Handbook of Research on Complexity

Handbook of Research on Complexity

Elgar original reference

Edited by J. Barkley Rosser Jr.

Complexity research draws on complexity in various disciplines. This Handbook provides a comprehensive and current overview of applications of complexity theory in economics. The 15 chapters, written by leading figures in the field, cover such broad topic areas as conceptual issues, microeconomic market dynamics, aggregation and macroeconomics issues, econophysics and financial markets, international economic dynamics, evolutionary and ecological–environmental economics, and broader historical perspectives on economic complexity.

Chapter 9: Applications of Statistical Physics in Finance and Economics

Thomas Lux

Subjects: economics and finance, evolutionary economics

Extract

Thomas Lux* 9.1 Introduction “The economy” easily comes to one’s mind when looking for examples of a “complex system with a large ensemble of interacting units”. The layperson usually feels that terms like “out-of-equilibrium dynamics”, “critical states” and “self-organization” might have a natural appeal as categories describing interactions in single markets and the economy as a whole. When dealing with the economy’s most opalescent part, the financial sphere with its bubbles and crashes, “life at the edge of chaos” and “self-organized criticality” equally easily enter the headlines of the popular press. However, this proximity of the keywords of complexity theory to our everyday perception of the economy is in contrast to the relatively slow and reluctant adaptation of the ideas and tools of complexity theory in economics. While there has been a steady increase of interest in this topic from various subsets of the community of academic economists, it seems that the physicists’ wave of recent research on financial markets and other economic areas has acted as an obstetrician for the wider interest in complexity theory among economists. Physicists entered the scene around 1995 with the ingenious invention of the provocative brand name of econophysics for their endeavors in this area. Both the empirical methodology and the principles of theoretical modeling of this group were in stark contrast to the mainstream approach in economics so that broad groups of academic economists were initially quite unappreciative of this new current. While the sheer ignorance of mainstream economics by practically all econophysicists...

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