Wednesday, February 20, 2013

Innovation as a Social Bubble: The Example of the Human Genome Project

Long time readers will remember Doktor, Docteur Didier Sornette, now hanging his hat at the Swiss Federal Institute of Technology Zurich (ETH Zurich)  and at the Swiss Finance Institute, from a couple* of our 2009 posts and from the memorably titled Alphaville post "Dragon-king of the outlier events".

Anyhoo, the good professor was co-author of a 2010 paper that may be of interest to bubbleologists.
From MIT's Physics arXiv blog, March 17, 2010:

The Rise and Fall of the Human Genome Project
It’s not just financial markets that experience bubbles, society does too. And the Human Genome Project is a perfect example, says a new study. 
Fig. 4. Overview of genomic patent applications after 1985.
Source: A. Plomer and P. Taylor, ESRC Complexity Seminar Series, 
26th November 2008.
The world has become painfully familiar with the notion of financial bubbles in the last two years. These are periods of in which prices are temporarily raised above their fundamental value, sometimes by orders of magnitude.

But the contention put forward by Monika Gisler and a couple of pals at the Swiss Federal Institute of Technology in Zurich is that it’s not just financial markets that experience bubbles. They say there is good evidence for the existence of social bubbles too. They point to the great boom of railway building in Britain in the 1840s, cloning of mammals such as Dolly the sheep, and the craze over Haute Couture, the so-called democratisation of fashion design.

All of these were characterised not by prices rising far above fundamental values, but by human expectations being inflated beyond reason. “These cases were all characterized by extremely high expectations concerning the outcome of the proposed research and/or innovation project,” say Gisler and her colleagues.

Today, they show how the Human Genome Project is a particularly good example of a social bubble. They give a fascinating history of the project and the expectations associated with it and focus in particular on how it was funded. This, they say, is an objective way of assessing the enthusiasm for it project, at the time....MORE
Before we go any further into the paper, a brief diversion. From 2007's "Indexes, ETF's and Global Warming":
...The Amex rolled out the BTK biotech index in October 1991 and a very astute trader told me that was a top, get flat or short of the biotechs. Good call-see chart. The biowrecks fell 50+% over the next three years....
That was far from being the height of exuberance, more like a quick comment on the timing of Wall Street marketeers. For exuberance you have to look at the 1998-2001 time period (from the paper):
Full-size image (30 K)
Fig. 1. Amex Biotechnology Index (in logarithmic scale) from Jan. 1997 to June 2002. The inset shows the same data magnified from June 1998 to April 2000. The vertical line indicates the time (30 Nov. 1999) when the Biotech index disconnects and shoots up until the crash in early March 2000, leaving the Nasdaq index largely behind. The oscillating continuous lines in the main figure and inset correspond to the calibration of Eq. (1) to the Biotech index up to the peak. Note the upward curvature in this log(price) versus time, which qualifies a super-exponential accelerating price, which is our definition of a bubble (Sornette, 2003).
Hard as it may be for our younger readers to believe, a couple of the genomics darlings, Affymetrix (AFFX, $3.86) and Sequenom (SQNM, $4.40) traded as high as $163.50 and $573.75 respectively.
Good times.

Here's the arXiv version of the paper (22 page PDF):
“And all this back and forthing over who did what and what strategy was used and which money was public and which was private is probably going to sink below the radar screen.” (Francis Collins)

“The prevailing view is that the genome is going to revolutionize biology, but in some way, it’s overhyped. In the end, the real insights are coming from individuals studying one gene at a time in real depth.” (Gerald Rubin)
We present a detailed synthesis of the development of the Human Genome Project (HGP) from 1986 to 2003 in order to test the “social bubble” hypothesis that strong social interactions between enthusiastic supporters of the HGP weaved a network of reinforcing feedbacks that led to a widespread endorsement and extraordinary commitment by those involved in the project, beyond what would be rationalized by a standard cost- benefit analysis in the presence of extraordinary uncertainties and risks. The vigorous competition and race between the initially public project and several private initiatives is argued to support the social bubble hypothesis. We also present quantitative analyses of the concomitant financial bubble concentrated on the biotech sector. Confirmation of this hypothesis is offered by the present consensus that it will take decades to exploit the fruits of the HGP, via a slow and arduous process aiming at disentangling the extraordinary complexity of the human complex body. The HGP has ushered other initiatives, based on the recognition that there is much that genomics cannot do, and that “the future belongs to proteomics”. We present evidence that the competition between the public and private sector actually played in favor of the former, since its financial burden as well as its horizon was significantly reduced (for a long time against its will) by the active role of the later. This suggests that governments can take advantage of the social bubble mechanism to catalyze long-term investments by the private sector, which would not otherwise be supported.
 And here is the ETH slideshow (31 page PDF)

See also:
Biotech as a Leading Indicator for the S&P 500 BTK SPY
Converging Technologies for Improving Human Performance: Nanotechnology, Biotechnology, Information Technology and Cognitive Science
"Can the Cure for Cancer Be Securitized?"

* Econophysicist Predicts Date of Chinese Stock Market Collapse--Part II
Forecasting Financial Crashes: The Ultimate Experiment Begins