Researchers look for warning signals of major shifts.
The stock market, the Arctic, and your brain have more in common than you might think. Many complex systems – including natural habitats like lakes, animal populations, financial markets, and even the human brain – exhibit “early warning” behaviors prior to big, disruptive changes. These changes include desertification or fish die-off in the case of the natural world, a brain seizure, or a stock market crash, according to the authors of the new article titled “Early-Warning Signals for Critical Transitions,” published in the September 2009 issue of Nature.
One such “warning” behavior they identify is the slowing down of one part of the system, which can be an indication that that system is seeking to establish a new equilibrium. But slowing down can also reduce the ability of the system to adjust to fluctuations. In financial markets, many investors moving away from risky bets (like stocks) into supposedly safer investments (such as U.S. Treasury notes) can be seen as slowing-down behavior.
“Flickering” is another potential earlywarning signal, wherein parts of the system make what the researchers call “transient excursions” into alternative states. These excursions may occur before epileptic seizures, the end of a glacial period, and in lakes before they shift to a turbid state, they write.
Bodies of water sometimes show symptoms of flickering during the process of eutrophication, when an overabundance of plant or nutrient matter – such as too much algae or too much nitrogen in the water – kills off all the other life in the lake or pond, pushing the ecosystem into a different state.
In terms of finance, too many investors buying put options contracts can also be seen as a sign of flickering and thus of imminent collapse. Put options allow investors to back out of a stock purchase if the price declines significantly in a short period, usually 30 days, which is rare. The volatility index, or VIX, which tracks the number and price of put options, is generally seen as the most important indicator of a coming “major event” in the stock market. Market watchers regard a sudden jump in the price of options contacts as a symptom of extreme investor fear.
The researchers also point to studies showing that the brain releases mild bursts of electrical activity in the minutes prior to epileptic seizures as further evidence of “flickering.”
A separate study recently released in the Journal of Palliative Medicine claims to show that terminally ill patients who are unconscious or under anesthesia exhibit sudden spikes in electrical brain activity just before death, when blood pressure is greatly reduced. The finding adds credence not only to the early-warning argument put forth in the Nature paper but also the observed phenomenon of the “near-death experience,” though the Journal paper posits a fairly mundane biological explanation.
The science of early warnings in complex systems is – so far – not exactly scientific. Many of the warning signs seem to be in the eye of the beholder, and the authors acknowledge that looking for patterns in data across so many different areas can lead to false positive results as well as false negatives. Furthermore, any “reliable” signal of an imminent stock market collapse would become useless the moment a large number of people heeded it, since any rational investors would sell their investments in response to the activation of said signal. By acting en masse, the investors would dive into the very stock market crash scenario they had hoped to avoid. The dynamic is comparable to that of Werner Heisenberg’s uncertainty principle, which postulated that the act of attempting to observe particle behavior on the quantum level inevitably changes the behavior, which renders any “objective” observation illusionary.
“We note that most of the signals we have discussed should still be interpreted in a relative sense,” the researchers lament. They suggest that the study of corollary warning signals across systems would benefit from more reliable statistical tools.
– Patrick Tucker
It’s a system out there. A new paper argues that complex systems, like stock markets, the brain, and ecosystems, all exhibit similar early warning behaviors prior to a big shift event.
Sources: “Early-Warning Signals for Critical Transitions” by Marten Scheffer et al. Nature (September 2009).
“Surges of Electroencephalogram Activity at the Time of Death: A Case Study” by Lakhmir S. Chawla, MD, et al., Journal of Palliative Medicine (October 2009).
Originally published in THE FUTURIST, January-February 2010