Chaos theory and economics.

Rosser Jr, John Barkley rosserjb at jmu.edu
Mon Aug 10 15:18:30 PDT 1998


Doug,

Guess that depends on "what we knew before." There is a lot of disagreement about that. Did "we know" about the butterfly effect? "We" certainly knew (or should have known, although lots of people pretended to forget) that markets can change very suddenly and have a lot of local instability. Chaos theory tells us that this local instability is endogenous, not just the result of exogenous shocks or noise, sudden external disturbances. It says that the market is much more deeply and inherently volatile.

I note that there is an open debate about all this, obviously. In principle one could do some short-term predicting if one could find the "true chaotic model." If anybody has, they are quietly making money on it rather than publishing it, :-).

BTW, I don't think you should have picked on Brad's piece as being so unclear. It was not so bad for writing by economists, which is generally utter impenetrability. Hey, you are are an English major turned journalist who writes very concisely and wittily. Only economists like Keynes and Galbraith can outdo you for clarity and wit. The rest of us poor schmucks, well, we're just too overdetermined, that's all, :-). Barkley Rosser On Mon, 10 Aug 1998 16:19:30 -0400 Doug Henwood <dhenwood at panix.com> wrote:


> Rosser Jr, John Barkley wrote:
>
> > 1) Leading candidates for true chaotic dynamics in
> >economics are financial markets, and certain micro markets,
> >especially such things as fisheries and ag commodities
> >where there are lags (leading to cobwebs).
> > 2) Linear plus noise is not much of a competito for
> >financial markets in particular. The only way to salvage
> >that dead horse at this point is to throw in switching
> >regimes, that is to posit periodic discontinuous shifts of
> >the allegedly linear function. Some linearity.
>
> What gain in knowledge does this represent? Aside from it being neat
> mathematically, what does this tell us about financial markets we didn't
> know before?
>
> Doug
>
>
>

-- Rosser Jr, John Barkley rosserjb at jmu.edu



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