10 Pages

A Dynamic Systems Modelling Perspective

WithGunilla Sundström, Erik Hollnagel

In 1776, Adam Smith introduced the notion of the 'invisible hand' to describe the dynamics among self-interest, competition, demand, and supply. In the context of Financial Services systems, the term pro-cyclicality refers to the deviation-amplifying consequences of couplings between the global Financial Services system and the various economic sectors. One key assumption underlying the counterbalancing loops of the 'invisible hand' is that market participants have access to the same information, that the information is accurate, and that the market participants behave in a rational manner. The hand is 'invisible' in the sense that the individual in the market does not understand what goes on, and therefore is unable to explain which actions give rise to which effects. The hand is only 'invisible' if there is a lack of understanding of how the market works or if the understanding is limited or incorrect.