Network Paradigm

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In this first module we kick the course off with a discussion on networks by looking at what we call the network paradigm, a paradigm is the set of methods and assumptions underlying a particular scientific domain as such it constitutes a whole way seeing the world.



Transcription:

In this first section we are going to talk about what we might call the network paradigm, all models and theories are like windows onto the world, none of them are perfect they all enable us to see some things but also inhibit us from seeing others and more importantly they all rest upon some set of assumptions.
This set of methods and assumptions that support a particular scientific domain is called a paradigm. So before we start to get into the technical side of network theory we want to make you aware of some of the key features to the network paradigm, these features will constitute major themes that we will be rediscovering and trying to highlight as we go through the course.
Firstly networks are all about connectivity, within systems whose components are relatively isolated we can focus our interest on the individual components within the system, by analyzing their properties we can gain an understanding of how the whole system works. For example say I have put together a financial portfolio of different assets, well if the risk on these different assets is not related in anyway, that is to say they are all from very different sectors of the economy, well I can calculate the overall risk of my portfolio by simply analyzing the properties of each asset and then summing them up to formulate a total value for the overall portfolio.
But what if many of the assets in my portfolio are correlated? If I have acquired many investments within both say the food processing industry and agriculture well the risk on both is correlated, or assets in both logistic and retail which are again interconnected. Because of these correlations the value of the assets will move together thus the real risk return ratio of my portfolio is no longer defined by that of each asset in isolating but now by these correlations, that is to say what is connected to what and in what way are they connected comes to now define the whole system.
The point to take away here is that we often spend a lot of time analyzing individual components and then assume that the whole system is simply an additive function of these parts, but when we turn up the connectivity within a system it is increasingly the relations between components that come to define the overall system and this is where networks theory finds its relevance as it is all about connectivity.
To go back to our finance example hedge fund managers and other financial institution don’t go out of business because they fail to analyst the characteristics of their assets in isolation, they go bank corrupt and we get financial crisis because we don’t see the networks of colorations behind these assets. To see the world through the network paradigm we need to see not so much things but the connections between them.