10-18-2022, 04:08 PM
Market Crises are like Brain Seizures
<!-- SC_OFF --><div class="md"><p>Dror Kennett, a 31 year old physicist (at the time) was involved in a unique study that focused on the analysis and modeling of financial systems. He works within the area of "econophysics"-- a unique field of physics that applies concepts developed by physicists to solve economic problems. </p> <p>Findings from the study show that the connected way that financial markets behave during a market crisis is similar to the behavior of a brain during epileptic fits. Dr Kennett explains: "you can think of different regions of the brain as different economic markets. Each region has it's own dynamic and behavior. Yet once a brain seizure starts, all the regions start acting together--just as when there is a crash in the markets." </p> <p>He says that in epilepsy, one part of the brain takes over and interferes with normal brain activity. I've read that during market crises, all correlations go to 1, meaning all asset classes move down in tandem. The brain, similarly, falls under one single focus of correlation. "And this is what we see in the markets; when the markets start to go down, the correlations between the different stocks and companies become stronger and stronger, keeping this downward momentum going."</p> <p>In response to the GFC, he said "The excessive dominance of the financial sector distorted healthy activity in other sectors leading to 'market stiffness'. This 'market stiffness' was demonstrated in the emergence of 'market seizure' behavior. In epilepsy, there is the over-dominance of the epileptic focus on the functioning of all other regions of the brain."</p> <p>Dr Kennett believes that a new way of analyzing financial systems is needed to prevent economic crises moving forward. "Economics as a science is mainly driven by theories, and much of the economic theories are based on the physics of 100 years ago, particularly the notion of equilibrium. But physics has really evolved over the past 100 years--and systems are not always in equilibrium."</p> <p>Have markets always behaved this way during crises? Or did crises use to be more compartmentalized? </p> <p>Credit securitization has minimized the risk of individual credit and widened the availability of funding. But will the resulting financial market interconnectedness turn every crisis into a systemic one with global implications?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/werenotthatcool"> /u/werenotthatcool </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/y6lg6b/market_crises_are_like_brain_seizures/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/y6lg6b/market_crises_are_like_brain_seizures/">[comments]</a></span>
<!-- SC_OFF --><div class="md"><p>Dror Kennett, a 31 year old physicist (at the time) was involved in a unique study that focused on the analysis and modeling of financial systems. He works within the area of "econophysics"-- a unique field of physics that applies concepts developed by physicists to solve economic problems. </p> <p>Findings from the study show that the connected way that financial markets behave during a market crisis is similar to the behavior of a brain during epileptic fits. Dr Kennett explains: "you can think of different regions of the brain as different economic markets. Each region has it's own dynamic and behavior. Yet once a brain seizure starts, all the regions start acting together--just as when there is a crash in the markets." </p> <p>He says that in epilepsy, one part of the brain takes over and interferes with normal brain activity. I've read that during market crises, all correlations go to 1, meaning all asset classes move down in tandem. The brain, similarly, falls under one single focus of correlation. "And this is what we see in the markets; when the markets start to go down, the correlations between the different stocks and companies become stronger and stronger, keeping this downward momentum going."</p> <p>In response to the GFC, he said "The excessive dominance of the financial sector distorted healthy activity in other sectors leading to 'market stiffness'. This 'market stiffness' was demonstrated in the emergence of 'market seizure' behavior. In epilepsy, there is the over-dominance of the epileptic focus on the functioning of all other regions of the brain."</p> <p>Dr Kennett believes that a new way of analyzing financial systems is needed to prevent economic crises moving forward. "Economics as a science is mainly driven by theories, and much of the economic theories are based on the physics of 100 years ago, particularly the notion of equilibrium. But physics has really evolved over the past 100 years--and systems are not always in equilibrium."</p> <p>Have markets always behaved this way during crises? Or did crises use to be more compartmentalized? </p> <p>Credit securitization has minimized the risk of individual credit and widened the availability of funding. But will the resulting financial market interconnectedness turn every crisis into a systemic one with global implications?</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/werenotthatcool"> /u/werenotthatcool </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/y6lg6b/market_crises_are_like_brain_seizures/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/y6lg6b/market_crises_are_like_brain_seizures/">[comments]</a></span>