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

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

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

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

The invisible hand in nature von Foersters magnetized cubes termite mounds Self-organization or the shape of randomness? The shape results from constraints on the building blocks or on the builders

The invisible hand on the markets Adam Smiths An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Aristotles philia Prices and the predator / prey model (Lotka- Volterra) Actors may erroneously believe their representations and strategies lead to the final outcome

References (1) Paul Jorion, All-brother crews in the North-Atlantic. Canadian Review of Sociology and Anthropology, 19, 4, 1982: Geneviève Debos & Paul Jorion, La transmission des savoirs, Maison des Sciences de lHomme, 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: Paul Jorion, Le sujet dans la parenté africaine. in Aspects du malaise dans la civilisation. Psychanalyse au CNRS, Navarin, Paris, 1987:

References (2) Paul Jorion, Accounting for human activity through physics, Cybernetics and Systems, 35, No 2-3, 2004: ; DF DF Paul Jorion, Adam Smiths Invisible Hand Revisited, Proceedings of the 1st World Conference on Simulation of Social Systems, Kyoto, August 2006, Vol. I, Springer Verlag : content/uploads/2007/04/adamsmith-kyoto_rev.pdfAdam Smiths Invisible Hand Revisited 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 Paul Jorion, Stock prices and the shape of randomness, Oct. 5, prices and the shape of randomness