Dirk Helbing (ETH Zurich) Rethinking Economics Based on Complexity Theory
„The Economy Is an Equilibrium System“ Going beyond Equilibrium Economics
As Coupling Gets Stronger, System Behavior Can Become Unstable: Crowd Disasters Love Parade Disaster in Duisburg, 2010 At low densities: self-organized lane formation, At large densities: coordination breaks down like Adam Smith’s invisible hand
As Coupling Gets Stronger, System Behavior Can Become Unstable: Traffic Breakdowns Thanks to Yuki Sugiyama Capacity drop, when capacity is most needed! At high densities, free traffic flow is unstable: Despite best efforts, drivers fail to maintain speed
John D. Sterman’s Beer Game Perturbations in demand amplify
Supply Network of Economic Sectors Commodity flow (average of FRA, GER, JAP , UK, USA) Network structure D. H., U. Witt, S. Lämmer, T. Brenner, Physical Review E 70 70, 056118 (2004).
Business Cycles as Result of Network Flows Investigation of the effect of network structure: § Positive Positive and negative feedbacks negative feedbacks in production processes § Time lags ime lags in the information flow and adaptation process Business cycles because of the structure of production networks? Input output matrix Related delivery Resulting oscillations network in the gross domestic product
„More Liquidity is Better“
The Need for Bubble Control Mode of heat transfer depends on Does liquidity play a similar role? energy input: 1. diffusion 2. convection rolls 3. bubbles
„(Financial) Markets Are Efficient“ Going Beyond the Efficient Market Paradigm
The Flash Crash on May 6, 2010 600 billion dollars evaporated in 20 minutes The flash crash turned solid assets into penny stocks within minutes. Was an interaction effect, no criminal act, ‘fat finger’, or error.
Google Data Reveal Stock Market Inefficiency Is all relevant information in the price? US Search Volume Data Joint work with Tobias Preis, Suzy Moat, Cumulative Return, R [%] Cumulative Return, R [%] and H. Eugene Stanley B A − 50 0 50 100 150 200 250 − 20 0 20 40 60 Buy and Hold Strategy Google Trends Strategy Random Time Periods Entire Time Period ’debt’ ’debt’ Cumulative Return, R [%] ’housing’ ’housing’ μ + σ , μ , μ − σ of Random Strategy ’happy’ ’happy’ ’derivatives’ ’stocks’ ’stocks’ ’derivatives’ ’debt’ ’leverage’ ’credit’ A ’profit’ ’marriage’ ’credit’ ’markets’ 300 312 ’cancer’ ’profit’ ’investment’ ’portfolio’ ’society’ ’leverage’ ’marriage’ ’cancer’ ’portfolio’ ’society’ ’hedge’ ’opportunity’ ’markets’ ’nyse’ 200 ’nyse’ ’religion’ ’money’ ’bonds’ ’religion’ ’investment’ ’bonds’ ’banking’ ’dow jones’ ’present’ ’greed’ ’hedge’ 100 ’house’ ’revenue’ ’holiday’ ’war’ ’color’ ’success’ ’success’ ’stock market’ ’revenue’ ’house’ ’economics’ ’dow jones’ ’consumption’ ’consumption’ 16 0 ’banking’ ’color’ ’present’ ’returns’ ’fine’ ’risk’ ’trader’ ’holiday’ ’restaurant’ ’money’ ’office’ ’greed’ ’war’ ’economics’ ’default’ ’office’ ’crisis’ ’nasdaq’ B ’unemployment’ ’movie’ 60 ’inflation’ ’unemployment’ ’stock market’ ’ ’return’ ’risk’ ’growth’ ’forex’ ’financial markets’ 40 ’nasdaq’ ’forex’ ’culture’ ’bubble’ ’crisis’ ’opportunity’ ’inflation’ ’car’ ’finance’ ’returns’ ’crash’ 20 ’invest’ ’trader’ ’financial markets’ ’bubble’ 16 16 ’chance’ ’chance’ ’crash’ ’metals’ 0 ’movie’ ’invest’ ’growth’ ’fine’ ’food’ ’cash’ ’sell’ ’lifestyle’ ’return’ ’food’ − 20 ’consume’ ’default’ ’gains’ ’culture’ ’finance’ ’short selling’ ’tourism’ ’restaurant’ ’cash’ ’gold’ − 40 μ − σ of Random Strategy μ + σ of Random Strategy ’lifestyle’ μ − σ of Random Strategy ’politics’ ’health’ ’headlines’ ’short selling’ ’gains’ ’kitchen’ ’gain’ ’gold’ ’fun’ ’travel’ ’car’ DOW JONES 2004 2005 2006 2007 2008 2009 2010 2011 ’metals’ ’earnings’ DOW JONES ’dividend’ BUY AND HOLD ’consume’ ’headlines’ ’sell’ ’buy’ ’kitchen’ ’gain’ Time, t [Years] ’buy’ ’politics’ ’culture’ BUY AND HOLD ’garden’ ’travel’ ’loss’ ’rare earths’ ’dividend’ ’loss’ ’earnings’ ’tourism’ ’rare earths’ ’health’ ’fun’ ’fed’ ’water’ ’water’ ’freedom’ ’economy’ ’short sell’ ’short sell’ ’fed’ ’train’ It would have been possible to ’economy’ μ + σ of Random Strategy ’conflict’ ’train’ ’freedom’ ’home’ ’energy’ ’arts’ ’garden’ ’world’ ’fond’ ’rich’ ’home’ ’conflict’ ’arts’ ’energy’ ’oil’ ’oil’ ’rich’ ’fond’ ’world’ make >300% profit during the ’transaction’ ’environment’ ’environment’ ’transaction’ ’labor’ ’labor’ ’ore’ ’ore’ ’ring’ ’ring’ μ + 2 σ μ + 2 σ μ + 3 σ μ + 4 σ financial crisis
„Selfish Behavior Optimizes the Systemic Outcome“ When Does Adam Smith‘s Principle of the Invisible Hand Work?
Self-Organized Traffic Light Control Inspiration: Self- organized oscillations at bottlenecks Optimal compromise between coordination Measurement and local flexibility input Published in JSTAT (2008)
Local Travel Time Minimization Does Not Optimize Traffic Flows With constant arrival rates: The switching sequence adapts to the arrival patterns. � We observe a flexible switching flexible switching regime with maximum r maximum red-times ed-times.
„Individuals and Companies Decide Rationally“ Going Beyond the Rational Agent Paradigm
Experimental Ultimatum Game with Power: Proposals Offered and Accepted hyperfair proposal fair proposal rational proposal Rational responder Fairness-oriented always rejects responder accepts 16% rejections Fairness-oriented responder rejects Rational Fairness-oriented responder 37% rejections responder rejects always accepts Fairness-oriented responder accepts Rational Fairness-oriented responder 27% rejections responder accepts accepts Rational responder Fairness-oriented rejects responder rejects
Consensus and Overconfidence Undermine the Wisdom of Crowds
„The Mean Behavior Is Representative“ „Agents Can be Treated as if Acting Identically“
Something has changed…
People are linked and influence each other…
How Second-Order Free-Riders Are Eliminated +Punishment Spreads D = Defectors (Free-Riders), M = Moralists, I=Immoralists C = Non-punishing Cooperators (Second-Order Free-Riders)
Overcoming the Tragedy of the Commons by Spatial Interactions
„Competition Eliminates Non-Selfish Behavior“ The Evolution of Moral Behavior
Evolution of Other-Regarding Preferences by Biological Selection Joint work with Thomas Grund R. Murphy et al. : � There is a broad spectrum of non- selfish behavior
„More Networking is Good and Reduces Risks“
Too Much Networking Can Cause Self- Destabilization: Breakdown of Cooperation Different recipes, new solutions, and a paradigm shift in our understanding of the world are needed.
How the Banking Network Changed From: Haldane
Bankruptcy Cascades of Banks 18 10 Cascade size increases with interbank linkages log of the aggregate output 16 10 x=1 x=5 14 10 12 s 10 e c n a r 10 10 u 400 600 800 1000 1200 1400 1600 1800 2000 c c time o f o r x=49 x=10 50 e average number of surviving banks b m u 40 N 30 20 10 Cascade size Joint work with G. Tedeschi, A. 0 0 1 2 5 10 49 50 Mazloumian, and M. Gallegati interbank linkages
Cascading Effects During Financial Crises Video by Frank Schweitzer, Stefano Battiston, et al.
„Regulation Can Fix the Imperfections of Economy“
Limits of Predictability § Large number of non-linearly interacting Source: J. D. Murray system components leads to complex dynamics § Example: Weather forecast § Chaotic dynamics/butterfly effect/ sensitivity: Small initial differences can cause very different behavior
The Illusion of Control § Big changes may have small, no, adverse or unexpected effects § Irreducible randomness: A degree of uncertainty and perturbation that cannot be eliminated § Principle of Le Chatelier/Goodhart’s law: A system tends to counteract external control attempts § Delays may cause instabilities § Regime shifts („phase transitions “ , catastrophes): Sometimes small changes have a big impact § Unknown unknowns, structural instability “
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