Panel calls for various researchers to band together to create an economic policy dashboard

February 19, 2016 by Bob Yirka report
Credit: George Hodan/public domain

(Phys.org)—A widely disparate group of scientists and other individuals engaged in modeling and economic research has banded together to call for building a new kind of business model intended to help forecast financial meltdowns, such as occurred in 2008. They have written a paper together and have had it published as a Perspectives piece in the journal Science—in it they are asking others in other areas of study to join the effort to help forge a path to developing a product that might help foresee troubling economic indicators and in so doing perhaps provide a way to prevent serious problems in the future.

As the group notes, to date no tool, model or human being is capable of predicting the type of collapse that occurred in 2008, which contributed heavily to what became known as the Great Recession, and that problem has many people in the financial community on edge, including Andrew Haldane, one of the authors of the paper and chief economist for the Bank of England. He and his colleagues point out that current models are built to approximate the actions of a single rational player, which clearly does not account for the many irrational acts of many in the financial business world—and that has to change.

They authors also note that over the past few decades a lot of work has been put into creating models (many based on complexity theory) that have proved useful in other pursuits, such as weather forecasting—they write that they believe the time has come to look for contributions from experts in a variety of fields to come together to see if it might not be possible to create such a model for the global financial system.

Key to such a program would be network analysis and behavioral modeling tools—both have proven able to offer useful forecasting given the right set of inputs. With finance, the group acknowledges, such inputs might be more difficult to gather due to the sometimes fuzzy nature of financial interactions between various players; but that does not mean it cannot be done, they propose that it should not be impossible to isolate various tipping points, and to create agent-based computer models which take as inputs actions by some of the most important agents in the field, i.e. individuals who exert strong influence in the financial world and use that information to provide an economic dashboard that would highlight looming problems.

Explore further: Overconfidence, loss aversion are key predictors for investment mistakes

More information: S. Battiston et al. Complexity theory and financial regulation, Science (2016). DOI: 10.1126/science.aad0299

Abstract
Traditional economic theory could not explain, much less predict, the near collapse of the financial system and its long-lasting effects on the global economy. Since the 2008 crisis, there has been increasing interest in using ideas from complexity theory to make sense of economic and financial markets. Concepts, such as tipping points, networks, contagion, feedback, and resilience have entered the financial and regulatory lexicon, but actual use of complexity models and results remains at an early stage. Recent insights and techniques offer potential for better monitoring and management of highly interconnected economic and financial systems and, thus, may help anticipate and manage future crises.

Press release

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Sparverius
5 / 5 (5) Feb 19, 2016
Hmmm....This article or at least the effort behind this model for economic prediction seems a bit fishy to me. It joins in with the old chorus we all heard of "nobody saw this coming" when the financial collapse of 2008 occurred. There were plenty of people who saw the conditions that created the crisis come into being as far back as nine years before and warned of the consequences. But very few people listened. We have to stop treating the economy/marketplace as some kind of force of nature that is beyond our control. It isn't. We created it. And we can control it so that these kinds of disasters don't happen again. Otherwise, we allow very wealthy, very powerful men to bamboozle us into thinking that "nothing could have been done to prevent" such meltdowns in the future. All the while they make big money as the bubble inflates and while it collapses. And the rest of us get screwed.
promile
Feb 19, 2016
This comment has been removed by a moderator.
RichManJoe
1 / 5 (1) Feb 19, 2016
What is interesting about this model compared to, say, a model of the weather, is that the big players (economists, investors and bankers (some of which are aka as crooks)) are in the loop - in other words, they can look at intermediate results, figure out how to maximize their gain, and this, in turn, must be fed back into the model for the next step. We see how well this approach is working for the climate model and Exxon. Good luck.

Let us start differentiating between wealthy and moneyed - they are not the same - read Adam Smith if one wants to better understand this, he uses the word in the old, correct sense.
ForFreeMinds
1 / 5 (2) Feb 19, 2016
I disagree with Sparverius that " We have to stop treating the economy/marketplace as some kind of force of nature that is beyond our control. It isn't. We created it. And we can control it so that these kinds of disasters don't happen again." But I do agree many foresaw it coming. The marketplace is made up of billions of individuals all doing what they believe is best for themselves; "we" don't control everyone. All we do have control over is who is allowed to print fiat money and its use in the marketplace, which is a big part of the problem.

Further, such a model is likely impossible, and any prediction of "meltdown" (who said the 2008 crisis is a meltdown anyway - it was quite profitable to those who saw it coming and invested in its occurance) is likely to be too late to do anything about it.

But hey, it looks like a way to get the government to take our money and pay economists to build a model for their financial benefit.



Steelwolf
5 / 5 (1) Feb 21, 2016
The entire financial meltdown was a PLANNED event by those who enriched themselves Greatly from it. There were enough warning signs even for those NOT in finance to see what was about to happen, as it was, the Banks created massive fraud and plain stole about 35% of the total net Value of Currencies and items of value(world wide) while giving people paper that only entitled them to having to pay off the debts of the 'Derivatives' market. With the LIBOR scandal, the Metals price fixing, the Banking Collusion in the FOREX markets speaks to the fact that the entire upper financial system was Not being run under the laws that protect the depositors, they were all being run in such a way as to take maximum profit out of them NOW and let 'the little people' deal with the fallout.

This whole thing is not only predictable, once you toss in the criminal element, it becomes very plainly seen for what it is, one big conspiracy to get ALL the money and control in as few hands as possible
MR166
not rated yet Feb 21, 2016
So none of these crashes were predictable eh! The internet bubble was quite obvious from start to finish. Most of the high fliers had no chance of ever earning dime one. It was not a matter if but when.

The 2008 housing bubble was much the same. In the name of equality, the government FORCED to banks to lower lending standards to the point where totally unqualified buyers were not putting any money down and actually walking away with cash in their pockets at the closing. The banks then lied about these junk loans and unloaded them in the form of fraudulent AAA rated bonds. If the US had a government that actually cared this would have never happened. Both the Republicans and Democrats knew what was going on and encouraged it along with the FED.
Macrocompassion
not rated yet Feb 22, 2016
The panel of experts should consider the cause of the 2007 economic crisis as being due to the rise in land prices due to speculation in this natural resource. The Henry George School of Social Science was one of the few organizations whose analysis was able to forecast correctly when this crisis would occur (Professor Fred Foldvery among others). According to their Georgist theory the next crisis (due to the same cause) will occur in 2025 or there abouts and is due to speculation in land values. That is to say, every 18 years.

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