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February 26, 2015

Predicting the Next Wall Street Disaster

“Wouldn’t it be great if the U.S. had a heat map of the entire financial system that could alert it to vulnerabilities and approaching calamities before a global crisis struck?

“While members of Congress squabble over a move in the House to erode provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a 64-year-old Wall Street veteran and MIT-trained economist named Richard Bookstaber is quietly working on an ambitious project that aims to do just that. “Most people in government don’t even know this is going on right now,” Bookstaber tells Newsweek of his work at the U.S. Treasury Department’s Office of Financial Research (OFR).

“Using what are called “agent-based models,” Bookstaber’s project focuses on how the actions of individual agents—such as banks or traders on Wall Street—create chain reactions that cascade through a much wider ecosystem in ways that can threaten the global economy. “One of the earlier and simpler inspirations for agent-based modeling was looking at the migrating of birds,” Bookstaber says. “It’s not like they decide, ‘Hey guys, let’s make this V-shaped pattern.’ The birds are acting relative to the bird next to them. They’re in these patterns that can change in a second, and they just shift in a different direction. If you have a bird acting based on what the other birds are doing, you get this very complex, group-based behavior.”

“In the wake of the financial crisis, agent-based models, or ABMs, were highlighted for their potential to help stave off the next disaster by the National Science Foundation and MIT, where Bookstaber earned his doctorate. However, their pecuniary applications remained in embryonic stages until recently. After more than three years of tweaking his prototype, Bookstaber says he’s hoping to start running live data by the end of this year: “This is a project we believe could have huge value not just for the U.S. financial system but, as we collect more data and test and improve our models, the global financial system as a whole.”


Read the full Newsweek article by Leah McGrath Goodman here

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