The price of complexity in financial networks.

Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

Dynamical evidence for causality between galactic cosmic rays and interannual variation in global temperature.

As early as 1959, it was hypothesized that an indirect link between solar activity and climate could be mediated by mechanisms controlling the flux of galactic cosmic rays (CR) [Ney ER (1959) Nature 183:451-452]. Although the connection between CR and climate remains controversial, a significant body of laboratory evidence has emerged at the European Organization for Nuclear Research [Duplissy J, et al. (2010) Atmos Chem Phys 10:1635-1647; Kirkby J, et al. (2011) Nature 476(7361):429-433] and elsewhere [Svensmark H, Pedersen JOP, Marsh ND, Enghoff MB, Uggerhøj UI (2007) Proc R Soc A 463:385-396; Enghoff MB, Pedersen JOP, Uggerhoj UI, Paling SM, Svensmark H (2011) Geophys Res Lett 38:L09805], demonstrating the theoretical mechanism of this link. In this article, we present an analysis based on convergent cross mapping, which uses observational time series data to directly examine the causal link between CR and year-to-year changes in global temperature. Despite a gross correlation, we find no measurable evidence of a causal effect linking CR to the overall 20th-century warming trend. However, on short interannual timescales, we find a significant, although modest, causal effect between CR and short-term, year-to-year variability in global temperature that is consistent with the presence of nonlinearities internal to the system. Thus, although CR do not contribute measurably to the 20th-century global warming trend, they do appear as a nontraditional forcing in the climate system on short interannual timescales.

Systemic risk in banking ecosystems.

In the run-up to the recent financial crisis, an increasingly elaborate set of financial instruments emerged, intended to optimize returns to individual institutions with seemingly minimal risk. Essentially no attention was given to their possible effects on the stability of the system as a whole. Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, we explore the interplay between complexity and stability in deliberately simplified models of financial networks. We suggest some policy lessons that can be drawn from such models, with the explicit aim of minimizing systemic risk.

Tracking and forecasting ecosystem interactions in real time.

Evidence shows that species interactions are not constant but change as the ecosystem shifts to new states. Although controlled experiments and model investigations demonstrate how nonlinear interactions can arise in principle, empirical tools to track and predict them in nature are lacking. Here we present a practical method, using available time-series data, to measure and forecast changing interactions in real systems, and identify the underlying mechanisms. The method is illustrated with model data from a marine mesocosm experiment and limnologic field data from Sparkling Lake, WI, USA. From simple to complex, these examples demonstrate the feasibility of quantifying, predicting and understanding state-dependent, nonlinear interactions as they occur in situ and in real time--a requirement for managing resources in a nonlinear, non-equilibrium world.

Size and complexity in model financial systems.

The global financial crisis has precipitated an increasing appreciation of the need for a systemic perspective toward financial stability. For example: What role do large banks play in systemic risk? How should capital adequacy standards recognize this role? How is stability shaped by concentration and diversification in the financial system? We explore these questions using a deliberately simplified, dynamic model of a banking system that combines three different channels for direct transmission of contagion from one bank to another: liquidity hoarding, asset price contagion, and the propagation of defaults via counterparty credit risk. Importantly, we also introduce a mechanism for capturing how swings in "confidence" in the system may contribute to instability. Our results highlight that the importance of relatively large, well-connected banks in system stability scales more than proportionately with their size: the impact of their collapse arises not only from their connectivity, but also from their effect on confidence in the system. Imposing tougher capital requirements on larger banks than smaller ones can thus enhance the resilience of the system. Moreover, these effects are more pronounced in more concentrated systems, and continue to apply, even when allowing for potential diversification benefits that may be realized by larger banks. We discuss some tentative implications for policy, as well as conceptual analogies in ecosystem stability and in the control of infectious diseases.

John Snow's legacy: epidemiology without borders.

This Review provides abstracts from a meeting held at the London School of Hygiene and Tropical Medicine, on April 11-12, 2013, to celebrate the legacy of John Snow. They describe conventional and unconventional applications of epidemiological methods to problems ranging from diarrhoeal disease, mental health, cancer, and accident care, to education, poverty, financial networks, crime, and violence. Common themes appear throughout, including recognition of the importance of Snow's example, the philosophical and practical implications of assessment of causality, and an emphasis on the evaluation of preventive, ameliorative, and curative interventions, in a wide variety of medical and societal examples. Almost all self-described epidemiologists nowadays work within the health arena, and this is the focus of most of the societies, journals, and courses that carry the name epidemiology. The range of applications evident in these contributions might encourage some of these institutions to consider broadening their remits. In so doing, they may contribute more directly to, and learn from, non-health-related areas that use the language and methods of epidemiology to address many important problems now facing the world.

Why worry about how many species and their loss?

We are astonishingly ignorant about how many species are alive on earth today, and even more ignorant about how many we can lose yet still maintain ecosystem services that humanity ultimately depends upon. Mora et al.'s paper is important in offering an imaginative new approach to assessing total species numbers, both on land and in the sea.

Why fishing magnifies fluctuations in fish abundance.

It is now clear that fished populations can fluctuate more than unharvested stocks. However, it is not clear why. Here we distinguish among three major competing mechanisms for this phenomenon, by using the 50-year California Cooperative Oceanic Fisheries Investigations (CalCOFI) larval fish record. First, variable fishing pressure directly increases variability in exploited populations. Second, commercial fishing can decrease the average body size and age of a stock, causing the truncated population to track environmental fluctuations directly. Third, age-truncated or juvenescent populations have increasingly unstable population dynamics because of changing demographic parameters such as intrinsic growth rates. We find no evidence for the first hypothesis, limited evidence for the second and strong evidence for the third. Therefore, in California Current fisheries, increased temporal variability in the population does not arise from variable exploitation, nor does it reflect direct environmental tracking. More fundamentally, it arises from increased instability in dynamics. This finding has implications for resource management as an empirical example of how selective harvesting can alter the basic dynamics of exploited populations, and lead to unstable booms and busts that can precede systematic declines in stock levels.

Individual versus systemic risk and the Regulator's Dilemma.

The global financial crisis of 2007-2009 exposed critical weaknesses in the financial system. Many proposals for financial reform address the need for systemic regulation--that is, regulation focused on the soundness of the whole financial system and not just that of individual institutions. In this paper, we study one particular problem faced by a systemic regulator: the tension between the distribution of assets that individual banks would like to hold and the distribution across banks that best supports system stability if greater weight is given to avoiding multiple bank failures. By diversifying its risks, a bank lowers its own probability of failure. However, if many banks diversify their risks in similar ways, then the probability of multiple failures can increase. As more banks fail simultaneously, the economic disruption tends to increase disproportionately. We show that, in model systems, the expected systemic cost of multiple failures can be largely explained by two global parameters of risk exposure and diversity, which can be assessed in terms of the risk exposures of individual actors. This observation hints at the possibility of regulatory intervention to promote systemic stability by incentivizing a more diverse diversification among banks. Such intervention offers the prospect of an additional lever in the armory of regulators, potentially allowing some combination of improved system stability and reduced need for additional capital.

Fishing elevates variability in the abundance of exploited species.

The separation of the effects of environmental variability from the impacts of fishing has been elusive, but is essential for sound fisheries management. We distinguish environmental effects from fishing effects by comparing the temporal variability of exploited versus unexploited fish stocks living in the same environments. Using the unique suite of 50-year-long larval fish surveys from the California Cooperative Oceanic Fisheries Investigations we analyse fishing as a treatment effect in a long-term ecological experiment. Here we present evidence from the marine environment that exploited species exhibit higher temporal variability in abundance than unexploited species. This remains true after accounting for life-history effects, abundance, ecological traits and phylogeny. The increased variability of exploited populations is probably caused by fishery-induced truncation of the age structure, which reduces the capacity of populations to buffer environmental events. Therefore, to avoid collapse, fisheries must be managed not only to sustain the total viable biomass but also to prevent the significant truncation of age structure. The double jeopardy of fishing to potentially deplete stock sizes and, more immediately, to amplify the peaks and valleys of population variability, calls for a precautionary management approach.

Oscillations in continuous culture populations of Streptococcus pneumoniae: population dynamics and the evolution of clonal suicide.

Agents that kill or induce suicide in the organisms that produce them or other individuals of the same genotype are intriguing puzzles for ecologists and evolutionary biologists. When those organisms are pathogenic bacteria, these suicidal toxins have the added appeal as candidates for the development of narrow spectrum antibiotics to kill the pathogens that produce them.We show that when clinical as well as laboratory strains of Streptococcus pneumoniae are maintained in continuous culture (chemostats), their densities oscillate by as much as five orders of magnitude with an apparently constant period. This dynamic, which is unanticipated for single clones of bacteria in chemostats, can be attributed to population-wide die-offs and recoveries. Using a combination of mathematical models and experiments with S. pneumoniae, we present evidence that these die-offs can be attributed to the autocatalytic production of a toxin that lyses or induces autolysis in members of the clone that produces it. This toxin, which our evidence indicates is a protein, appears to be novel; S. pneumoniae genetic constructs knocked out for lytA and other genes coding for known candidates for this agent oscillate in chemostat culture. Since this toxin lyses different strains of S. pneumoniae as well as other closely related species of Streptococcus, we propose that its ecological role is as an allelopathic agent. Using a mathematical model, we explore the conditions under which toxins that kill members of the same clone that produces them can prevent established populations from invasion by different strains of the same or other species. We postulate that the production of the toxin observed here as well as other bacteria-produced toxins that kill members of the same genotype, 'clonal suicide', evolved and are maintained to prevent colonization of established populations by different strains of the same and closely related species.

Infectious disease: can we avert a lethal flu pandemic?

If avian flu becomes directly transmissible among humans, could we prevent a pandemic by using prophylactic antivirals? Possibly, if the virus is not too transmissible, and we react fast and efficiently.