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Financial Flocking (2)

It is perhaps unsurprising that in the current financial malaise few people seem really able to make proper sense of what is really going on. Perhaps this is because many of us are still looking at the world in the wrong way. Jeff Jarvis postulates that we are not only witnessing the result of an unregulated over-leveraged system gone mad, but a world whose fundamental structure is changing in ways we can't yet fully fathom. I couldn't agree more.

The New Scientist has been running some challenging writing on different aspects of the current economic turmoil, including this piece by Debora Mackenzie which explains how many definitions of the economic world still see it as characterised by policies which are "based on the theory that the economic world is made up of a series of simple, largely separate transaction-based markets" instead of acknowledging that transactions (and interactions) are interrelated – affecting each other, creating new meaning, and forming complex ecosystems where ideas, value, rumour, behaviours spread rapidly around the network.

As Jeff Jarvis says – the link changes everything: "It’s not that one piece of information can spread fast; it’s that information is connected to information in interdependent and complex ways impossible to unravel". I heard BBC radio business correspondent Adam Shaw say the other day on the Today programme that watching the financial markets was like watching a flock of birds – "you have no idea in which direction they may take off next". He (unwittingly) could hardly have picked a more appropriate metaphor. Like a flock of birds, large interconnected systems can behave in unexpected ways, and operate to counter-intuitive principles. Like the fact that small changes can trigger fundamental shifts. Like the fact that traders following the herd can contribute more to the instability of markets than the impact of negative or positive news stories.

Nobel prize winning economist Paul Krugman apparently said as much very recently, bemoaning that the channels created by such connections "are not yet part of the standard analysis". A system that calculates risk based on individual investments in isolation without taking account of the potential impact from associated interdependent risks is a flawed system.

So it's not just money that the proliferation of connections in the financial world has helped flow. Ideas also flow in ways that mean localised change in one place can result in severe and unexpected consequences elsewhere. Perhaps even global consequences. In this way apparently insignificant changes can, under the right circumstances, have large scale repurcussions causing systems to "flip" into operating to the tune of a wholly different set of rules – like mistrust. Which hints at how we might find our way out of this mess. There is one human principle that underpins every system based on hyper-connected networks of people. It is the common operating system. It is the oil that makes it all flow. It is trust.

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