Why the financial markets are like slime mold….
and what we can do about it.
In his book Emergence, Steven Johnson describes how scientists wrestled with the actions of slime mold. Usually it exists as tiny single entities, feeding on micro-organisms that live in dead plant material. However under certain circumstances it flocks together and acts as one large glutinous blob, seemingly with a mind of its own. For many years scientists were convinced that this activity was dictated by some slime mold pacemakers that spurred the other particles to coalesce around them. In fact, it was discovered that they merely responded to climactic stimuli. They congealed by following each other’s trails of cyclic AMP. If weather conditions didn’t encourage its release, they ignored each other. If weather was favourable they produced more, creating denser and longer trails that were followed by other mold cells which also excreted the AMP and thus made the trail even longer and denser. Eventually they combined into an apparent single unit. No pacemaker, just the weather and fairly basic biological responses.
This action is exactly similar to the way the financial markets work. They respond to given stimuli in specific and predictable ways. You can’t expect them to listen to reason, or act differently, because they have no sentient command structure. If they discover a weak currency, company or country, they will automatically go in for the kill. Unlike wolves, their feeding frenzy cannot be sated. A victim won’t have a lucky escape because the markets are full.
However, just as slime mold explains the actions of the markets, it also supplies the simple solution. Prevent the climactic conditions that allow the mindless destruction to occur. In other words, when it seems that the markets are about to tailspin, close them down for a month to allow the governing bodies to deal with the problem without the added pressure of clammering traders and collapsing markets. This might seem like overkill, and it can certainly be argued that closing the markets does not solve the basic problem or remove the need for market re-adjustment, but that would not be the purpose of the closure. The point is to prevent the needless collateral damage caused by mass panic on the trading floors.