What do complexity and self-organized criticality imply for the existence of bla
ID: 1167742 • Letter: W
Question
What do complexity and self-organized criticality imply for the existence of black swans? In particular, are black swan events really as improbable as we think they are if the economy and financial markets are characterized by complexity and self-organized criticality?What do complexity and self-organized criticality imply for the existence of black swans? In particular, are black swan events really as improbable as we think they are if the economy and financial markets are characterized by complexity and self-organized criticality?
Explanation / Answer
Complexity are systems with a large number of mutually interacting parts, often open to their environment, which self-organize their internal structure and their dynamics with novel and sometimes surprising macroscopic “emergent” properties. Climate and finance are complex systems.
Black Swan events: Rare, high-impact, and difficult-to-predict events that live in the tails of the probability distribution, beyond the average of history (as in science and finance). Such events are non-computable using standard scientific methods.
Self-organized criticality is a new way of viewing nature. The idea of self-organized criticality (SOC) is commonly illustrated conceptually with avalanches in a pile of grains. The grains are dropped onto a pile one by one, and the pile ultimately reaches a stationary `critical' state in which its slope fluctuates about a constant angle of repose, with each new grain being capable of inducing an avalanche on any of the relevant size scales.
People working in complex systems – and surely financial markets for long know that any systemic structure could collapse if only positive-feedbacks are injected into them, creating an auto-catalytic snow-ball effect, leading among other things to a power-law like Black Swan. Indeed power-laws are a striking powerful signature. This is especially true when we address self-organization In order to be a truly self-regulated system, financial markets should also be embedded with negative-feedbacks as well. In fact, in order to emerge as a truly self-organized system, self-interest, should constitute just one among many of the ingredients over the entire financial system, and not the isolated unique ingredient. Self-interest promotes amplification and positive feedback, which is necessary. However, left alone, promotes instead dramatic snowballing drifts over chaotic regimes, due to its intrinsic amplification
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.