfonz Viszolay, who is studying algae in his lab in the city. He nourishes it with waste water so he can make it grow fast and harvest it for biofuel He keeps a snazzy sports car ready to show how well-and how fast-it can run on bioethanol and alcohol. In the local tradition of blending the novel and the ancient, he has often invited Navajo dancers to bless his projects.

Ed Angel is president of the New Santa Fe Complex, another organization that brings together teams of creative scientists, artists, and people practiced in innovative technology to apply complexity science to real world problems.

“We bring creative people together but we are not here to achieve certain results,” he explained to Shukman. Like an experiment in complexity?  he was asked. “Exactly,” he replied. “We don’t want to know the outcome.  We’re here to see what happens, that’s all.”

Supply Chains and Virtuous Circles: More Than the Sum of Their Parts

The route between suppliers and customers can be a labyrinthine network with calamities lurking in unexpected places.  The top 10 supply chain disasters reported in Supply Chain Digest convey the possibilities. But supply chain disasters themselves are evolving.

 Dan Gilmore, editor in chief of the publication, says technological meltdowns are less likely today.  Most of today’s supply chain trouble,  he says, flows from failures of strategy or execution.

 “Virtuous Connections,” a Strategy + Business article by Richard Verity and Chris McNally, describes how one supply chain manager untangled the Gordian knots in the sprawling maze of connections an anonymous European company used to supply 30,000 products to 10,000 customers  The manager realized, the article says, that every supply chain is a set of virtuous or vicious circles. Both types of circles are complexes of events, in which each iteration of a cycle reinforces another iteration.  The S+B article explains that in a supply chain, deficiencies in on area reinforce weaknesses elsewhere in the chain. Read the article here to learn the managerial insights and decisions that fostered success.

The best known vicious circle is hyperinflation, in which prices spiral out of control as currency loses its value.  In a virtuous circle, each iteration of a cycle reinforces conditions that led to favorable results.

 A finely tuned supply chain—with no lost, late or damaged products and a shortage of irate customers—is a virtuous circle in which each link improves the next.  A functioning supply chain is more than the sum of its parts, the S & B authors showed, and the economic gains were more than those anticipated by each individual improvement. They were exponential. Improvements created tipping points that led to cost savings in parts of the network that seemed to have little to do with each other.   

 AMR Research published the Supply Chain Top 25 for 2009, which it identifies as iconic businesses that achieved innovational and operational excellence. What is the next supply chain disaster? It’s hard to say, but some experts suggest some supply chain failures are inevitable, and they may afflict those least prepared for change.