In an exclusive excerpt from The Rules of Contagion, epidemiologist Adam Kucharski re-examines the parallels between 2020 and the 2008 financial crisis to explain how quickly panic goes viral—and how to stop it.


One Saturday morning in March 2003, a group of experts gathered at WHO headquarters in Geneva to discuss a newly discovered infection in Asia. Cases had already appeared in Hong Kong, China and Vietnam, with another reported in Frankfurt that morning. WHO was about to announce the threat to the world, but first they needed a name. They wanted something that was easy to remember, but which wouldn’t stigmatize the countries involved. Eventually they settled on ‘Severe Acute Respiratory Syndrome,’ or SARS for short.

The SARS epidemic would result in over eight thousand cases and several hundred deaths, across multiple continents. Despite being brought under control in June 2003, the epidemic would cost an estimated $40 billion globally. It wasn’t just the direct cost of treating disease cases; it was the economic impact of closed workplaces, empty hotels and cancelled trade.

According to Andy Haldane, now Chief Economist at the Bank of England, the wider effects of the SARS epidemic were comparable with the fallout from the 2008 financial crisis. “These similarities are striking,” he said in a 2009 speech. “An external event strikes. Fear grips the system, which, in consequence, seizes. The resulting collateral damage is wide and deep.”

Haldane suggested that the public typically responds to an outbreak in one of two ways: flight or hide. In the case of an infectious disease, flight means trying to leave an affected area in the hope of avoiding infection. Because of travel restrictions and other control measures, this generally wasn’t an option during the SARS epidemic. Had infected people travelled—rather than being identified and isolated by health authorities—it could have spread the virus to even more locations.

The flight response can also happen in finance. Faced with a crash, investors may cut their losses and sell off assets, driving prices even lower. Alternatively, people may “hide” during an outbreak, dodging situations that could potentially bring them into contact with the infection. If it’s a disease outbreak, they might wash their hands more often, or reduce their social interactions. In finance, banks might hide by hoarding money rather than risking lending to other institutions. However, Haldane pointed out that there is a crucial difference between hide responses in disease outbreaks and financial crises. Hiding behavior will generally help reduce disease transmission, even if it incurs a cost in the process. In contrast, when banks hoard money it can amplify problems, as happened with the “credit crunch” that hit economies in the run up to the 2008 crisis.

The 2008 crisis wasn’t the first time Haldane had thought about contagion in financial systems. “I remember back in 2004/5, writing a note about us having entered the era of “super-systemic risk” as a result of these sorts of infections.” His note suggested that the financial network might be robust in some situations and extremely fragile in others. The idea was well-established in ecology: the structure of a network might make it resilient to minor shocks, but the same structure could also leave it vulnerable to complete collapse if put under enough stress. Think about a team at work. If most people are doing well, weaker members can get away with mistakes because they are linked to high performers. However, if most of the team is struggling, the same links will instead drag strong members down. “The basic point was that all this integration did indeed reduce the probability of mini-crashes,” Haldane said, “but increased the probability of a maxi-crash.”

After Lehman Brothers collapsed, people across the banking industry started thinking in terms of epidemics. According to Haldane, it was the only way to explain what had happened. “You couldn’t tell a story about why Lehman had brought the financial system down without telling a contagion story.”

If you were to make a list of network features that could amplify contagion, you’d find that the pre-2008 banking system had most of them. Let’s start with the distribution of links between banks. Rather than connections being scattered evenly, a handful of firms dominated the network, creating massive potential for superspreading. In 2006, researchers working with the Federal Reserve Bank of New York picked apart the structure of the US Fedwire payment network. When they looked at the $1.3 trillion of transfers that happened between thousands of US banks on a typical day, they found that 75 percent of the payments involved just 66 institutions.



The variability in links wasn’t the only problem. It was also how these big banks fitted into the rest of the network. In 1989, epidemiologist Sunetra Gupta led a study showing that the dynamics of infections could depend on whether a network is what mathematicians call “assortative” or “disassortative.” In an assortative network, highly connected individuals are linked mostly to other highly connected people. This results in an outbreak that spreads quickly through these clusters of high-risk individuals, but struggles to reach the other, less connected parts of the network. In contrast, a disassortative network is when high-risk people are mostly linked to low-risk ones. This makes the infection spread slower at first, but leads to a larger overall epidemic.

The banking network, of course, turned out to be disassortative. A major bank like Lehman Brothers could therefore spread contagion widely; when Lehman failed, it had trading relationships with over one million counter-parties. “It was entangled in this mesh of exposures—derivatives and cash—and no one had the faintest idea quite who owed what to whom,” Haldane said. It didn’t help that there were numerous, often hidden, loops in the wider network, creating multiple routes of transmission from Lehman to other companies and markets. What’s more, these routes could be very short. The international financial network had become a smaller world during the 1990s and 2000s. By 2008, each country was only a step or two away from another nation’s crisis.

When one bank lends money to another, it creates a tangible link between the two: if the borrower goes under, the lender loses their money. In theory, we could trace this network to understand the outbreak risk, just as we can for STIs.

But there’s more to it than that. Mathematical epidemiologist Nim Arinaminpathy has pointed out that networks of loans were just one of several problems in 2008. “It’s almost like HIV,” he said. ‘You can have transmission through sexual contacts, as well as needle exchanges or blood transfusions. There are multiple routes of transmission.” In finance, contagion can also come from several different sources. “It isn’t just lending relationships—it’s also about shared assets and other exposures.”

A longstanding idea in finance is that banks can use diversification to reduce their overall risk. By holding a range of investments, individual risks will balance each other out, improving the bank’s stability. In the lead up to 2008, most banks had adopted this approach to investment. They’d also chosen to do it in the same way, chasing the same types of assets and investment ideas. Although each individual bank had diversified their investments, there was little diversity in the way they had collectively done it.

Why the similarity in behavior? During the Great Depression that followed the 1929 Wall Street crash, economist John Maynard Keynes observed that there is a strong incentive to follow the crowd. “A sound banker, alas, is not one who foresees danger and avoids it,” he once wrote, “but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” When multiple banks invest in the same asset, it creates a potential route of transmission between them. If a crisis hits and one bank starts selling off its assets, it will affect all the other firms who hold these investments. The more the largest banks diversify their investments, the more opportunities for shared contagion.

In February 2009, investor Warren Buffett used his annual letter to shareholders to warn about the “frightening web of mutual dependence” between large banks. “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease,” he wrote. “It’s not just whom you sleep with, but also whom they are sleeping with.” As well as putting supposedly careful institutions at risk, Buffett suggested that the network structure could also incentivize bad behavior. If the government needed to step in and help during a crisis, the first companies on the list would be those that were capable of infecting many others. “Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits.”

Excerpted from The Rules of Contagion: Why Things Spread and Why They Stop by Adam Kucharski. Copyright © 2020. Available from Basic Books, an imprint of Hachette Book Group, Inc.