Washington Post (02/16/09) P. A7; Vedantam, Shankar
Scientist Yaneer Bar-Yam has developed a computational model of the economy that uses virtual actors to populate the world, instead of digital representations of specific individuals, companies, and brokers, enabling researchers to change how the actors behave and study how those changes affect the economic ecosystem. Bar-Yam says the principle behind the model is that humans regularly solve problems by imaging how certain behaviors will affect specific outcomes, but in a complex system such as the economy, which can be affected by fear, rumors, and misinformation, the ability to forecast accurately is severely reduced. He wanted to understand why the economy was so turbulent, and his model provides a unique explanation for the instability. In July 2007, the Bush administration eliminated a 69-year-old regulation known as the uptick rule. The rule was designed to prevent bear raids, which is when a powerful investor suddenly sells a large number of shares in a company, creating a temporary situation in which supply is greater than demand, causing prices to fall and allowing the investor to buy back shares at a lower price. Bar-Yam's model suggests that the elimination of the uptick rule created instability in the same way removing a support from a house would, which allowed the housing crisis to cripple the economy. The model, which was created at Bar-Yam's New England Complex Systems Institute, is just one of many computational models that have recently been developed to obtain a more thorough understanding of complex systems. Other models include two University of Maryland models, one used to predict how different situations could amplify the likelihood of violence in the Middle East, and one that shows that infant mortality levels predict the likelihood of political instability in a country better than any other single measurement.
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