The FT had a great article last week on all the different ways economists try to use scientific principles to understand their world. It’s chock full of interesting insights.
Early in the article they explain that while all these banks were diversifying, they were all diversifying in the same way, something we know all understand. What was especially interesting, though, was that when you think of especially diverse ecosystems, like the rainforst, they’re actually not all that strong with “so many interdependent species that it is more vulnerable to an external shock than the simpler ecological diversity of savannahs and grasslands.”
The conlcusion also got me thinking, noting that the problem with the use of all the scientific models in finance is that when they’re used in the way they are they effect the world they’re modeling, something the model does not take into account (in doesn’t need to when it’s just being used to examine/understand the biological world). “Donald MacKenzie of Edinburgh university says the real problem with models is that bankers tend to view them as ‘cameras’ that capture how the world works, like the camera that might photograph a physics experiment. Instead, he argues, they should be viewed as ‘engines’ – since the presence of a model tends to change and drive market behaviour in a way that makes it impossible to assume that the past can predict the future.”