The (unfortunate) complexity of the economy – Niels Bohr Institute - University of Copenhagen

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The (unfortunate) complexity of the economy

NBI Lecture by Jean-Philippe Bouchaud, head of research at Capital Fund Management and a professor at the Ecole Polytechnique, both in Paris, France

About the speaker: Jean-Philippe Bouchaud has for the last decades been a leading physicist in Europe within the field of statistical and complex physics. He received his diploma from Ecole Normale Superieure in 1981 and worked since at Cavendish Laboratory (Cambridge University) and CEA, Paris. He became interested in applying the methods of statistical physics in finance and formed in 1994 the 'French Society for Science and Finance', later turning into 'Capital Fund Management' in 2000. He has since then both worked in basic research on physics, contributing to a large variety of topics, and the new field of 'Econophysics'. At the same time, he has been a very successful director of the 'Capital Fund Management'.

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 short review of fifteen years of "Econophysics'', insisting on the prevalence of data, empirical research and numerical simulations over axioms and prejudices.

Recent data allow in particular to 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 impact and feedback, illustrated by some simple models from statistical physics. We will insist on the fact that models of financial markets can by themselves, in the absence of regulation and control, lead to instabilities.