Jean-Philippe Bouchaud

Title

The (Unfortunate) Complexity of Economic Systems

Abstract

The current crisis puts classical economics thinking under huge pressure. In theory, deregulated markets should be efficient, thanks to perfectly rational agents that correct (“arbitrage”) any mispricing or forecasting error. These equilibrated markets should be stable: crises can only be triggered by acute exogeneous disturbances, but certainly not precipitated by the dynamics of the market itself. We will propose a partial review of fifteen years of “Econophysics”, insisting on the prevalence of data, empirical research and numerical simulations over axioms and prejudices. Recent data cast doubts on several pillars of the classical dogma. In particular, market fluctuations seem to result from the endogeneous dynamics of a complex systems, that spontaneously exhibits jumps and shocks. We will discuss the importance of the impact of trades on prices and feedback loops, illustrated by some simple models from statistical physics. Models of financial markets can by themselves, in the absence of appropriate regulation and control, lead to instabilities.