Book contents
- Frontmatter
- Contents
- Figures
- Preface
- 1 Introduction
- 2 Bifurcations and chaos in 1-D systems
- 3 Bifurcations and strange attractors in 2-D systems
- 4 The nonlinear cobweb model
- 5 The cobweb model with heterogeneous expectations
- 6 An asset pricing model with heterogeneous beliefs
- 7 Empirical validation
- 8 Laboratory experiments
- Bibliography
- Index
1 - Introduction
Published online by Cambridge University Press: 05 February 2013
- Frontmatter
- Contents
- Figures
- Preface
- 1 Introduction
- 2 Bifurcations and chaos in 1-D systems
- 3 Bifurcations and strange attractors in 2-D systems
- 4 The nonlinear cobweb model
- 5 The cobweb model with heterogeneous expectations
- 6 An asset pricing model with heterogeneous beliefs
- 7 Empirical validation
- 8 Laboratory experiments
- Bibliography
- Index
Summary
The economy is a complex system with nonlinear interactions and feedback loops. Early traces of this view date back, for example, to Schumpeter and Hayek, and to Simon. The complexity modeling paradigm has been strongly advocated since the 1980s by economists and multidisciplinary scientists from various fields, such as physics, computer science and biology, linked to the Santa Fe Institute. More recently the complexity view has also drawn the attention of policy makers, who are faced with complex phenomena, irregular fluctuations and sudden, unpredictable market transitions. For example, the chairman of the FED, Ben Bernanke, noted that the 1000-point collapse of the Dow Jones Industrial Average on the afternoon of May 6, 2010, reflected the complexity of financial-market systems:
The brief market plunge was just a small indicator of how complex and chaotic, in the formal sense, these systems have become. Our financial system is so complicated and so interactive – so many different markets in different countries and so many sets of rules. What happened in the stock market is just a little example of how things can cascade or how technology can interact with market panic.
(interview Ben Bernanke, IHT, May 17, 2010).The recent financial-economic crisis is a dramatic example of large movements, similar to critical transitions that are so characteristic for complex evolving systems. These large changes of global financial markets can hardly be viewed as a rational response to news about economic fundamentals and cannot be explained by traditional representative rational agent macro-finance models.
- Type
- Chapter
- Information
- Publisher: Cambridge University PressPrint publication year: 2013