26
2 Complexity Time Bomb
success, they were often doing it well. The failure was to see how collectively
this added up to a series of interconnected imbalances over which no single
authority had jurisdiction. … Individual risks may rightly have been viewed as
small, but the risk to the system as a whole was vast. … So in summary … the
failure to foresee the timing, extent and severity of the crisis … was principally
the failure of the collective imagination of many bright people to understand
the risks to the systems as a whole.”
Thus, was nobody responsible for the financial crisis in the end? Or do we all have
to accept some responsibility, given that these problems are collective outcomes of a
huge number of individual (inter)actions? And how can we differentiate the degree
of responsibility of different individuals or firms? This is certainly an important
question worth thinking about.
It is also interesting to ask, whether complexity science could have forecasted the
financial crisis? In fact, I followed the stock markets closely before the crash and
noticed strong price fluctuations, which I interpreted as advanced warning signals of
an impending financial crash. For this reason, I sold my stocks in late 2007, while
I was sitting in an airport lounge, waiting for my connection flight. In spring 2008,
about half a year before the collapse of Lehman brothers, James Breiding, Markus
Christen and I wrote an article taking a complexity science view on the financial
system. We came to the conclusion that the financial system was in the process of
destabilization. We believed that the increased level of complexity in the financial
system was a major problem and that it made the financial system more vulnerable to
cascading effects, as was later also stressed by Andrew Haldane (*1967), the Chief
Economist and Executive Director at the Bank of England.
In spring 2008, we were so worried about these trends that we felt we had to
alert the public. At that time, however, none of the newspapers we contacted were
ready to publish our essay. “It’s too complicated for our readers” was the response.
We responded that “nothing can prevent a financial crisis, if you cannot make this
understandable to your readers”. With depressing inevitability, the financial crisis
came. Although it gave us no pleasure to be proven right, a manager from McKinsey’s
UK office commented six months later that our analysis was the best he had seen.
Of course, some far more prominent public figures also saw the financial crisis
coming. The legendary investor Warren Buffet (*1930), for example, warned of the
catastrophic risks created by large-scale investments in financial derivatives. Back
in 2002 he wrote:
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands.
These people believe that derivatives act to stabilize the economy, facilitate
trade, and eliminate bumps for individual participants. On a micro level, what
they say is often true. I believe, however, that the macro picture is dangerous
2 Complexity Time Bomb
success, they were often doing it well. The failure was to see how collectively
this added up to a series of interconnected imbalances over which no single
authority had jurisdiction. … Individual risks may rightly have been viewed as
small, but the risk to the system as a whole was vast. … So in summary … the
failure to foresee the timing, extent and severity of the crisis … was principally
the failure of the collective imagination of many bright people to understand
the risks to the systems as a whole.”
Thus, was nobody responsible for the financial crisis in the end? Or do we all have
to accept some responsibility, given that these problems are collective outcomes of a
huge number of individual (inter)actions? And how can we differentiate the degree
of responsibility of different individuals or firms? This is certainly an important
question worth thinking about.
It is also interesting to ask, whether complexity science could have forecasted the
financial crisis? In fact, I followed the stock markets closely before the crash and
noticed strong price fluctuations, which I interpreted as advanced warning signals of
an impending financial crash. For this reason, I sold my stocks in late 2007, while
I was sitting in an airport lounge, waiting for my connection flight. In spring 2008,
about half a year before the collapse of Lehman brothers, James Breiding, Markus
Christen and I wrote an article taking a complexity science view on the financial
system. We came to the conclusion that the financial system was in the process of
destabilization. We believed that the increased level of complexity in the financial
system was a major problem and that it made the financial system more vulnerable to
cascading effects, as was later also stressed by Andrew Haldane (*1967), the Chief
Economist and Executive Director at the Bank of England.
In spring 2008, we were so worried about these trends that we felt we had to
alert the public. At that time, however, none of the newspapers we contacted were
ready to publish our essay. “It’s too complicated for our readers” was the response.
We responded that “nothing can prevent a financial crisis, if you cannot make this
understandable to your readers”. With depressing inevitability, the financial crisis
came. Although it gave us no pleasure to be proven right, a manager from McKinsey’s
UK office commented six months later that our analysis was the best he had seen.
Of course, some far more prominent public figures also saw the financial crisis
coming. The legendary investor Warren Buffet (*1930), for example, warned of the
catastrophic risks created by large-scale investments in financial derivatives. Back
in 2002 he wrote:
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands.
These people believe that derivatives act to stabilize the economy, facilitate
trade, and eliminate bumps for individual participants. On a micro level, what
they say is often true. I believe, however, that the macro picture is dangerous