Network and Systems Theory

Institutional Investors and the Offshore Hedge Fund Industry: Investigating Patterns of Linkage, Organization, and Governance

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This study combines the expertise of social anthropology, social network analysis, portfolio theory, and computational social science with the treasure-trove of a wholly unique database on hedge funds compiled by the Foundation for Fund Governance to examine the organization and governance of the offshore hedge fund industry.

Despite the substantial exposure of pension funds (including those of near-retirement or retired baby boomers), endowments, charities, and other institutional investors to hedge funds, little research has been done from this perspective on the market and other risks that surround the industry. Yet the implications for financial stability are considerable.

Identification and Modeling Risk Cascades with Dynamic Network Models

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Financial markets consist of sets of institutional entities in the form of large traders, banks, corporate firms and countries that carry out business with each other, forming networks. The financial standing of these networks, and how integrated they are, positively or negatively reinforce each other but may only be known imperfectly. This is a problem, since such complex interactions may lead to global (in)stability. This project aims to model financial interdependencies in the form of dynamic networks and propose policy and risk measurement tools to pre-identify contagion and to control these interdependencies before they become a threat to the global community.

Leanne Ussher and Sorin Solomon - Financial Fragility in a Network of Trade Credit

About the Interview

The physicist Sorin Solomon begins to feel dizzy when the economist Leanne Ussher talks econ lingo. Yet he listens, because the two of them have found a productive area of collaboration: some economic phenomena, they find, can be explained without recourse to the quirks that feed into human decision making. Sometimes, they say, we can model people as if they were particles, and explore consequences of the social structure that constrains their possible actions. Ussher and Solomon set up a model of Italian industry, stock-flow consistent and grounded in firm-level data on trade credits, to trace out the relation between network structure and financial fragility -- this is new economic thinking. Read more

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Doyne Farmer - Macroeconomics From the Bottom Up

About the Interview

In 2006, the Fed asked its macroeconometric model what would happen if house prices dropped by 20%. The model projected the past into the future and said: "Not much." Well, the financial crisis proved it wrong. Meanwhile, DSGE models, the main alternative up to this date, do not feature financial institutions; "They are not even good enough to be wrong," says Doyne Farmer. That's why Farmer and his team are developing an agent-based model, of the housing market first and of the entire economy next, to mimic the current financial crisis. The team collects data on actual people to calibrate a rich model with millions of interacting agents. This is a bottom-up approach to macroeconomics -- this is new economic thinking. Read more

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Domenico Delli Gatti - Microfoundations for the Vision of Minsky

About the Interview

Delli Gatti starts where his dissertation advisor, Hyman Minsky, left off. With tools from network theory and agent-based modeling, he simulates the economy as enormous web of credit relations. He says agent-based models can capture a simple idea that traditional macro models could not: when a business fails to pay, its creditors may fail to pay – that’s interaction – threatening to shake the entire web of credit relations. The microfoundations are a step beyond Minsky, the interaction is a step beyond the representative agent – this is new economic thinking. Read more

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Complexity in Economic Theory

Session at Bretton Woods Conference
Sunday, April 10, 2011

Exploring Complexity in Economic Theory

Eric Beinhocker - Senior Fellow, McKinsey and Company

  

 

 

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Exploring Complexity in Economic Theory - Thomas Homer-Dixon

Thomas Homer-Dixon, Professor at the Centre for Environment and Business in the Faculty of Environment at the University of Waterloo, speaking in the panel "Exploring Complexity in Economic Theory" at the Bretton Woods Conference on April 10, 2011.