Financial Crisis Aftermath: How to Predict, Fix, and Stop Decline

The financial crisis was one of the worst economic disasters since the Great Depression. Now that the markets have bottomed out and recovery seems imminent, regulators now turn to the task of making sure it never happens again. Below are some of the ways an interdisciplinary task force of economists, mathematicians, ecologists, physicists, and regulators are going about to predict, fix and stop the financial crisis.

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Bubble Bust No More: Speculators Please be Aware

Physicist Didier Sornette from the Swiss Federal Institute of Technology is dedicated to detecting financial crises before they happen. Sornette uses a simple but effective mathematical comparison to deliver shockingly accurate results: any sector which grows faster than an exponential function is unsustainable and therefore a bubble.

Behavioral Economics

Psychology and economics were at one time interdisciplinary. Adam Smith, the father of economics, used psychological ground work to understand markets in his day. Alas things are not as they once were, but economists Karl Case of Wellesley College in Massachusetts and Robert Shiller of Yale University are calling for change. They believe the heuristic of constantly rising house prices is the cause of decreased savings rates, which has led to the financial crisis.

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Financial Ecosystems

Regulation of financial networks have worked to protect us in the past; however, the `shadow banking system` bypassed these safeguards and created the financial crisis. A mixture of applied mathematics, network theory, and the study of ecological food webs may provide the answer to new regulation. Food webs and other networks seem to shed this systematic risk from decreased connections through hubs. Network theory allows economist to model these complex relationships and apply this new theory.

Financial Quaking

Statistical models to predict earthquakes may now be used to predict the next financial crisis. Financial historical data dos not plot a bell curve, but instead a curve with fat long tails – the fat tails are where all the statistically improbable crashes are. Matching data from earthquakes points to markets out of equilibrium, contrary to common economic theory.

 Unity for Some: The Macro – Micro Divide

The two major disciplines in economics -  micro and macro - are divided not only by subject matter, but by firm predictive link between the two.  This division could be related to the divide between quantum mechanics and general relativity in physics. Rightly so Weisnstein, a physicist working at Natron Group, is lending gauge theory to link these topics. Economists treat the independent players in microeconomics, which make up the macroeconomic framework, as static players. Weistiens model instead assigns each agent as a particle in a larger system. A computer simulation allows the particle to adapt and learn. When a majority of the particles are shown to have convergent goals, a large market shift is imminent.