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Economic decision making: application of the theory of complex systems

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  • Robert Kitt
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    Abstract

    In this chapter the complex systems are discussed in the context of economic and business policy and decision making. It will be showed and motivated that social systems are typically chaotic, non-linear and/or non-equilibrium and therefore complex systems. It is discussed that the rapid change in global consumer behaviour is underway, that further increases the complexity in business and management. For policy making under complexity, following principles are offered: openness and international competition, tolerance and variety of ideas, self-reliability and low dependence on external help. The chapter contains four applications that build on the theoretical motivation of complexity in social systems. The first application demonstrates that small economies have good prospects to gain from the global processes underway, if they can demonstrate production flexibility, reliable business ethics and good risk management. The second application elaborates on and discusses the opportunities and challenges in decision making under complexity from macro and micro economic perspective. In this environment, the challenges for corporate management are being also permanently changed: the balance between short term noise and long term chaos whose attractor includes customers, shareholders and employees must be found. The emergence of chaos in economic relationships is demonstrated by a simple system of differential equations that relate the stakeholders described above. The chapter concludes with two financial applications: about debt and risk management. The non-equilibrium economic establishment leads to additional problems by using excessive borrowing; unexpected downturns in economy can more easily kill companies. Finally, the demand for quantitative improvements in risk management is postulated.

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    File URL: http://arxiv.org/pdf/1208.1277
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1208.1277.

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    Date of creation: Aug 2012
    Date of revision: Apr 2013
    Handle: RePEc:arx:papers:1208.1277

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    Web page: http://arxiv.org/

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    1. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
    2. Stanley, H. Eugene & Plerou, Vasiliki & Gabaix, Xavier, 2008. "A statistical physics view of financial fluctuations: Evidence for scaling and universality," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(15), pages 3967-3981.
    3. Bischi, Gian Italo & Kopel, Michael, 2001. "Equilibrium selection in a nonlinear duopoly game with adaptive expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 73-100, September.
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