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Published online 1 February 2008 | Nature | doi:10.1038/news.2008.541
Column: Muse
Calculating the risk on your cash
Managing risk in financial markets requires better understanding of their complex dynamics. But it's already clear that unfettered greed makes matters worse, says Philip Ball.
It seems to be sheer coincidence that the multi-billion-dollar losses at the French bank Société Générale (SocGen), caused by the illegal dealings of rogue trader Jérôme Kerviel, come at a time of imminent global economic depression. But the conjunction has fuelled discussion about whether such localized shocks to the financial market can trigger worldwide (‘systemic’) economic crises.
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"imminent global economic recession" ?! never heard of that
I disagree with the statement: "The analogy is potentially misleading, however, because the financial system, and the global economy generally, is never in equilibrium. Money is constantly in motion, and it’s widely recognized that instabilities such as market crashes depend in a sensitive but ill-understood way on feedbacks within the system that can act to amplify small disturbances and that enforce perpetual change". Indeed, the stated facts are closely analogous to those in thermodynamics. Take water as an example. Water at room temperature is in equilibrium, but the water molecules are constantly in motion: The kinetics, like the flow of money, are very dynamic. Feedbacks are of course known as well: Supercooled water is in (unstable) equilibrium, but add a crystallization seed and it will instantly turn to ice.