In March of 2011, a massive shoal of sardines was navigating through the Pacific Ocean just south of Los Angeles. They swam in tight formation, moving as one; to the observer, the shoal seemed to possess a collective intelligence. This particular group navigated their way into Redondo Beach’s King Harbor, California. Apparently hell-bent on self-destruction, they failed to reverse course: caught in a trap of their own creation, they sucked the oxygen supply from the shallow waters, suffocating en masse.
This is an example of a network. Networks are everywhere. Fish, neurons, humans, computer servers: they can be made of anything. Such networks are brilliant indeed; they are also destructive. Their tendency for wanton self-inflicted damage can only be described as masochistic. The individual elements that form a network are neither aware of this tendency nor of the role they play in forming it; they wear a blindfold.
Local experts were not sure how the sardines had managed such a calamitous error. The Guardian reported on the incident, quoting Andrew Hughan, a spokesman from the California Department of Fish and Game. He told Reuters: “It looks like they just swam in the wrong direction and ended up in a corner of the pier that doesn’t have any free-flowing oxygen in it. There’s nothing that appears to be out of sorts, no oil sheen, no chemicals, no sign of any kind of illegal activity. As one fisherman just told me, this is natural selection.” Hughan went on to say that such incidents were rare but not unheard of. He was not wrong in that respect. Just a few weeks later, another shoal off the California coast swam into Ventura Harbor; once again the over-concentration of fish swiftly exhausted the oxygen supply. They died, leaving the harbour patrol with the unpleasant job of clearing up.
Various theories have been proposed as to why the sardines adopted such short-sighted behaviour. One explanation put forward is that they were running from a “red tide”: a bloom of marine algae that causes poison-related disorientation. Others proposed that the shoal was seeking refuge from an offshore storm. However, such explanations are not necessary.
Networks are quite capable of self-destruction; the behaviour of the sardines can be explained without recourse either to inclement weather, or to bad algae. Such is the nature of a network: whilst it appears to possess intelligence, it does not; if it did, such self-inflicted harm would surely be of no purpose.
The network that dragged the global economy to its knees, swimming the uncharted waters of financial toxicity was equally destructive. The individuals that constituted this network: bankers, regulators, economists and commentators were clearly lacking in vision. Just like the sardines, while their behaviour seemed appropriate on an individual basis, their collective actions were disastrous.
These bankers had come up with a cunning way of reducing their own individual risk when providing loans. The loans they made were re-packaged, chopped into little pieces and sold on. By dividing them up, if a given loan went bad, only a small percentage of the resulting loss would be felt by any one institution. They called it “mortgage securitisation”. The financial network as a whole was lauded for its intelligence, for its creativity. So compelling was this new way of doing things that the IMF itself stated, in 2006, that the risk of a banking crisis had been reduced as a result. This claim was made a mere 18 months before the most serious financial meltdown of our times.1
The core of the problem was that on an individual loan by loan basis, this strategy made perfect sense. However, the mechanism proved to be catastrophic when applied across the economy as a whole. Because loans had been securitised, banks were no longer fully liable for the decisions they made: they began to provide more risky loans. Each bank mimicked the next to the extent that the entire banking system found itself exposed to an unsustainable asset bubble of its own creation. What the banks and the IMF failed to comprehend is that networks are dangerous: when crowds act in unison, when they engage in collective behaviour, their actions magnify systemic risk. Yet, the brilliance of the crowd and the power of the network can be quite incredible.
Us: that’s you, me, the bloke next door and all of the members of Homo sapiens sapiens, are experts at working, playing, laughing and crying within our network. The product of our collective behaviour has enabled us to organise the world, create wonderful art and music, tame nature, and, most importantly, develop the potential to create unprecedented wealth and guarantee a prosperous future for each and every member of our species. In order to fulfil this potential, we must learn to see clearly, to understand the collective to which we belong, and in the process avoid the fate of the sardines of King Harbor. Unlike the bankers, we must avoid shallow economic waters; we must never deprive ourselves of the oxygen that gives life to the global economy and indeed, our global civilisation.
First of all, however, we need to have a better understanding of networks. Network theory is a relatively new area of study, but it is shining light on mysteries that have long been a source of puzzlement. To use the jargon, the individual components that make up a network are nodes and the way they connect with each other is crucial. Some nodes are highly connected: these are the hubs of the network. The network’s structure and emergent properties, where chaos at the local level creates order at the group level, is the stuff of magic.
To fully realise how the human network operates, we must learn of our evolution and the inherent failings of our minds, our tendencies as individuals and our society as a whole. As individuals within the network we are simply one of the many nodes in the system, one of the particles in the chaos. The greatest figures of history do nothing more than fulfil the role that the network demands of them; they are dust in the wind, grist to the mill. As a crowd, we are both brilliant and frightening. Our capability for innovation, for discovery and achievement are awesome: in the mere few millennia of our history as a species, we have changed the world more completely than it has changed us. Yet, given our abilities, our history is littered with events that we were able to prevent: wars that did not need to be fought, famines we could have prevented, oppression that should never be tolerated and ignorance both wilful and shameful.
The crowd is a genius – and a madman.
Today we have new hope; we possess the tools, the skills and the means to overcome all of that. We have the ability to take humanity into a new and golden age, to learn from the mistakes of history, to avoid the pitfalls of our evolution and psychology, to put an end to the harm we inflict upon ourselves. We can harness the power of our network and make it work for us. There are few challenges more important than these.
© Investment & Business News 2013
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