Human Complex Systems in the Economy and in Finance Paul Jorion, Ph.D.

1. Human Complex Systems in the Economy and in Finance Paul Jorion, Ph.D. Paul Jorion, Ph.D. UCLA, October 16, 2007

2. Particles and fields • Agent-Based Models and Equation-Based Models • The complexity approach amounts to being prepared to adopt both simultaneously • The two approaches should be consistent • If both ABM and EBM can be produced there is evidence of emergence

3. Reasons vs. causes • Requires clarification of “objectivity” / “subjectivity” • Complement each other: final cause vs. efficient cause • Structure vs. sentiment • Field: cause – structure; Particle: reason – sentiment • Agents are able to interrupt positive feedbacks • Following a rule: when reason and cause conflate

4. Economics and finance? • Methodological individualism as an obstacle • When the whole is bigger than the sum of the parts • What methodological individualism fails to explain • The collective may emerge although individuals are unaware of it • Production responding to consumption requirements • Family size • Carrying capacity vs. witchcraft accusations • “Reasons” may be misguided

5. The “invisible hand” in nature • von Foerster’s magnetized cubes • termite mounds • Self-organization or the shape of randomness? • The shape results from constraints on the building blocks or on the builders

6. The “invisible hand” on the markets • Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) • Aristotle’s “philia” • Prices and the predator / prey model (Lotka-Volterra) • Actors may erroneously believe their representations and strategies lead to the final outcome

7. References (1) • Paul Jorion, All-brother crews in the North-Atlantic. Canadian Review of Sociology and Anthropology, 19, 4, 1982: 513 526 • Geneviève Debos & Paul Jorion, La transmission des savoirs, Maison des Sciences de l’Homme, Paris, 1984 • Paul Jorion, Chayanov should be right: Testing "Chayanov's Rule" in a French fishing community. in E.P. Durrenberger (ed.), Chayanov, Peasants and Economic Anthropology, Academic Press, New York – London, 1984: 71-95. • Paul Jorion, Le sujet dans la parenté africaine. in Aspects du malaise dans la civilisation. Psychanalyse au CNRS, Navarin, Paris, 1987: 174-181

8. References (2) • Paul Jorion, Accounting for human activity through physics, Cybernetics and Systems, 35, No 2-3, 2004: 275-284; http://eclectic.ss.uci.edu/~drwhite/EMCSR02papers/Jorion_EMCSR.PDF • Paul Jorion, Adam Smith’s “Invisible Hand” Revisited, Proceedings of the 1st World Conference on Simulation of Social Systems, Kyoto, August 2006, Vol. I, Springer Verlag : 247-254 http://www.pauljorion.com/blog/wp-content/uploads/2007/04/adamsmith-kyoto_rev.pdf • Paul Jorion, Reasons vs. Causes. Emergence as experienced by the human agent, Structure and Dynamics: eJournal of Anthropological and Related Sciences: Vol. 2: No. 1, 2007: Article 1 http://repositories.cdlib.org/imbs/socdyn/sdeas/vol2/iss1/art1/ • Paul Jorion, Stock prices and the shape of randomness, Oct. 5, 2007 http://www.pauljorion.com/blog_en/?p=76