Santa Fe Institute, here I come!

Did you know that there isn’t a single non-stop flight from any of New York City’s three airports to Albuquerque, New Mexico?  This matters to me now that I’ve joined the Santa Fe Institute’s Business Network and will be visiting.  The Santa Fe Institute is a “trans-disciplinary” research institute where the main focus is bringing research experts from different disciplines together to work on a problem of common interest.  It’s exactly the approach that I advocate for risk management: incorporating lessons from other fields into my own.  I learned the value of this approach in college, where my university encouraged students and faculty to work on creative combinations of fields.  In my freshmen year we were amazed by the popular new course – the result of a collaboration between a biologist and a psychologist – called the “Biological Basis of Behavior.”  BBB was scary: those who took it learned that our decisions, while seemingly the result of free will, can largely be understood as a combination of genetics and our experiences that manifest themselves as electrical signals in the 3 pound lump of matter encased in our skulls.  Collaborations between seemingly disparate disciplines can lead to novel discoveries.

The Santa Fe Institute mainly studies complex adaptive systems including the economy and market dynamics.  Physicists, Economists, Biologists, Network Scientists (think Google and Yahoo!) and others come together to work on some of the toughest problems.  I attended one of their workshops in NY this past week on the topic of “Forecasting in the Face of Risk and Uncertainty” where the topics and speakers ranged the gamut from a NY Times sports writer talking about predicting baseball players’ performances and election results to the head of the US Geological Survey talking about earthquake and storm prediction/preparedness to a Hedge Fund Manager talking about his investments in “Catastrophe Bonds” which pay out only if a disaster occurs (think of them as insurance).  The USGS presentation, and a related one from the head of Woods Hole Oceanographic Institution, had a number of interesting things to relate about natural disasters and our ability to forecast their occurrences, intensities and trajectories.  For example, current technology can tell us very well where a hurricane will hit (the past two years have had predictions of landfall within 10 miles of the actual spot!), but our models aren’t up to snuff on the intensity (neither wind speed nor rainfall amounts).  We’ve gotten much better at El Niño and La Niña predictions once they start, but we still don’t know what causes them in the first place.

Most interestingly for me was the news about “Atmospheric Rivers.”  This, too, was scary: in the upper atmosphere of the Pacific, Jet-Stream like currents can create an atmospheric river where massive amounts of water are literally transported over the ocean to be dumped on the West Coast.  These monster storms carry so much rain, that the volume is measured in units of Mississippi Rivers.  A “4 Mississippi” river event would dump 4 times the total amount of water in the Mississippi.  In 1861-1862 there were two such Atmospheric Rivers, each of which carried 50 Mississippi’s.  Think about that for a moment.  California’s Central Valley flooded for a year.  The Governor went to his inauguration in a row boat, and the California Legislature didn’t meet at all.  Now imagine that happening today, and think of the devastation.  That’s real risk.  Forecasting these types of events, realizing that they’re not just “black swans” and that we might be able to predict them is the first step in protecting ourselves.  That’s Risk Management.

Another interesting topic was the possibility of an ‘early warning system’ for earthquakes.  Apparently, some people in New York received Twitter Posts about the August earthquake before they felt it.  Using the same principle, if you’re far enough away from the epicenter of a quake, you may get a warning before the shaking reaches you.  Earthquakes send out two waves of energy: so-called “S-waves” that don’t carry much energy followed by much more damaging “P-waves.”  By detecting the s-waves and sending a signal (at near the speed of light), people far away could have a warning of several seconds before the p-wave hits.  While that’s not enough time to evacuate a building, it is enough time to have elevators automatically stop at the nearest floor to get out.  It might be enough time to stop high-speed trains and alert surgeons not to make that next incision.  It also may be enough time to shut down a nuclear power plant.  That’s Risk Management.

I’m not yet sure how we should incorporate the lessons from these other fields into financial risk management, but I’m convinced that it’s a promising strategy to try.  By learning what others have done and how others are thinking about the problems of uncertainty and risk, I hope to bring some level of advancement into financial risk management.  Now that I’ve joined Santa Fe, my next priority is to convince some airline to add a direct flight…

3 Responses to Santa Fe Institute, here I come!

  1. Pingback: Santa Fe Institute, here I come! | Revolusionline

  2. r. voronka says:

    Very informative article. Thanks!

    • Thanks. Some of these presentations are just fascinating. There was one that I’ll post about later after I’ve had a chance to speak with the author/presenter, which I’m doing in two weeks. He’s a post-doc at the Imperial College London and he and I are having dinner there during my next trip.

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