Chaos theory holds that a small and seemingly insignificant event has the potential to cause a chain reaction of systemic proportions days or weeks later.
While it’s uncertain whether the kinetic movements of a butterfly in Brazil can impact weather patterns in Texas, the theory can be used in global markets to illustrate the unpredictable nature of risk and the importance of being vigilant in monitoring across all financial markets.
Throughout much of history the common thread that ties together many economic panics - from bank runs of the 19th century, the stock market crashes in 1929 and 1987 and the most recent global financial crisis - is that these events originated from what appeared to be small and unexpected sources and occurred with little notice. In each case, they resulted in widespread damage to global financial markets and the real economy.
Download the Congressional Testimony: Protecting Global Markets From the Butterfly Effect