Global Meltdown

It didn't have to happen. There are methodologies which could have been used to see the cascading effects of a housing meltdown in an environment of mortgage derivatives.

It needn't continue. Those same methodologies show how to move beyond the mess.

Complexity science has many dimensions. It utilizes mathematics from quantum mechanics and chaos theory. It cuts across traditional disciplines. It uses the latest computer techniques for analysis and data organizaton and visualization. It can be combined with the tools of actuairal science to form the most powerful analytical structure imagineable.

In a book entitled, "The Misbehaviour of Markets", Mandlebrot provides a "Fractal View of Risk...". He shows how, "the old way" (CAPM, Portfolio Theory, Black-Scholes...) assumes price variations can be modeled by random processes that follow "mild" patterns. He goes on to say that a more accurate, multifractal model "paves the way" to a new type of financial theory.

Power Law Distributions, Fat Tails, Cascades, Fractals, Turbulence, Topology, all examples of elements emphasized in the new model.

Mandlebrot illustrates the failure of traditional models by talking about the 1998 Russian collapse and its effect on world markets. Standard theory would put the probability of the collapse at one in twenty million.

He goes on to show the 1998 event was not that unusual. In 1987 the Dow fell almost 30%. According to the standard models , the likelihood of that was a number so small it was outside the scale of nature.


What were the odds of the current meltdown according to the standard theory? Probably close to zero. When will they ever learn?


Complexity scientists in places like Santa Fe, Chicago and Los Alamos have harnessed the power of computers and mathematics to the point where the most intractable problems can be considered. Practical problems of commerce, government and technology are routinely addressed in the context of complex systems.


The dynamic, nonlinear, agent based models developed by complexity scientists are ideally suited to the issues arising in an interconnected global economy. Our world of extreme events and high correlations, requires a new analytical toolbox.


The Obama Administration will begin in the midst of great economic turmoil. Budget deficits, unemployment, bailouts, stimulus packages, all part of an interconnected web of economic
factors. Standard economic models are useless in such a context.


Imagine a budget which recognizes the interconnectedness of traditional categories. Social Security, Healthcare, Welfare, all part of a web of resources attempting to enhance quality of life.

Bailouts, Stimulus packages, Fiscal and Monetary policies, all ways of trying to transform the economy into one which produces things people will buy.

By combining the power of actuarial and complexity science we can find a way out of the wilderness. We can create programs which will provide sustainable growth and improve quality of life.

We can find the promised land.

Lee