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SSRN-Networks in Finance by Franklin Allen, Ana Babus
Modern financial systems exhibit a high degree of interdependence. There are different possible sources of connections between financial institutions, stemming from both the asset and the liability side of their balance sheet. For instance, banks are directly connected through mutual exposures acquired on the interbank market. Likewise, holding similar portfolios or sharing the same mass of depositors creates indirect linkages between financial institutions. Broadly understood as a collection of nodes and links between nodes, networks can be a useful representation of financial systems. By providing means to model the specifics of economic interactions, network analysis can better explain certain economic phenomena. In this paper we argue that the use of network theories can enrich our understanding of financial systems. We review the recent developments in financial networks, highlighting the synergies created from applying network theory to answer financial questions. Further, we propose several directions of research. First, we consider the issue of systemic risk. In this context, two questions arise: how resilient financial networks are to contagion, and how financial institutions form connections when exposed to the risk of contagion. The second issue we consider is how network theory can be used to explain freezes in the interbank market of the type we have observed in August 2007 and subsequently. The third issue is how social networks can improve investment decisions and corporate governance. Recent empirical work has provided some interesting results in this regard. The fourth issue concerns the role of networks in distributing primary issues of securities as, for example, in initial public offerings, or seasoned debt and equity issues. Finally, we consider the role of networks as a form of mutual monitoring as in microfinance.
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Edge: CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS?
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Financial systems exhibit the Gödelian incompleteness characteristic of all (sufficiently powerful) formal systems: within the given system it is possible to construct statements (or financial instruments) whose value appears to be sound, but cannot be proved within the system itself. The same limitations apply to models of financial systems.
There is good news and bad news in this. No financial system (or model of such a system) can ever be completely secure and closed. On the other hand, there is no limit to the level of concepts that an economy (or a model of that economy) is able to comprehend.
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"Ten years ago I started a company based on the assumption that people are basically good," argued E-Bay founder Pierre Omidyar (at the Santa Fe Institute) in 2004. "And now I have the data to prove it." Instead of putting a dozen scientists in a room to come up with a better model of the existing global financial system, we should put a dozen Pierre Omidyars, Elon Musks, Salar Kamangars, and Jeff Bezoses in a room (with Danny Hillis) and let them actually build one (a new financial system, not another model).
Financial systems are the oldest and most centrally-regulated information-processing systems we have, and that's one reason they have been so resistant to change. At the beginning of the 21st century (five years after "Toy Story") 20th-Century Fox was still running their internal payroll system on punched cards. Why change now?
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Nothing-Buttery
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- A person is nothing but a collection of protoplasm.
- A person is nothing but a pile of atoms.
- Beethoven's 5th is nothing but vibrations in the air.
- Love is nothing but chemistry.
- A photograph is nothing but pixels on a screen.
Another apt description is due to Donald MacKay, author of A Clock Work Image (InterVarsity, 1974), who calls such notions "nothing-buttery". We encounter, nearly every day, the idea that "X" is nothing but "Y":
Sometimes the words "nothing but" are left out, but the problem remains: it is supposed that "X" doesn't really exist since sciences has shown that it's actually just "Y". Two of my main goals in teaching are to expose the problems with reductionism and to open students' minds to the much broader perspective offered by a Christian worldview.
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Redefining the CEO Agenda for the 21st Century - Umair Haque
Or consider what Eric Schmidt said today: that Google has a "moral imperative" to help publishers benefit from advertising. That's a living example of one of the principles we've discussed - good beats evil - being used to make real-world strategic decisions.\n\nHow many other CEOs have mentioned the words "moral imperative" recently? Almost none. The results of a search on that phrase related to CEOs, for example, are almost all Eric Schmidt - and I stopped counting after ten pages of results. More tellingly, the inverse search - CEOs who aren't Eric Schmidt talking about a moral imperative - yields almost no meaningful results.\n\nCan you imagine Steve Ballmer, Steve Case, Chuck Prince, Michael Eisner, Rupert Murdoch, or Jeff Immelt talking about a "moral imperative"? It's about as likely as Elvis coming back from the beyond. Why don't they? Because orthodox management and strategy have given them tools and concepts built for an industrial era. Perhaps it's no surprise, then, that the companies they run (or ran) are falling squarely into strategy decay.\n\nAnd that's how Google ends up in a league of it's own. Schmidt's quote is important because it's a vivid demonstration of Google having the courage to question business as usual - in fact, this time, Schimdt is challenging perhaps the foundational orthodoxy of industrial-era business.\n\nGreed is good, right? Wrong. In fact, good is good: today, it's good that can be deeply strategic, and powerfully profitable.\n\nThink about that for a second.\n\nNo - Google doesn't always get it right, it doesn't always do no evil, and doing good isn't the only new principle of management (here's another one). In the coming days, we'll discuss Google's weaknesses. But Google - to resort to an inelegant turn of phrase - gets it.\n\nI discuss Google often because I think it just might be the first real 21st century business: a company with a radically different set of principles wired into it's DNA. Larry, Sergey, and Eric, I think, understand intuitively that the tools and c
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Or consider what Eric Schmidt said today: that Google has a "moral imperative" to help publishers benefit from advertising. That's a living example of one of the principles we've discussed - good beats evil - being used to make real-world strategic decisions.
How many other CEOs have mentioned the words "moral imperative" recently? Almost none. The results of a search on that phrase related to CEOs, for example, are almost all Eric Schmidt - and I stopped counting after ten pages of results. More tellingly, the inverse search - CEOs who aren't Eric Schmidt talking about a moral imperative - yields almost no meaningful results.
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Can you imagine Steve Ballmer, Steve Case, Chuck Prince, Michael Eisner, Rupert Murdoch, or Jeff Immelt talking about a "moral imperative"? It's about as likely as Elvis coming back from the beyond. Why don't they? Because orthodox management and strategy have given them tools and concepts built for an industrial era. Perhaps it's no surprise, then, that the companies they run (or ran) are falling squarely into strategy decay.
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SemioPhysics Articles - HEINZ
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The import of Heinz’s impact rests upon recognizing the difference
between trivial thought and non-trivial understanding. For Heinz the
abstract notion of a "machine" denotes any conceptual device used to
contemplate something. Machines are mechanisms that link a
system's external variables to the system's internal states (if there
are any) and its operations. Machines describe the form of such
linkages and can be realized in flesh and blood or on a silicon
chip. They are not to be thought of as what people or beings are
but rather machines are the generalized patterns of thought which
connect. Heinz describes two types of machines: trivial and
non-trivial. Heinz depicts the implications of trivial machines to be
like the schemas of a light switch or a soda machine, in that they
characterize modes of thinking in different domains that employ
cause-effect thinking and the desire for predictability. Given
the same input you get the same output. You have, for example, a
cause (the input), the law of nature (the transfer function) and then
you get the effect (output). With a trivial machine, say a soda
machine, you put in your money, push the soda choice (coke, orange,
7-Up) and get your soda. The trivial machine is designed to give
a specific output to every specific input. Imagine that the soda
machine had "internal states" that biased or even determined what soda
would come out despite your selection. That is, pretend that the
machine had developed internal dynamics that made its output
unpredictable. What if you are in the mood for a coke and you
punch the coke button but the machine is in a "7-up mood" and so gives
you 7-Up? That kind of unpredictability would render the machine
non-trivial. -
Heinz von Foerster: "the trivial machine is the mainstay, the paradigm,
underlying our 'logical' working conditions in almost all fields of
study." Some examples from Heinz's biography The Dream of Reality
by Lynn Segal:
Input
Transfer
Function
Output
____________________________________________________________________
1. Cause
Law of nature
Effect
2. Stimulus
Central nervous
system
Response
3. Motivation
Character
Deeds
4. Goal
System
Action
5. Minor premise
Major
premise
Conclusion
6. Dependent argument Independent
Argument Function
"These machines have the following properties:
1) They are
predictable.
2) They are history
independent. Whatever took place in the
past will not
influence the present.
3) They are
synthetically deterministic. You can plug them
together. You can
synthesize them.
4) They are
analytically deterministic. If you want to find
out how they work, you can give them inputs, observe
the outputs, and figure out the transfer function.”
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PROFESSOR ANTHONY GIDDENS - Reith Lectures
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As the changes I have described in this lecture gather weight, they are creating something that has never existed before, a global cosmopolitan society. We are the first generation to live in this society, whose contours we can as yet only dimly see. It is shaking up our existing ways of life, no matter where we happen to be. This is not - at least at the moment - a global order driven by collective human will. Instead, it is emerging in an anarchic, haphazard, fashion, carried along by a mixture of economic, technological and cultural imperatives.
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