Transcript “MORE IS DIFFERENT” transition in Finance

Complexity Research
and
Economic Growth
Sorin Solomon
Racah Institute of Physics HUJ Israel
Complex Multi-Agent Systems Division, ISI Turin
Lagrange Interdisciplinary Lab for Excellence In Complexity
More Is Different
Sorin Solomon
HUJ and ISI
Real world is controlled …
– by the exceptional, not the mean;
– by the catastrophe, not the steady drip;
– by the very rich, not the ‘middle class’.
we need to free ourselves from ‘average’ thinking.
Philip Anderson
Simplest Example of a “More is Different” Transition
?
Extrapolation?
1cm
1cm
1Kg
950C
1Kg
97
1Kg
99
The breaking of
macroscopic
linear
extrapolation
101
BOILING PHASE TRANSITION
More is different:
a single molecule does not boil at 100C0
Example of “MORE IS DIFFERENT” transition in Finance:
Instead of
Water Level:
-economic Index
(Dow-Jones etc…)
95
97
99
101
The crashes are the result of many traders interactions.
MORE is DIFFERENT: A market with a single trader
would never have crashes
Instead of temperature
(energy / matter):
Exchange rate/
interest rate
Value At Risk /
liquid funds
Equity Price /
Dividends
Equity Price /
fundamental value
Taxation (without
representation)/ Tea
Product Propagation
Bass extrapolation formula
vs
microscopic representation
CARS in USA
1895-1930
VCR
Actual sales
Extrapolatio
DVD
Reality curves
Market 'spikes' are seen by
traders as freak events.
Physicists expect them
Lev Muchnik
Phys. Scripta
Stock market shock explained
Physicists model recent
trading frenzy.
Market 'spikes' are seen by
traders as freak events.
Physicists expect them
Stock market shock explained
Physicists model recent
trading frenzy.
Small changes in product quality, price,
external conditions can produce large effects
(e.g. large market fluctuations)
Small deterioration in credit market can trigger
large waves of bankruptcies
“Levy, Solomon and Levy's
Microscopic Simulation of
Financial Markets
points us towards the
future of financial economics.
If we restrict ourselves to
models which can be
solved analytically,
we will be modeling for our
mutual entertainment,
not to maximize explanatory
or predictive power."
--HARRY M. MARKOWITZ,
Nobel Laureate in
Economics
Executive Abstract:
The classical paradigms fail in predicting emergence of
novelty / development in bio/ cogni / socio/ econo systems
The Multi-Agent Complex Systems approach identifies
-singular local elements of change / growth
(even at early stages where, as whole, the system seems in regress)
-spatio-temporal patterns of growth relevant resources
- socio-economic / human interactive causal mechanisms
leading to growth (e.g. education / cultural level / tradition).
Concrete interdisciplinary example: post-liberalization Poland
- identifies emergence of resilient, sustainable, developing
patterns likely to support sustainable global growth
- prediction of (space-time) singular fluctuation patterns that
may lead to increased social inequality and
economic instability (but also to novelty emergence)
- Extension of study to other regions / disciplines
“Almost all the social phenomena…
obey the logistic
growth”
Elliot W Montroll
I would urge… logistic equation early in the education
… in the everyday world of politics and economics
Lord Robert May
Growth ~ a Size - Nonlinear Terms (Competion/Saturation)
“continuum” Logistic Solution: uniform in space and time:
Size
a>0
a<0
TIME
In reality, in Growth ~ a Size,
a is the result of multi-agent
spatio-temporal distributed
discrete contributions
This leads to a complex solution
presenting fractal / intermittent
collective macro-objects with
self-organized adaptive behavior
Size
Logistic Multi-Agent Prediction
<a> < 0
Logistic
Differential Equation
a<0
TIME
Theorem:
resilience and
sustainability
even for <a><0
EXAMPLE of Theoretical Applied Science
THEOREM
(Statistical Mechanics
Mathematics)
MACRO decay
+ MICRO growth
___________________
=> MACRO growth
APPLICATION:
Liberalization Experiment
Poland Economy after 1989
1990 MACRO decay (90)
1991 MICRO growth (91)
1992 MACRO growth (92)
GNP
Education 88
89
90
91Global analysis92
prediction
Maps by the group of Social Psychologist
Andrzej Nowak (Warsaw U.)
Economic Growth is in turn
for Political Transformation
“A’s”
Nowak
Voting for Reformist Parties
fractal space distribution
Prediction of campaign success (15/17)
Goldenberg
Desertification/ Reclaim space-time localized patterns
Lavee+Sarah
Mediterranean; Semi-arid; Desert;uniform
uniform 500mm patchy
200mm
Theorem: Logistic Multi-Agent Systems=>Intermittent Fluctuations
Globalization
(efficient but unstable fluctuations)
Local Consumption Economy
(inefficient but very stable (if population is stable))
-emergence of High-Tech communities
-start-ups connections to previous businesses
-entrepreneurs emerging from old businesses
-partners having previous common institutions
Future and
on-going
studies
Romania
Piemonte
Piemonte
Belarus
Conclusions
• The connections between the main
ubiquitous complexity features
Pareto-Zipf scaling laws / Levy-stable fat-tail fluctuations,
Fractal-Intermittent singular spatio-temporal Growth patterns,
Logistic Malthus-Verhulst-Lotka-Volterra-Eigen-Schuster system
Percolation, phase transitions, Emergence of adaptive objects
can be understood and expressed within a
comprehensive coherent
interdisciplinary research framework.
• Its applicability in monitoring and inducing
novelty emergence, social change, stable
economic growth and sustainable
development has been demonstrated.