To understand market perturbations like crashes and bubbles, SFI Distinguished Professor Geoffrey West and three co-authors advocate a revised view that treats an economy like biologists would think about an ecosystem rife with evolutionary dynamics.
"Here, we emphasize the importance of an ecosystems perspective: it is precisely due to the web of interdependencies among all companies that the unrestrained growth of one, or a few, companies leads to systematic imbalance."
The growth of such imbalances, they say, is a result of evolutionary processes often leading to feedback loops. Drawing on their recent paper in Proceedings of the Royal Society A, for example, the authors suggest that two mechanisms "act as catalysts for the emergence of a crisis. The first is banks copying the business models of the most (short-term) successful bank, which leads to loss of both diversity and resilience. The second is investors such as fund managers increasing their appetite for risk by trying to outperform competitors."
Read the article in New Scientist (November 1, 2014, subscription required)