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Why bankers are like bacteria
OPINION
Of bankers and bacteria Financial institutions could learn a thing or two from humble micro-organisms and the scientists who study them, says Harvey Rubin WHETHER you call the current financial situation a setback, a crisis or a meltdown, it has had at least one positive effect: financiers are searching for new ways to deal with complex risk. I have a suggestion for them. Look to nature, where analogous problems have already been solved by engineers and computer scientists. Bacteria, for example, have a robust, adaptive regulatory system that optimises the growth of the colony under any set of conditions. They adapt to the composition of their growth medium, the acidity, temperature and salinity of their environment, attack by other organisms and many other threats. Adaptation depends on regulatory systems built into the system itself, and yet this regulation does not constrain growth or innovation. What does this have to do with finance? Well, there are formal similarities in the architectures of financial systems and biological systems. Financial systems are composed of institutions – banks, pension funds, finance houses, insurance companies and the like. These create products such as mortgages, mutual funds, insurance policies and credit default swaps. Consumers buy and sell these products, funds flow throughout the system and, hopefully, growth follows. In a bacterial colony, the equivalent of institutions are pathways – families of enzymes and metabolic reactions that are linked together to perform necessary functions. These create products in the form of 24 | NewScientist | 19 September 2009
molecules such as DNA, ATP, arrays of response mechanisms proteins and lipids. These that protect them against these products are then used by the and other threats. While some bacteria and growth occurs. Voila! regulatory mechanisms are In both financial and bacterial engaged to counter specific systems, commitment to growth threats, others operate in a more does not come without risks. general way to protect against In financial systems, a party to threats that the organism has not a contract may not meet its yet encountered. Bacteria also obligations. In bacterial systems, optimise growth for any external molecules that are necessary for and internal conditions. That growth may be missing. Financial is why I believe they represent instruments may lose value an excellent system on which to because of price fluctuations. base a model financial system. A bacterial colony’s external media Finance and biology are distant may literally dry up. Financial “There are similarities markets may lack liquidity. between the architectures Micro-organisms may lose their of financial systems and central energy molecule, ATP. biological systems” Bacteria have remarkable
fields, of course, but there is a way to bridge them: engineering. Recently, my research group and others have found that biological systems such as bacterial colonies can be analysed and modelled using tools developed to study “hybrid systems”, which are characterised by a combination of both continuous and discrete dynamic behaviour. The classic example is a bouncing ball; other examples are air traffic control, production plants and wireless networks. This leads me to believe that we can use those same tools to analyse financial systems and make them more resilient. As another example, consider two cars approaching an intersection. This is a hybrid system because the cars move smoothly forward but also stop, start and change direction. How do you ensure that the cars pass without crashing? How do you get them through in the fastest time possible? Can a system of regulators be designed to optimise both safety and speed? Where will the cars be at some specified time after they pass? Now multiply the number of cars by 1000 and add many more intersections. The problems become very difficult to solve, but not impossible. I suggest that the corresponding problems in the financial world – to avoid crashes, maximise productivity, design a regulatory system and predict the future – are equally accessible to our analytical tools. First, though, we need to analyse finance as a hybrid system. I’m confident we can do that because of recent work
Comment on these stories at www.NewScientist.com/opinion
Harvey Rubin directs the Institute for Strategic Threat Analysis and Response at the University of Pennsylvania, Philadelphia. This article is based on a talk he gave to a meeting of financiers in New York City in July
One-minute interview
Trevor Nunn In 1925 the state of Tennessee took evolution to court. The acclamed director is bringing the episode to the London stage Why did you choose this play? I was approached about how to commemorate Darwin in the theatre. So I read On The Origin of Species from cover to cover. I was fascinated by it, especially by Darwin obviously struggling with the knowledge that he was going to upset a vast number of people. Then I remembered that at university I had directed a scene from Inherit the Wind. I had a look at it again and I was very, very impressed. So I contacted Kevin [Spacey, artistic director of the Old Vic theatre in London], and proposed the possibility of the play. Inherit the Wind is set in 1920s America. What relevance does it have today? Creationism versus evolution is still hotly debated, to the point where it is still a legal issue in the US. A considerable proportion of people in UK are opposed to evolution. In areas of the Middle East, Darwin is censored. Darwin has still only reached a minority of the population of this planet. Do you think evolution and religion can be reconciled? I genuinely think that each individual should be resolving that question for themselves. It requires a leap of faith to say I believe in an omniscient creator. By the same token, scientific inquiry requires a leap of faith. Where did the matter in the big bang come from? Where does the nothingness that contained the matter come from? One thing we know is that we don’t know. So the play doesn’t have heroes and villains. It’s not valuable to approach this play like it’s an open-and-shut case – here we are as the audience looking at a group of total maniacs in the south of the US. The reality is more sophisticated and creates more food for thought.
PROFILE Trevor Nunn is a theatre and film director. His production of Inherit the Wind by Jerome Lawrence and Robert Edwin Lee opens this week at the Old Vic theatre in London
Can you give us an example? William Jennings Bryan [the creationists’ lawyer] was a religious fundamentalist but surprisingly he had very socialist beliefs. He stood for the presidency three times, and each time was for the poor, the dispossessed, the working man. What he saw in Darwinism was the worst kind of survival-of-the-fittest capitalism. What are you hoping the audience will take away from the play? Some people will have their minds changed, some people will have their views confirmed, but I think a lot of people in the audience will not have listened to a debate about evolution. I think people will be fascinated by the arguments. Interview by Celeste Biever
PRIZE DRAW Would you like to see Inherit the Wind at the Old Vic on Sunday 11 October? We have a pair of tickets to give away. Simply go to www.newscientist.com/projects/forms/inheritthewind for details of how to enter, or post your name, address and telephone number to: Inherit the Wind Competition, Lacon House, 84 Theobald’s Road, London WC1X 8NS. The first entry out of the hat wins. You must make your own travel arrangements. The deadline for entries is 5 pm BST on 1 October 2009.
19 September 2009 | NewScientist | 25
THE OLD VIC
showing that the tools we use to analyse such systems are applicable to biology. Two results in particular will resonate with the financial sector. One predicts which bacterial genes are essential and which can be knocked out without killing the organism. This is the bacterial version of asking “is this bank too big to fail; if I get rid of it, will the whole system crash?” The second models how flocks of birds or schools of fish perform collective tasks without centralised coordination. It is not a big stretch to propose that financial group behaviour, like panic selling, may be analysed using these tools. More complex questions about the growth of bacterial colonies can be answered if more complete information is known, such as the individual biological properties of each cell. Similarly, more complete information about financial institutions will allow more complex questions about financial systems to be answered. This proposal raises several practical questions. Will the relevant parties make the information available? Where should the information reside, who will have access to it and how will confidentiality be guaranteed? In conversations with financiers, I have found that there is an appetite for making the information available if confidentiality and anonymity are guaranteed. There is also acceptance that a government agency should be the repository of the information. All we need now is the political and corporate will to gather the information, engage the right team and apply these tools to help solve a really important problem. ■
Of bankers and bacteria Financial institutions could learn a thing or two from humble micro-organisms and the scientists who study them, says Harvey Rubin WHETHER you call the current financial situation a setback, a crisis or a meltdown, it has had at least one positive effect: financiers are searching for new ways to deal with complex risk. I have a suggestion for them. Look to nature, where analogous problems have already been solved by engineers and computer scientists. Bacteria, for example, have a robust, adaptive regulatory system that optimises the growth of the colony under any set of conditions. They adapt to the composition of their growth medium, the acidity, temperature and salinity of their environment, attack by other organisms and many other threats. Adaptation depends on regulatory systems built into the system itself, and yet this regulation does not constrain growth or innovation. What does this have to do with finance? Well, there are formal similarities in the architectures of financial systems and biological systems. Financial systems are composed of institutions – banks, pension funds, finance houses, insurance companies and the like. These create products such as mortgages, mutual funds, insurance policies and credit default swaps. Consumers buy and sell these products, funds flow throughout the system and, hopefully, growth follows. In a bacterial colony, the equivalent of institutions are pathways – families of enzymes and metabolic reactions that are linked together to perform necessary functions. These create products in the form of 24 | NewScientist | 19 September 2009
molecules such as DNA, ATP, arrays of response mechanisms proteins and lipids. These that protect them against these products are then used by the and other threats. While some bacteria and growth occurs. Voila! regulatory mechanisms are In both financial and bacterial engaged to counter specific systems, commitment to growth threats, others operate in a more does not come without risks. general way to protect against In financial systems, a party to threats that the organism has not a contract may not meet its yet encountered. Bacteria also obligations. In bacterial systems, optimise growth for any external molecules that are necessary for and internal conditions. That growth may be missing. Financial is why I believe they represent instruments may lose value an excellent system on which to because of price fluctuations. base a model financial system. A bacterial colony’s external media Finance and biology are distant may literally dry up. Financial “There are similarities markets may lack liquidity. between the architectures Micro-organisms may lose their of financial systems and central energy molecule, ATP. biological systems” Bacteria have remarkable
fields, of course, but there is a way to bridge them: engineering. Recently, my research group and others have found that biological systems such as bacterial colonies can be analysed and modelled using tools developed to study “hybrid systems”, which are characterised by a combination of both continuous and discrete dynamic behaviour. The classic example is a bouncing ball; other examples are air traffic control, production plants and wireless networks. This leads me to believe that we can use those same tools to analyse financial systems and make them more resilient. As another example, consider two cars approaching an intersection. This is a hybrid system because the cars move smoothly forward but also stop, start and change direction. How do you ensure that the cars pass without crashing? How do you get them through in the fastest time possible? Can a system of regulators be designed to optimise both safety and speed? Where will the cars be at some specified time after they pass? Now multiply the number of cars by 1000 and add many more intersections. The problems become very difficult to solve, but not impossible. I suggest that the corresponding problems in the financial world – to avoid crashes, maximise productivity, design a regulatory system and predict the future – are equally accessible to our analytical tools. First, though, we need to analyse finance as a hybrid system. I’m confident we can do that because of recent work
Comment on these stories at www.NewScientist.com/opinion
Harvey Rubin directs the Institute for Strategic Threat Analysis and Response at the University of Pennsylvania, Philadelphia. This article is based on a talk he gave to a meeting of financiers in New York City in July
One-minute interview
Trevor Nunn In 1925 the state of Tennessee took evolution to court. The acclamed director is bringing the episode to the London stage Why did you choose this play? I was approached about how to commemorate Darwin in the theatre. So I read On The Origin of Species from cover to cover. I was fascinated by it, especially by Darwin obviously struggling with the knowledge that he was going to upset a vast number of people. Then I remembered that at university I had directed a scene from Inherit the Wind. I had a look at it again and I was very, very impressed. So I contacted Kevin [Spacey, artistic director of the Old Vic theatre in London], and proposed the possibility of the play. Inherit the Wind is set in 1920s America. What relevance does it have today? Creationism versus evolution is still hotly debated, to the point where it is still a legal issue in the US. A considerable proportion of people in UK are opposed to evolution. In areas of the Middle East, Darwin is censored. Darwin has still only reached a minority of the population of this planet. Do you think evolution and religion can be reconciled? I genuinely think that each individual should be resolving that question for themselves. It requires a leap of faith to say I believe in an omniscient creator. By the same token, scientific inquiry requires a leap of faith. Where did the matter in the big bang come from? Where does the nothingness that contained the matter come from? One thing we know is that we don’t know. So the play doesn’t have heroes and villains. It’s not valuable to approach this play like it’s an open-and-shut case – here we are as the audience looking at a group of total maniacs in the south of the US. The reality is more sophisticated and creates more food for thought.
PROFILE Trevor Nunn is a theatre and film director. His production of Inherit the Wind by Jerome Lawrence and Robert Edwin Lee opens this week at the Old Vic theatre in London
Can you give us an example? William Jennings Bryan [the creationists’ lawyer] was a religious fundamentalist but surprisingly he had very socialist beliefs. He stood for the presidency three times, and each time was for the poor, the dispossessed, the working man. What he saw in Darwinism was the worst kind of survival-of-the-fittest capitalism. What are you hoping the audience will take away from the play? Some people will have their minds changed, some people will have their views confirmed, but I think a lot of people in the audience will not have listened to a debate about evolution. I think people will be fascinated by the arguments. Interview by Celeste Biever
PRIZE DRAW Would you like to see Inherit the Wind at the Old Vic on Sunday 11 October? We have a pair of tickets to give away. Simply go to www.newscientist.com/projects/forms/inheritthewind for details of how to enter, or post your name, address and telephone number to: Inherit the Wind Competition, Lacon House, 84 Theobald’s Road, London WC1X 8NS. The first entry out of the hat wins. You must make your own travel arrangements. The deadline for entries is 5 pm BST on 1 October 2009.
19 September 2009 | NewScientist | 25
THE OLD VIC
showing that the tools we use to analyse such systems are applicable to biology. Two results in particular will resonate with the financial sector. One predicts which bacterial genes are essential and which can be knocked out without killing the organism. This is the bacterial version of asking “is this bank too big to fail; if I get rid of it, will the whole system crash?” The second models how flocks of birds or schools of fish perform collective tasks without centralised coordination. It is not a big stretch to propose that financial group behaviour, like panic selling, may be analysed using these tools. More complex questions about the growth of bacterial colonies can be answered if more complete information is known, such as the individual biological properties of each cell. Similarly, more complete information about financial institutions will allow more complex questions about financial systems to be answered. This proposal raises several practical questions. Will the relevant parties make the information available? Where should the information reside, who will have access to it and how will confidentiality be guaranteed? In conversations with financiers, I have found that there is an appetite for making the information available if confidentiality and anonymity are guaranteed. There is also acceptance that a government agency should be the repository of the information. All we need now is the political and corporate will to gather the information, engage the right team and apply these tools to help solve a really important problem. ■