What the Financial Markets Could Learn From Industrial Motion Control

Lemmings. I can't help but think that the current state of financial markets takes quite a bit from lemmings. Some guy at Apple drops an iPhone and Apple's stock takes a dive. Some guy in India says "I think I'd like a car" and the price of oil triples. As a rule, it seems like market participants are too reactionary and too quick to follow the herd - right over the cliff. Lemmings.

Like many things in our culture it seems like the infrastructure around the financial markets might be optimized for when the stock prices were monitored on a tickertape. It's been a long time since anyone has used a tickertape in that manner. When it took weeks for news to spread or when every single occurrence at every little company wasn't reported maybe this system worked. But we don't live in that world any longer. It's too reactive.

Interestingly, reactivity is a problem in motion control as well. When you send a device to a position, it isn't enough to know where it is; with only that information you just cruise right by your limit without stopping. You also have to know what direction you're going, how far off you are, and how fast the values are changing. Engineers have come up with a system called PID to deal with this. PID has three components: proportion, integral, and derivative. Proportion adjusts a value by how far you're off. Integral modifies the proportional change based on how quickly the values are changing. The derivative component adjusts the rate of change of the controller, basically this is the term that allows the machine to power up to a stop without overshooting.

Without all three terms in a PID solution motion control systems become unreliable or can develop unstable oscillations - jumping from one side of a limit to the other indefinitely. Our current financial systems seem to suffer from similar ills. They're just too nimble for their own good, enabling the lemmings.

It seems like we need something more robust, something less nimble. Maybe it should be harder for people to make deals, or take longer, or have some sort of "never mind" bailout for once we've thought it over. To follow the motion control analogy, we seem to have the P and the I components, but we're missing the D, the fine control, something to keep the masses from overcompensating. Some structure to account for this would probably be a benefit to us all.