3. System Dynamics Modeling of Contagion Effects

Financial contagion has been with us as long as there has been an economy. The system of collective human behavior usually creates stable markets, but occasionally, this collective behavior results in various bubbles. Financial contagion specifically deals with the domino effect of one banking institution failure, which, due to interrelationships with other banks, leads to further failures. A decision support model of accounts receivable risk management is presented. Financial contagion and bubbles are discussed. The year 1929 was a very bad year, but 2008 had its moments as well. These financial contagions result in undermining confidence in similar institutions. Our research question is to examine the role of accounts receivable payments that are affected by the social interaction of those holding loans from a lending institution. System dynamics modeling is used to demonstrate the impact of word-of-mouth social contacts on accounts receivable and the ensuing increase in financial risk. This was proposed as a decision support tool for a common banking risk-management problem: Accounts Receivable risk management.