{"id":98,"date":"2008-01-25T04:22:18","date_gmt":"2008-01-25T03:22:18","guid":{"rendered":"http:\/\/www.pauljorion.com\/blog_en\/?p=98"},"modified":"2008-03-04T18:38:10","modified_gmt":"2008-03-04T17:38:10","slug":"the-subprime-crisis-a-human-complex-system-phenomenon","status":"publish","type":"post","link":"https:\/\/www.pauljorion.com\/blog_en\/2008\/01\/25\/the-subprime-crisis-a-human-complex-system-phenomenon\/","title":{"rendered":"The subprime crisis: a human complex system phenomenon"},"content":{"rendered":"<p>I\u2019ll be speaking at UCLA on Saturday March 8th, 2008 at the<br \/>\n<strong>Human Complex Systems &#8211; UCLA Four Campus Complexity Conference<\/strong>,<br \/>\nUCLA Haines Hall 352. The conference starts at 9 AM, my own talk is at 2:30 PM.<\/p>\n<p>If it looks like proposing an entirely new paradigm for financial studies, that\u2019s because that\u2019s precisely what it is. Hope you can join! <\/p>\n<p><strong>The subprime crisis: a human complex system phenomenon<\/strong><\/p>\n<blockquote><p>Explanations of the <strong>subprime<\/strong> crisis typically combine partial explanations, illustrations, \u201cspeaking\u201d analogies, etc. treading at different levels: from the \u201celementary particle\u201d level where the consumer and the financial trader are acting, to that of the \u201cfield\u201d level where entities such as \u201cmarket distrust\u201d or \u201ccredit crunch\u201d are being invoked as observables. Understanding is assumed to derive unproblematically from such an impressionistic portrait where intuition is expected to fill the gaps of an overall explanation.<\/p>\n<p>What is presented here is what aims to be instead a total explanation of the subprime crisis, connecting in an integrated whole the \u201cparticle\u201d and \u201cfield\u201d levels of the financial system which provides the economy with its bloodstream. The mechanics of the financial instruments involved in the process (<strong>Asset-Backed Securities<\/strong>; <strong>Collateralized Debt Obligations<\/strong>; <strong>Asset-Backed Commercial Paper<\/strong> and <strong>Credit-Default Swaps<\/strong>) is first presented: their anatomy and their physiology where the circulation of cash flows underlines their analogy with hydraulic systems regulated by control structures. Is then added to the picture, the human agents\u2019 interaction with them, their representations of these instruments\u2019 behavior &#8211; or lack of it \u2013 as models and their failed as well as successful attempts, based on these models, at correcting what they observe as the unintended consequences of these instruments. <\/p>\n<p>Human models are shown to imply in most cases unwarranted assumptions about the feasibility of accurate forecasting. Adequate models typically favor homeostasis as they suggest ways for implementing corrective behavior or negative feedback while inadequate models typically encourage \u201cherd behavior\u201d or positive feedback leading to catastrophes. Positive feedback is however shown to be the leading dynamics of some core financial processes such as speculative pricing (i.e. pricing as an intrinsic dynamics severed from fundamentals); leverage (providing a multiplier to chances of gains and of losses) and derivatives (allowing to replicate the chances of gains and losses of an underlying instrument into a new \u201csynthetic\u201d one). <\/p>\n<p>Crises within human institutions derive often from an incomplete understanding of the processes at work. The paper has therefore the pragmatic aim of providing means for countering future disasters within the financial system.   <\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>I\u2019ll be speaking at UCLA on Saturday March 8th, 2008 at the<br \/> <strong>Human Complex Systems &#8211; UCLA Four Campus Complexity Conference<\/strong>,<br \/> UCLA Haines Hall 352. The conference starts at 9 AM, my own talk is at 2:30 PM.<\/p>\n<p>If it looks like proposing an entirely new paradigm for financial studies, that\u2019s because that\u2019s [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_crdt_document":"","footnotes":""},"categories":[6,12,11],"tags":[],"class_list":["post-98","post","type-post","status-publish","format-standard","hentry","category-finance","category-human-complex-systems","category-subprime"],"_links":{"self":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts\/98","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/comments?post=98"}],"version-history":[{"count":0,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/posts\/98\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/media?parent=98"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/categories?post=98"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pauljorion.com\/blog_en\/wp-json\/wp\/v2\/tags?post=98"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}