Tag: Political Risk

Predicting flu outbreaks, fashion trends, and political unrest with social networks

[Cross-posted at Signal/Noise]

Nicholas Christakis and James Fowler have released a new paper that looks at the potential predictive power of social networks.  They claim that current methods of contagion detection are, at best, contemporaneous with the actual epidemic.  What is needed is a true early detection method, one that would actually provide an accurate prediction of a coming epidemic.

Christakis and Fowler claim that social networks can be used as sensors for various types of contagions (whether biological, psychological, informational, etc).  In an inventive twist, they leverage what is known as the Friendship Paradox–the idea that, for almost everyone, a person’s friends tend to have more friends than they do.   Contagions tend to appear sooner in those individuals that are closer to the center of a social network.  The logic goes that if you ask a group of people to name one of their friends, those friends will be closer to the center of the network than the people you asked.  Rather than map and monitor an entire social network, simply monitoring these friends should allow researchers to detect the outbreak of, say, H1N1 much earlier.

They tested their theory using Harvard College undergrads, attempting to detect the outbreak of the flu.  (You can watch Christakis discuss the paper and research during a recent TED talk in the video embed below).  What did they find?

Based on clinical diagnoses, the progression of the epidemic in the friend group occurred 13.9 days (95% C.I. 9.9–16.6) in advance of the randomly chosen group (i.e., the population as a whole). The friend group also showed a significant lead time (p,0.05) on day 16 of the epidemic, a full 46 days before the peak in daily incidence in the population as a whole. This sensor method could provide significant additional time to react to epidemics in small or large populations under surveillance. The amount of lead time will depend on features of the outbreak and the network at hand. The method could in principle be generalized to other biological, psychological, informational, or behavioral contagions that spread in networks.

That is a pretty impressive result.  By simply tracking those individuals located closer to the center of the network, Christakis and Fowler were about to detect the progression of the flu a full 2 weeks before the general population.  They were also able to derive an early warning signal over a month before the peak of the outbreak in the general population.

If this result can be replicated and validated there are various ways it can be utilized.

Here are a few off the top of my head:

  1. Product Launches: Particularly in the tech industry–where so often we now see product launches as proto-typing–we could use this method to very quickly gauge the awareness and adoption of a new product and predict the extent to which it will spread throughout the general population.  Companies would have better early-warning systems, which would allow for killing dud products or boosting marketing for those products that are poised to explode.  I would assume this would be particularly applicable to products that benefit/rely on network effects.
  2. Political Indicators: One can think of political unrest as a contagion–discontent starting earlier with a core group within a social network and then, over time, spreading to those on the outskirts of the network.  Tracking the population as a whole may not give you an early warning of unrest, but rather a snapshot of a problem at a time when it is too late to do much about it.  Focusing on those closer to the core of a social network could provide enough lead time to diffuse tensions or intervene in other ways to avoid a full-scale upheaval.  Moreover, businesses and investors could also use the early warning as a signal to make adjustments in supply chain and their portfolios to take into account the potential unrest.  Finally, citizens within those countries could benefit by having more lead time to evacuate conflict zones, etc.
  3. Economic Indicators: Investors, businesses, and politicians are always looking for better economic indicators–those signals that are leading indicators of larger economic trends.  I wonder if adjusting the sampling frames of various polls to incorporate the Friendship Paradox might give us an even earlier warning for mortgage defaults, consumer confidence and spending, manufacturing activity, etc.  Not as sure about this one, but certainly much of economic activity takes place in a networked structure.

Would love to hear other thoughts.

A Nitpicky Critique of The Fat Tail’s Application of IR Theory

A while back I started reading The Fat Tail, a book about political risk by Eurasia Group’s Ian Bremmer (who also pens The Call for Foreign Policy) and Preston Keat, but couldn’t really get into it. I recently picked it back up and have been plowing through. I am reserving my final judgment until I’ve had a chance to complete it. However, one area has already irked me enough that I wanted to post a (rather long) comment: their treatment of international relations theory.

In Chapter 3, Bremmer and Keat outline a number of frameworks and theories that political risk analysis can (and should) consider when conducting a forecasting exercise. On page 47, the authors briefly outline the three major strains of international relations theory and attempt to illustrate how they might be applied to questions of political risk by asking how each theory would guide a US response to Iran’s nuclear program. First up, realism:

[Realism’s] foundation is premised on the conviction that states exist in an anarchic world, one with no international force or institution capable of arbitrating disputes between and among them (me: so far, so good). As a result, states exist in perpetual fear of being attacked, overtaken, or conquered by rival states (the “security dilemma”).

That last part is not correct. What they describe follows from the condition of anarchy states find themselves in. The security dilemma describes the process by which two states, neither of which have any desire or intention of initiating military hostility with each other, create conditions that facilitate conflict since the steps states take to increase their own security (e.g. expansion of military capabilities) necessarily decreases the security of other states. State A arms in order to protect itself, which leads State B to arm itself in order to protect itself in case State A decides to attack State B, etc, etc. The fear itself is not the security dilemma; rather, the actions taken as a result of anarchy (which includes fear of conquest) lead states to actually decrease their security by feeding arms races and spirals of insecurity. To be fair, the authors do describe this dynamic but they never correct the earlier misstatement regarding the security dilemma.

Ok, ok, minor point you might say. My real bone of contention lies with how they try to apply realism to their chosen scenario. Bremmer and Keat suggest that realists might provide two conflicting policy prescriptions to deal with Iran’s nuclear program:

One might argue that it is irresponsible to allow Iran to acquire nuclear weapons and insist that it must be prevented at all costs and by any means necessary.

I am not so sure. While there are various strains of realism, most would agree that states are rational actors that look to maximize their interests (or, at a minimum, their security). As such, it isn’t clear why realists would see a nuclear Iran as utterly unacceptable. Unless one lacks faith in the logic and power of a nuclear deterrent, a nuclear Iran posses little threat to the United States. Regionally, Iran would have to contend with Israel and their nuclear arsenal. Furthermore, simply gaining a nuclear capability would not propel Iran on a path of potential parity with a declining US. As such, I can’t see any rationale for a preemptive attack from the hegemonic war literature.

Another might argue that Iran’s neighbors should develop nuclear arsenals of their own to restore the regional balance of power–and, therefore, the region’s stability.

Yes, except that already happened–when Israel acquired a nuclear capability a few decades ago. Furthermore, the authors couched the discussion in terms of what the US should do. I fail to see why the US needs to encourage any regional players to develop nuclear weapons when the US could deploy their deterrent directly against potential Iranian action. (Yes, extended deterrence in the nuclear realm is not straightforward, but it is more realistic than promoting additional proliferation.)

On to liberal institutionalism:

Liberal institutionalists share the realist belief in an anarchic world, but they believe that international institutions (such as treaties and organizations) can and do provide a framework that can mitigate the security dilemma…Neoliberal institutionalists argue that institutions can overcome fears of cheating and unequal gains and allow cooperation to emerge between states.

I think they do a decent job summarizing liberal variants of institutionalism here and how it differs from realism. What I disagree with is how they apply institutionalism to the Iran scenario:

[…] a neoliberal institutionalist could provide varied policy recommendations, though these would emphasize a multilateral approach to the issue, preferably one involving diplomatic consensus reached within existing international organizations like the U.N. Security Council.

Sure, maybe, but this is a rather unimaginative application. The other approach would be to focus less on gaining international consensus on punitive measures via global institutions and more on how the US could leverage (or possibly design) international and regional organizations in such a way as to alter Iran’s preferences for acquiring a nuclear capability. If neoliberal institutionalism is all about exploiting absolute gains in order to affect actor’s choices (as the authors suggest), I find it odd that their application doesn’t speak to this at all. Can institutions (global or regional) be exploited to increase Iran’s security, thereby negating one reason for a nuclear program? Can concomitant financial incentives be baked in as well, altering Iran’s ‘payoff structure’ so as to make it less likely that their program will proceed? Those are the questions I believe a neoliberal institutionalist would more likely ask.

Finally, constructivism:

Constructivism is a radical departure from both the realist and neoliberal institutionalist traditions in international relations. An outgrowth of literary deconstruction and postmodernism, it focuses on how ideas, social identities, and theoretical concepts are created and employed in strategic politics…The main idea is that nothing is foreordained in international politics and that strategy and geopolitics are heavily dependent on how they are conceptualized.

I admit that describing constructivism is difficult, mainly because it isn’t so much a coherent paradigm as it is an approach that has many variations and, in some cases, divergent applications. I could write an entire book on what constructivism is or isn’t. Instead, I’ll focus once again on their application of the theory:

Our hypothetical constructivist analyst could address the question of what the United States or the international community should do in the case of Iran’s nuclear arsenal in a number of ways–from recommending direct U.S. diplomatic engagement with Iran, to regime change in that country. Overall, constructivism is more a critique than a school of thought and does not lend itself to policy prescriptions.

So, basically, a constructivist could recommend pretty much anything in this situation? There is no way for a constructivist to use insights from that approach to decide between diplomatic engagement and regime change? I am not sure how much the authors have engaged the constructivist literature and/or thought this through. More than likely (and this is pure speculation) they felt obliged to throw constructivism into the mix and either didn’t think all that much of it (given the line that it is ‘more a critique’) or did not bother to grapple with the large amount of constructivist scholarship that attempts to both apply the theory to specific policy issues and empirically test the theory against competing explanations. One could easily have picked up a copy of the edited volume Security Communities, published in 1998, to get an idea for how a constructivist might approach the issue of a nuclear Iran.

What’s stranger is that Bremmer and Keat go on in the next section to laud praise upon the ‘foreign policy analysis’ approach. They cite Kennan’s famous X article as a great example of how to apply foreign policy analysis to a situation:

[Kennan’s article] detailed the sources of Soviet behavior as extensions of its Communist ideology and of Russian history. The article described how Russia’s geopolitical condition–as a flat, open landmass lacking natural barriers to invasion–left it perpetually insecure in the face of potential marauders…As a consequence, Kennan argued, Russia had always sought expansion, both to create buffers and to fulfill a sense of “manifest destiny.”

While Kennan was widely regarded as a foreign policy “realist”, the analysis above fits in quite well with variants of constructivism. A focus on a state’s past experience and ideology to describe it’s decision-making process and likely actions fits right in with most strains of constructivism. Additionally, by noting that Soviet policy wasn’t simply a result of the condition of anarchy, but rather followed from their unique history, experiences (particularly with other states), and their ideology at the time, Kennan is going beyond Bremmer and Keat’s realist discussion.

Are these descriptions and applications–spread across only a few pages–essentially straw men? Sure, and the authors admit as much in a footnote in the back of the book. However, even while dealing with straw men I think the authors could have done a better job describing and applying the various theories, if for no other reason than to provide readers with a better summary of IR theory and to help them think about how one might incorporate insights from these theories into their analysis of political events.

And thus endeth the rant.

Sovereign Debt: The Next Financial Contagion?

This week, the government of Dubai decided to delay payment on the tens of billions of dollars that it’s Dubai World holding owes to various creditors (UBS speculates as much as $80B). Dubai World is the vehicle through which the state has invested heavily in various real estate projects around the world. In order to fund the expansive projects and investments, the government sought billions in debt to fuel their initiatives.

By delaying payment Dubai has not only created serious doubts about its dedication and ability to repay its loans, but also the credit worthiness and risk-level for other sovereigns. The price to insure against debt-default by Dubai more than doubled (from $300M to $675M). Additionally, the price of default insurance rose in general for many sovereigns, including Bulgaria, Abu Dhabi, Hungary, the U.K. and the U.S. (see graphic below).

It’s unclear at this point to what extent concerns for default (or an actual default) by Dubai would act as a contagion, setting off another global financial crisis. On Friday, global markets took a significant hit based largely on investor reaction to the payment delay. U.S. and Asian markets took the biggest hits, with European markets managing to close higher on the on the day.

At first glance, the sell-off for firms linked to Dubai World was contained on Friday. Additionally, the amount of risk at stake in this case is minuscule compared to the financial crises of a year ago. The Financial Times notes:

Credit Suisse, for example, assumes that European banks account for half of Dubai’s debt, estimated at about $80bn. If they lost 50 per cent on their exposure, bad loan provisions would rise by 5 per cent next year, equivalent to a €5bn after-tax hit. Compared with the $1,700bn of toxic assets European and US banks have wiped out in the credit crisis, that is a drop in the Burj Al Arab swimming pool.

It would appear at first blush that, financial speaking, there isn’t a great threat of a Dubai default leading to a global financial meltdown (however, I have not seen data on the holders of credit default swaps [cds] and to what extent they’ve assumed too much risk, as AIG did last year). However, I do wonder about the other major variable in financial crises–the psychological risk. Financial crises are the result of both economic and psychological variables interacting in dangerous ways (namely, a positive feedback loop where negative economic conditions feed into negative views on the market which leads to actions that increase negative economics conditions which feed into negative views on the market, etc, etc). As Mark Gongloff notes:

Every episode of sovereign worry raises market fears of contagion, “reminders that pockets of post-credit-excesses are intact and destabilizing,” Gluskin Sheff chief economist David Rosenberg told clients on Friday.

To me, that is the real risk. With states’ balance sheets in total disarray around the globe, investors will not long for worrisome indicators and troublesome cases to analyze (think of the conditions that facilitate brush fires). We’ll see to what extent this scenario plays out in the coming days. Would love to hear feedback from sovereign debt specialists and global finance experts.

[Cross-posted at bill | petti]

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