A study published this week in Nature compared the U.S. economic downturn with a current ecological issue: a decline in biodiversity. In the study, economist Andrew Haldane of the Bank of England and zoologist Robert May of Oxford University basically described the financial system as having similar weaknesses as a monoculture. That is, if all banks are run equally, they are more susceptible to a uniform crisis; much in the way that a pest invasion would have a farther-reaching impact on a plot of land with all of the same species.
According to a Scientific American article, “One way to combat this issue is to establish more self-contained “nodes” as has been employed in forest management and even computer networks, so that if one element takes a hit, it doesn’t take down the entire system.”
As Sarah Zielinski explained in today’s Surprising Science post, “There are lessons to be had from the world of ecology, say Haldane and May. We could be promoting and managing ecosystem resilience better by requiring banks to have a larger proportion of liquid assets on hand in case of some sort of shock to the system. Taking a lesson from epidemiology, we could focus on limiting the number of ‘super-spreaders’ within the network; but instead of quarantining infected individuals we would somehow limit the number of ‘super-spreader institutions,’ those banks more familiarly labeled as ‘too big to fail.’”
Discover’s blog 80beats implied that the current structure could be affected like a trophic cascade: “Modern ecologists recognize that the failure of key species could cause non-linear, cascading ripples that cripple a whole ecosystem.” Some might propose that these comparisons oversimplify the financial system; however, the overall recognition that industry could draw on ecological science to reevaluate such a complex network is a valid argument to make.
“Whether or not experts agree that biology is a useful lens through which to study financial markets, Haldane and May suggested that financial regulation is already ‘following in the footsteps of ecology, which has increasingly drawn on a system-wide perspective when promoting and managing ecosystem resilience,’” concluded the Scientific American article.
Photo Credit: Dirk Loop