From an entertaining article in the Financial Times that develops the analogy between the interconnectedness of financial instruments and biological ecosystems.

“From an individual firm’s perspective, these strategies looked like sensible attempts to purge risk through diversification: more eggs are being placed in the basket,” says Mr Haldane. “Viewed across the system as a whole, however, it is clear now that these strategies generated the opposite result: the greater the number of eggs, the greater the fragility of the basket – and the greater the probability of bad eggs.”

That is what a mathematical ecologist would have predicted if he or she had known what was going on in the world of finance. The tropical rainforest, for example, has so many interdependent species that it is more vulnerable to an external shock than the simpler ecological diversity of savannahs and grasslands.

I wonder what prescription naturally arises from this perspective?  Total laissez-faire so that the financial system can suffer enough crashes, extinctions, and re-organizations to find a configuration that is stable for the long run?  Would we someday see Business schools sending missions out to shuttering financial institutions clamoring for intervention in the name of preserving derivative-diversity.  What is the analog of sexual reproduction and random genetic mixing?

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