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In this paper we argue that if we want to find a more satisfactory approach to tackling the major socio-economic problems we are facing, we need to thoroughly rethink the basic assumptions of macroeconomics and financial theory. Making minor modifications to the standard models to remove “imperfections” is not enough, the whole framework needs to be revisited. Dirk Helbing and Alan Kirman: Rethinking Economics Using Complexity Theory http://www.soms.ethz.ch/paper_economics_complexity_theory
Via Complexity Digest
I had the great pleasure of co-authoring the International Peace Institute's (IPI) unique report on "Big Data for Conflict Prevention" (PDF) with my two colleagues Emmanuel Letouzé and Patrick Vinc...
A highly unusual collaboration between economists and scientists offers an important insight for those who want to fix the world’s crisis-prone financial system: There’s no simple way to understand a complex network.
John Fullerton asks what it will take for mainstream economists and financial theorists to understand the vital connection between economics and ecosystem. Click on the image or title to learn more.
Recent debates about the crisis vulnerability of international financial networks indicate that in economics complexity is still a widely misunderstood concept. Great post on comparing financial trading with the behaviour of crowds. Worth reading - click on image or title for more info.
Diane Coyle talks to Viv Davies about her recent edited volume on 'What's the use of economics?' They discuss what economists need to bring to their jobs and the way in which education in universities could be improved to fit economic graduates better for the real world. The interview was recorded in London on 22 September 2012. Worth listening too. Click on image or title to learn more.
Nice over view article on why complexity (or complex systems) can help economics and the challenges that still remain before complex systems based approaches become mainstream in economics thinking. Click on title to learn more.
Financial regulators and policy makers should focus on financial institutions that are ‘too central to fail’ as well as those that are ‘too big to fail’, research published in Scientific Reports this week suggests. T. Inspired by feedback-centrality measures in networks, such as PageRank, Stefano Battiston and colleagues in the Systems Design research team at ETH Zurich, Switzerland introduce a new measure of systemic impact, which they call DebtRank. They use DebtRank to analyze a recently released data set with information on the institutions that received aid from the US Federal Reserve Bank through its US$1.2 trillion emergency loans programmes from 2008 to 2010. The authors find that during the peak of the crisis, a group of 22 financial institutions, which received most of the loans, became more central to the network, which means that the default of each one would have a larger economic impact on the whole network. Even small, dispersed shocks to individual banks could thus have triggered the default of a large portion of the system. The authors note that because the network of impact used in the study is a proxy of the real, unknown network, the findings should be regarded with caution, but the study shows the kinds of insights that can be gained using DebtRank. Click on image or title to learn more.
Unfortunately you will need an account to access this. Excellent paper from Arizona state and Center of Complexity Research at Beijing Normal University. The research provides a general method to detect hidden nodes in complex networks, using only time series from nodes that are accessible to external observation. This is important for a bunch of research and analysis areas that are looking at complex systems with time series data and trying to determine hidden actors/processes or patterns in black boxed systems/subsystems with network connections. The detailed method is based on compressive sensing and encompasses continuous- and discrete-time and the evolutionary-game type of dynamical systems as well. The practical demonstration of the technique is done using analysis of a social network. Worth taking a look at. To learn more click on title of article.
Dr. Farmer said classical economics had failed miserably to provide the right data for us to understand ourselves. He and others have begun to develop so-called agent-based models of the economy, asking in effect how the seemingly random behavior of individual ants can give rise to anthills with all their pulsing purpose, form and intelligence.
"We have reduced the economics profession to a bunch of math nerds who somehow believe that by using ever more complex formulas, they can describe reality. It doesn't work like that. Yet we still follow these charlatans over the cliff because they have convinced us their complex math makes them as scientific as physicists. Maybe they should try musical notation (just kidding!!!) " - Interesting review by Jonathoan Larson of George Soros's recent presentation of the Festical of Economics, Trento, Italy June 2, 2012. Read more...
Useful set of links to posts on microfoundations in macroeconomics and other useful models. Well worth reading to see some of the benefits and challenges of using individua and agent based models for economic applications. Learn more...
Amazon.com: Complexity and the History of Economic Thought (Perspectives on the History of Economic Thought) (9780415133562): David Colander. A number of researchers, such as Brian Arthur and Buz Brock, have used complex adaptive systems and emergent complexity theories to consider issues in economics. This volume considers the complexity approach to economics from a history of thought and methodological perspectives. It finds that the ideas underlying complexity have been around for a long time, and that this new work in complexity has many precursors in the history of economic thought. Learn more...
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Networks are commonly used to define underlying interaction structures where infections, information, or other quantities may spread. Although the standard approach has been to aggregate all links into a static structure, some studies have shown that the time order in which the links are established may alter the dynamics of spreading. In this paper, we study the impact of the time ordering in the limits of flow on various empirical temporal networks. By using a random walk dynamics, we estimate the flow on links and convert the original undirected network (temporal and static) into a directed flow network. We then introduce the concept of flow motifs and quantify the divergence in the representativity of motifs when using the temporal and static frameworks. We find that the regularity of contacts and persistence of vertices (common in email communication and face-to-face interactions) result on little differences in the limits of flow for both frameworks. On the other hand, in the case of communication within a dating site and of a sexual network, the flow between vertices changes significantly in the temporal framework such that the static approximation poorly represents the structure of contacts. We have also observed that cliques with 3 and 4 vertices containing only low-flow links are more represented than the same cliques with all high-flow links. The representativity of these low-flow cliques is higher in the temporal framework. Our results suggest that the flow between vertices connected in cliques depend on the topological context in which they are placed and in the time sequence in which the links are established. The structure of the clique alone does not completely characterize the potential of flow between the vertices. Flow motifs reveal limitations of the static framework to represent human interactions Luis E. C. Rocha and Vincent D. Blondel Phys. Rev. E 87, 042814 (2013) http://dx.doi.org/10.1103/PhysRevE.87.042814
Via Complexity Digest
Talk at Understanding Financial Catastrophe Risk: Developing a Research Agenda.
In economic systems, the mix of products that countries make or export has been shown to be a strong leading indicator of economic growth. Hence, methods to characterize and predict the structure of the network connecting countries to the products that they export are relevant for understanding the dynamics of economic development. Here we study the presence and absence of industries in international and domestic economies and show that these networks are significantly nested. Bustos S, Gomez C, Hausmann R, Hidalgo CA (2012) The Dynamics of Nestedness Predicts the Evolution of Industrial Ecosystems. PLoS One 7(11): e49393. http://dx.doi.org/10.1371/journal.pone.0049393
Via Complexity Digest
Nassim Nicholas Taleb who coined the term black swans writes an interesting article in the Wall Street Journal on the need for systems to be non-fragile in order to cope with unexpected change. Its a good application of complex adaptive systems thinking on shaping possible paths to governance and large scale systems such as banking regulation. Worth reading. Click on the image or the title to learn more.
Good interview at the Institutional Investor with J. Doyne Farmer, an external professor at the Santa Fe Institute, a private, nonprofit research organization, but was originally trained as a physicist. In the 1980s he worked at the Los Alamos National Laboratory, home of the Manhattan Project, where scientific luminaries like J. Robert Oppenheimer and Richard Feynman once plied their trade. At Los Alamos Farmer founded the Complex Systems Group in the theoretical division. In 1991, he co-founded the Prediction Company, a quantitative trading firm which was purchased by Swiss banking giant UBS in 2005.The Santa Fe academic and Los Alamos alum says the insights of classical and behavioral finance can be much refined by using computers to simulate how real people act — and interact — when making economic decisions. Click on the title to learn more.
The interdependence and complexity of the global finanical system is is a rich area for complex systems research. So it is interesting when bank executives state who needs to own and manage the complexity of the system. Sallie L. Krawcheck, a former Bank of America and Citigroup executive, discussed her concerns about the complexity of financial behemoths at the Bloomberg Markets 50 Summit in Manhattan conference.“If you look at the job of the board, if you look at the job of investors, it’s the concern about complexity,” When asked whether she saw evidence that banks had become too complex. “It’s tough to generalize,” she said. “My concern is when the products themselves become too complex to understand, one begins to have a problem.”
Herman Daly applies a biophysical lens to the economy and finds that bigger isn’t necessarily better. Herman Daly is an ecological economist and co-founder and associate editor of the journal Ecological Economics. As the World Bank’s senior environmental economist from 1988 to 1994, Daly focused on Latin American poverty and development and helped to establish the discipline of ecological economics. Today, based at the School of Public Policy at the University of Maryland, Daly spoke with Seed editor Maywa Montenegro about growth, technology, happiness, and the steady-state economy. A great article worth reading and thinking about. Click on the image or the title to learn more.
Newsnight Economics Editor Paul Mason interviews the controversial economist Steve Keen before an audience at the London School of Economics (30 minutes). Keen was one of a small number of economists who predicted there would be a major financial crisis before the 2008 crash. He argues that if we keep the "parasitic banking sector" alive the economy dies, and says that conventional economics provides an unwitting cover for "the greatest ponzi schemes in history". Click on title or image to learn more.
Jenna Burrel is a sociologist and assistant professor in the School of Information at UC-Berkeley. If you are interested in the intersection of socioeconmics, ethnography, big data and good research her blog is a must read. Also her latest article “Technology Hype vs. Enduring Uses: A longitudinal study of Internet use among early adopters in an African city” is out this month in the wonderful open access journal First Monday. Click on the image or headline to learn more..
Markets are not provided by nature. They are constructed — by laws, rules, and institutions. All of these have moral bases of one sort or another. Hence, all markets are moral, according to someone’s sense of morality. The only question is, Whose morality? In contemporary America, it is conservative versus progressive morality that governs forms of economic policy. The systems of morality behind economic policies need to be discussed. Learn more...
Doyne Farmer, Professor at Santa Fe Institute speaking at the breakout panel entitled "Taking Stock of Complexity Economics: Which Problems Does It Illuminate?" at the Institute for New Economic Thinking's (INET) Paradigm Lost Conference in Berlin. April 14, 2012. All the presentations are available and very worth watching. Learn more..
In The Price of Inequality, Nobel Prize-winning economist Joseph Stiglitz argues in his new book, The Price of Inequality: How Today's Divided Society Endangers Our Future, that widely unequal societies don't function effectively or have stable economies and that even the rich will pay a steep price if economic inequalities continue to worsen. Stiglitz chaired President Clinton's Council of Economic Advisers and became the chief economist at the World Bank so his opinions are certainly informed. NPR books has a great interview that is worth reading. Learn more...
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