Systemic Risks in Society and Economics

Abstract

Many large-scale disasters have a strong human component. They cannot be solved by technical approaches alone, but require an understanding of the collective social dynamics. This is maybe most obvious for financial crises, famines and other shortages of resources, epidemic spreading of diseases, wars and international terrorism, revolutions, or the collapse of trust and cooperation in societies. This contribution presents a summary of how complexity contributes to the emergence of systemic risks in socio-economic systems. It is highlighted that large-scale disasters are mostly based on cascading effects, which are due to non-linear and/or network interactions. Different classes of spreading phenomena are distinguished and illustrated by examples, including the financial market instability. Sources and drivers of systemic risks in socio-economic systems are analyzed, and related governance issues are identified. Typical misunderstandings regarding the behaviour and functioning of socio-economic systems are addressed, and some current threats for the stability of social and economic systems are pointed out. It is shown that linear, experience-based, or intuitive approaches often fail to provide a suitable picture of the functioning of social and economic systems. This leads to the illusion of control and a dangerous logic of failure, which can lead to paradoxical system behaviours, unwanted side effects, and sudden regime shifts. The application of complex systems methods, however, allows one to anticipate, avoid, or mitigate systemic risks and certain disasters resulting from them. It even enables one to use the self-organizing, adaptive nature of socio-economic systems to reach favourable system behaviours, which are robust to external perturbations and adaptive to changing conditions.

Keywords: complex system, systemic risk, market instability, cascade effect, managing complexity