Exacerbated vulnerability of coupled socio-economic risk in complex networks

¹ College of Transport and Communication, Shanghai Maritime University - Shanghai, 201306, China
² Complex Systems Group, Institute of High Performance Computing, Agency for Science Technology and Research - 138632 Singapore, Singapore
³ Center for Polymer Studies and Department of Physics, Boston University - Boston, MA 02215, USA
⁴ School of Physics and Astronomy, Tel-Aviv University - Tel Aviv, Israel

Received: 2 September 2016
Accepted: 19 October 2016

Abstract

The study of risk contagion in economic networks has most often focused on the financial liquidities of institutions and assets. In practice the agents in a network affect each other through social contagion, i.e., through herd behavior and the tendency to follow leaders. We study the coupled risk between social and economic contagion and find it significantly more severe than when economic risk is considered alone. Using the empirical network from the China venture capital market we find that the system exhibits an extreme risk of abrupt phase transition and large-scale damage, which is in clear contrast to the smooth phase transition traditionally observed in economic contagion alone. We also find that network structure impacts market resilience and that the randomization of the social network of the market participants can reduce system fragility when there is herd behavior. Our work indicates that under coupled contagion mechanisms network resilience can exhibit a fundamentally different behavior, i.e., an abrupt transition. It also reveals the extreme risk when a system has coupled socio-economic risks, and this could be of interest to both policy makers and market practitioners.