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Dirk Helbing - The System Approach in Resiliency

1. 1. Dirk Helbing (ETH Zurich) The System Approach to Resilience!
2. 2. PERSPECTIVE doi:10.1038/nature12047 Globally networked risks and how to respond Dirk Helbing1,2 Today’s strongly connected, global networks have produced highly interdependent systems that we do not understand and cannot control well. These systems are vulnerable to failure at all scales, posing serious threats to society, even when external shocks are absent. As the complexity and interaction strengths in our networked world increase, man-made systems can become unstable, creating uncontrollable situations even when decision-makers are well-skilled, have all data and technology at their disposal, and do their best. To make these systems manageable, a fundamental redesign is needed. A ‘Global Systems Science’ might create the required knowledge and paradigm shift in thinking. G lobalization and technological revolutions are changing our pla- net. Today we have a worldwide exchange of people, goods, money, information, and ideas, which has produced many new opportunities, services and benefits for humanity. At the same time, however, the underlying networks have created pathways along which dangerous and damaging eventscanspreadrapidly and globally.This has increased systemic risks1 (see Box 1). The related societal costs are huge. When analysing today’s environmental, health and financial systems or our supply chains and information and communication systems, one finds that these systems have become vulnerable on a planetary scale. They are challenged by the disruptive influences of global warming, disease outbreaks, food (distribution) shortages, financial crashes, heavy solar storms, organized (cyber-)crime, or cyberwar. Our world is already facing some of the consequences: global problems such as fiscal and economic crises, global migration, and an explosive mix of incompatible interests and cultures, coming along with social unrests, international and civil wars, and global terrorism. In this Perspective, I argue that systemic failuresand extreme events are consequences of the highly interconnected systems and networked risks humans have created. When networks are interdependent2,3 , this makes them even more vulnerable to abrupt failures4–6 . Such interdependencies in our ‘‘hyper-connected world’’1 establish ‘‘hyper-risks’’ (see Fig. 1). For example, today’s quick spreading of emergent epidemics is largely a result of global air traffic, and may have serious impacts on our global health, social and economic systems6–9 . I also argue that initially beneficial trends such as globalization, increasing network densities, sparse use of resources, higher complexity, and an acceleration of institutional decision processes may ultimately push our anthropogenic (man-made or human- influenced)systems10 towardssystemicinstability—astateinwhichthings will inevitably get out of control sooner or later. Many disasters in anthropogenic systems should not be seen as ‘bad luck’, butastheresultsof inappropriate interactions and institutionalsettings.Even worse, they are often the consequences of a wrong understanding due to the counter-intuitive nature of the underlying system behaviour. Hence, conven- tional thinking can cause fateful decisions and the repetition of previous mistakes. This calls for a paradigm shift in thinking: systemic instabilities can be understood by a change in perspective from a component-oriented to an interaction- and network-oriented view. This also implies a fundamental change in the design and management of complex dynamical systems. The FuturICT community11 (see http://www.futurict.eu), which involves thousands of scientists worldwide, is now engaged in establishing a ‘Global Systems Science’, in order to understand better our information society with its close co-evolution of information and communication technology (ICT) and society. This effort is allied with the ‘‘Earth system science’’10 that now provides the prevailing approach to studying the physics, chemistry and biology of our planet. Global Systems Science wants to make the theory of complex systems applicable to the solution of global-scale problems. It will take a massively data-driven approach that builds on a serious collaboration between the natural, engineering, and social sciences, aiming at a grand integration of knowledge. This approach to real-life techno-socio-economic-environmental systems8 is expected to enable new response strategies to a number of twenty-first century challenges. 1 ETH Zurich, Clausiusstrasse 50, 8092 Zurich, Switzerland. 2 Risk Center, ETH Zurich, Swiss Federal Institute of Technology, Scheuchzerstrasse 7, 8092 Zurich, Switzerland. BOX 1 Risk, systemic risk and hyper-risk According to the standard ISO 31000 (2009; http://www.iso.org/iso/ catalogue_detail?csnumber543170), risk is defined as ‘‘effect of uncertainty on objectives’’. It is often quantified as the probability of occurrence of an (adverse) event, times its (negative) impact (damage), but it should be kept in mind that risks might also create positive impacts, such as opportunities for some stakeholders. Compared to this, systemic risk is the risk of having not just statistically independent failures, but interdependent, so-called ‘cascading’ failures in a network of N interconnected system components. That is, systemic risks result from connections between risks (‘networked risks’). In such cases, a localized initial failure (‘perturbation’) could have disastrous effects and cause, in principle, unbounded damage as N goes to infinity. For example, a large-scale power blackout can hit millions of people. In economics, a systemic risk could mean the possible collapse of a market or of the whole financial system. The potential damage here is largely determined by the size N of the networked system. Even higher risks are implied by networks of networks4,5 , that is, by the coupling of different kinds of systems. In fact, new vulnerabilities result from the increasing interdependencies between our energy, food and water systems, global supply chains, communication and financial systems, ecosystems and climate10 . The World Economic Forum has described this situation as a hyper-connected world1 , and we therefore refer to the associated risks as ‘hyper-risks’. 2 M A Y 2 0 1 3 | V O L 4 9 7 | N A T U R E | 5 1 Macmillan Publishers Limited. All rights reserved©2013 Evol. Inst. Econ. Rev. 10(1): 3–41 (2013) © 2013 The Japan Association for Evolutionary Economics DISCUSSION PAPER Economics 2.0: The Natural Step towards a Self-Regulating, Participatory Market Society Dirk Helbing* ETH Zurich, Swiss Federal Institute of Technology, Department of Humanities, Social and Political Sciences; Clausiusstrasse 50, 8092 Zurich, Switzerland. *E-mail: dirk.helbing@gess.ethz.ch Abstract Despite all our great advances in science, technology and financial innovations, many societies today are struggling with a financial, economic and public spend- ing crisis, over-regulation, and mass unemployment, as well as lack of sustain- ability and innovation. Can we still rely on conventional economic thinking or do we need a new approach? Is our economic system undergoing a fundamental transformation? Are our theories still doing a good job with just a few exceptions, or do they work only for “good weather” but not for “market storms”? Can we fix existing theories by adapting them a bit, or do we need a fundamentally different approach? These are the kind of questions that will be addressed in this paper. I argue that, as the complexity of socio-economic systems increases, networked decision-making and bottom-up self-regulation will be more and more important features. It will be explained why, besides the “homo economicus” with strictly self-regarding preferences, natural selection has also created a “homo socialis” with other-regarding preferences. While the “homo economicus” optimizes the own prospects in separation, the decisions of the “homo socialis” are self-deter- mined, but interconnected, a fact that may be characterized by the term “net- worked minds.” Notably, the “homo socialis” manages to earn higher payoffs than the “homo economicus.” I show that the “homo economicus” and the “homo so- cialis” imply a different kind of dynamics and distinct aggregate outcomes. There- fore, next to the traditional economics for the “homo economicus” (“economics 1.0”), a complementary theory must be developed for the “homo socialis.” This economic theory might be called “economics 2.0” or “socionomics.” The names are justified, because the Web 2.0 is currently promoting a transition to a new market organization, which benefits from social media platforms and could be character- ized as “participatory market society.” To thrive, the “homo socialis” requires suit- able institutional settings such a particular kinds of reputation systems, which will be sketched in this paper. I also propose a new kind of money, so-called “qualified money,” which may overcome some of the problems of our current financial sys- tem. In summary, I discuss the economic literature from a new perspective and argue that this offers the basis for a different theoretical framework. This opens the door for a new economic thinking and a novel research field, which focuses on the JEL: A13, C63, C72, D11, D20, D40, E44, H41, K20, L15, P40.
3. 3. Vision: Better understand society (collective decision making and behavior, ...) and its dependency on main driving factors (resources, environment, demographic changes, finances, ...) Examples: 1.  World financial, economic and debt crisis 2.  Social and political instabilities 3.  Global environmental change 4.  Organized crime, cybercrime 5.  Quick spreading of emerging diseases We Face Intensified and New, Global Problems
4. 4. Networking is Good … But Promotes Cascading Effects §  We now have a global exchange of people, money, goods, information, ideas… §  Globalization and technological change have created a strongly coupled and interdependent world Network infrastructures create pathways for disaster spreading! Need adaptive decoupling strategies.
5. 5. EU project IRRIIS: E. Liuf (2007) Critical Infrastructure protection, R&D view Failure in the continental European electricity grid on November 4, 2006 Cascading Effect and Blackout in the European Power Grid
6. 6. Cascading Effects During Financial Crises Video by Frank Schweitzer et al.
7. 7. A Letter to the Queen of England To: Her Majesty The Queen From: The British Academy 22 July 2009 MADAM, When Your Majesty visited the London School of Economics last November, you quite rightly asked: why had nobody noticed that the credit crunch was on its way? … So where was the problem? Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast. We have the honour to remain, Madam, Your Majesty’s most humble and obedient servants
8. 8. Connection density (%) Percentageofcooperation(%) 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.0 0.2 0.4 0.6 0.8 1.0 Too Much Connectivity Can Be Bad
9. 9. How the Banking Network Changed From: Haldane
10. 10. Hyperconnected Systems Great opportunities, but also systemic risks and too much complexity Source: World Economic Forum (WEF)
11. 11. How the Interplay of Risk and Complexity Creates Uncertainty
12. 12. Have We Created A Global Time Bomb?
13. 13. Are Derivatives Financial Weapons of Mass Destruction? Buffett warns on investment 'time bomb' Derivatives are financial weapons of mass destruction " Warren Buffett The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy ..., legendary investor Warren Buffett has warned. The world's second-richest man made the comments in his famous and plain-spoken "annual letter to shareholders", excerpts of which have been published by Fortune magazine. The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk. But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system. (BBC, 4 March, 2003)
14. 14. The Flash Crash on May 6, 2010 The flash crash turned solid assets into penny stocks within minutes. Was an interaction effect, no criminal act, ‘fat finger’, or error. 600 billion dollars evaporated in 20 minutes
15. 15. Strengthening Strong Links Does Not Help
16. 16. Engineered Breaking Points to Stop Cascades
17. 17. Network vulnerability can be reduced by §  backup strategies, redundancies, reserves, alternatives (‚plan B‘), §  stabilizing real-time feedback §  flexible, decentralized, self-organization and self-control mechanisms §  mutually compatible time scales and frictional effects §  symmetrical interactions §  a simplification of complex system designs §  diversity §  limitation of system size §  reduced connectivity §  dynamic decoupling strategies §  transparency, accountability, responsibility, and awareness Drivers of Systemic Risks and How to Respond Drivers of systemic risks: §  reduced redundancies §  more networking §  higher complexity §  faster dynamics §  high pace of innovation
18. 18. Cascading Effects During Financial Crises With all the Big Data of Human Activities Now Becoming Available, What Could We Do?
19. 19. Instruments to Explore the World Hubble, Nasa Connect web experiments with data mining and modelling tools to reach an acceleration of knowledge generation as in the Human Genome Project
20. 20. Global Participatory Platform Living Earth Simulator create new technology provide data Innovation Accelerator Planetary Nervous System Create systems to sense & understand Turn data into information What is? Develop models to simulate & predict Turn information into knowledge What if? Build platforms to explore & interact Turn knowledge into wisdom What for?
21. 21. Observatory for Financial Instabilities
22. 22. Observatory for Epidemic Spreading and Health Risks
23. 23. Observatory for Wars and Conflicts
24. 24. Transport and Logistics Observatory
25. 25. Towards Measuring the Social Footprint
26. 26. Happiness GDP Consider social capital: §  Solidarity, cooperativeness, §  compliance, §  reputation, trust, §  attention, curiosity, §  happiness, health, §  environmental care… Green = Happiest Blue Purple Orange Red = Least Happy Grey = Data not available New Compasses for Decision-Makers Goal: Create indices better than GDP/capita, considering health, environment, social well-being, … to promote sustainability
27. 27. Managing Complexity: Modifying Interactions Allows to Promote Favorable Self-Organization
28. 28. Cascading Effects During Financial Crises
29. 29. Cascading Effects During Financial Crises Gottes Hand/Finger
30. 30. Cascading Effects During Financial Crises Socio-Economic Problems
31. 31. Cascading Effects During Financial Crises Social Dilemma Problem -  Global Warming -  (Financial Crisis) -  Free-Riding -  Tax Evasion -  Environmental Pollution -  Environmental Exploitation -  Overfishing Global Warming
32. 32. Cascading Effects During Financial Crises Social Dilemma Problem -  Global Warming -  (Financial Crisis) -  Free-Riding -  Tax Evasion -  Environmental Pollution -  Environmental Exploitation -  Overfishing Enviromental Pollution
33. 33. Cascading Effects During Financial Crises Social Dilemma Problem -  Global Warming -  (Financial Crisis) -  Free-Riding -  Tax Evasion -  Environmental Pollution -  Environmental Exploitation -  Overfishing Overfishing
34. 34. Cascading Effects During Financial Crises Social Dilemma Problem -  Global Warming -  (Financial Crisis) -  Free-Riding -  Tax Evasion -  Environmental Pollution -  Environmental Exploitation -  Overfishing Border between Haiti and Dominican Republic Enviromental Exploitation
35. 35. Cascading Effects During Financial Crises Why Self-Organization Fails
36. 36. Cascading Effects During Financial Crises Why Self-Organization Fails
37. 37. Cascading Effects During Financial Crises
38. 38. Decentralized Can Outsmart Centralized Control Top-down regulation Selfish optimization Other-regarding self-organization
39. 39. Cascading Effects During Financial Crises How ever selfish man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without.
40. 40. Eli Pariser: The Filter Bubble
41. 41. Innovation is an Ecosystem Diversity is important and pays off, if we learn to deal with it
42. 42. Global problems call for a joint, global effort. Let’s create suitable institutions for the 21st century, the age of information, together!