Magazine article The Futurist

The Science of "Tipping Points": Researchers Look for Warning Signals of Major Shifts

Magazine article The Futurist

The Science of "Tipping Points": Researchers Look for Warning Signals of Major Shifts

Article excerpt

The stock market, the Arctic, and your brain have more in common than you might think. Many complex systems--including natural habitats like lakes, animal populations, financial markets, and even the human brain--exhibit "early warning" behaviors prior to big, disruptive changes. These changes include desertification or fish die-off in the case of the natural world, a brain seizure, or a stock market crash, according to the authors of the new article titled "Early-Warning Signals for Critical Transitions," published in the September 2009 issue of Nature.

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One such "warning" behavior they identify is the slowing down of one part of the system, which can be an indication that that system is seeking to establish a new equilibrium. But slowing down can also reduce the ability of the system to adjust to fluctuations. In financial markets, many investors moving away from risky bets (like stocks) into supposedly safer investments (such as U.S. Treasury notes) can be seen as slowing-down behavior.

"Flickering" is another potential early-warning signal, wherein parts of the system make what the researchers call "transient excursions" into alternative states. These excursions may occur before epileptic seizures, the end of a glacial period, and in lakes before they shift to a turbid state, they write.

Bodies of water sometimes show symptoms of flickering during the process of eutrophication, when an overabundance of plant or nutrient matter--such as too much algae or too much nitrogen in the water--kills off all the other life in the lake or pond, pushing the ecosystem into a different state.

In terms of finance, too many investors buying put options contracts can also be seen as a sign of flickering and thus of imminent collapse. Put options allow investors to back out of a stock purchase if the price declines significantly in a short period, usually 30 days, which is rare. The volatility index, or VIX, which tracks the number and price of put options, is generally seen as the most important indicator of a coming "major event" in the stock market. Market watchers regard a sudden jump in the price of options contacts as a symptom of extreme investor fear. …

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