NON-EQUILIBRIUM SOCIAL SCIENCE NUMBER 5 SEPT 2012 WWW.NESSNET.EU PAGE 1 Orthodox economic theory does not capture the behaviour of real markets due to unreasonable assumptions such as ... (read more inside) The collapse of Lehman Brothers in 2008 left the global financial system teetering, with cash machines hours away from ... (read more inside) NUMBER 5 The number 5 of the NESS Newsletter presents the new book Positive Linking, by Paul Ormerod, reviewed by Claire Jones. Our BOOKS section is completed by Michael Batty commenting the new book by Phil Ball. While the NESS team prepares the NESS WORKSHOP ON MICRO- FOUNDATIONS AND SYSTEMIC IMPACTS, this newsletter includes references to conferences, journals and web resources. Welcome and have a nice reading ! Modern economic theory was first set out on a formal basis in the late nineteenth century. There have certainly been developments since then, but at heart the basic view in economics of how the world operates remains the same. Economics is essentially a theory of how decisions are made by individuals, of what ... (read more inside) POSITIVE LINKING by Paul Ormerod NESS Newsletter WHEN COPYING OTHERS IS THE RATIONAL CHOICE NESS WORKSHOP ON MICRO- FOUNDATIONS AND SYSTEMIC IM- PACTS
Transcript
NON-EQUILIBRIUM SOCIAL SCIENCE NUMBER 5 SEPT 2012
WWW.NESSNET.EU PAGE 1
Orthodox economic theory does not capture the behaviour of real markets due to unreasonable assumptions such as ...
(read more inside)
The collapse of Lehman Brothers in 2008 left the global financial system teetering, with cash machines hours away from ...
(read more inside)
NUMBER 5The number 5 of the NESS Newsletter presents the new book Positive Linking, by Paul Ormerod, reviewed by Claire Jones. Our BOOKS section is completed by Michael Batty commenting the new book by Phil Ball. While the NESS team prepares the NESS WORKSHOP ON MICRO-FOUNDATIONS AND SYSTEMIC IMPACTS, this newsletter includes references to conferences, journals and web resources.
Welcome and have a nice reading !
Modern economic theory was first set out on a formal basis in the late nineteenth century. There have certainly been developments since then, but at heart the basic view
in economics of how the world operates remains the same. Economics is essentially a theory of how decisions are made by individuals, of what ...
(read more inside)
POSITIVE LINKINGby Paul Ormerod
NESS Newsletter
WHEN COPYING OTHERS IS THE RATIONAL CHOICE
NESS WORKSHOP ON MICRO-FOUNDATIONS AND SYSTEMIC IM-PACTS
Modern economic theory was first set out on a formal basis in the late nineteenth century. There have certainly been developments since then, but at heart the basic view in economics of how the world operates remains the same. Economics is essentially a theory of how decisions are made by individuals, of what information is gathered and how it is used by the decision maker.All scientific theories, even quantum physics, are approximations to reality. Theories involve making assumptions, simplifications, to enable us to understand problems better. A key feature of a good theory is that its assumptions are a reasonable description of the real world.In the early twenty-first century, just as it did in the late nineteenth, economics in general makes the assumption that individuals operate autonomously, isolated from the direct influences of others. A person has a fixed set of tastes and preferences.
When choosing amongst a set of alternatives, he or she compares the attributes of these alternatives and selects the one which most closely corresponds to his or
her
preferences.At first sight, this may seem quite reasonable, indeed even ‘rational’, as economists choose to describe this theory of behaviour. But there is a
serious problem with the assumption that individuals operate in isolation from each other, that their preferences are not affected directly by the decisions of others. The social and economic worlds of the twenty-first century are simply not like this at all. We are far more aware than ever before of the choices, decisions, behaviours and opinions of other people. In 1900, not much more than 10 per cent of the world’s population lived in cities. Now, for the first time in human history, more than half of us live in cities, in close, everyday proximity to large numbers of other people. In the last decade or so, the internet has revolutionised communications in a manner not experienced since the invention of the printing press in the mid-fifteenth century.The assumption that people make choices in isolation, that they do not adopt different tastes or opinions simply because other people have them, is no longer sustainable. Perhaps – perhaps, and it is a big ‘perhaps’ – over a hundred
years ago this might not have been a bad assumption to make. But no longer.The choices people make, their attitudes, their opinions, are influenced directly by other people. The medium via which this influence spreads is the social network. Often, social networks are thought of as purely a web-based phenomenon: sites such as Facebook. These can indeed influence behaviour. But it is real-life social networks – family, friends, colleagues – that are even more important in helping us shape our preferences and beliefs, what we like and what we do not like.Network effects, the fact that a person can and often does decide to change his or her preferences simply on the basis of what others do, pervade the modern world. Throughout history, a crucial feature of human behaviour has been our propensity to copy or imitate the behaviours, choices, opinions of others. We can see it in the fashions in pottery in the Middle Eastern Hittite Empire of three and a half millennia ago. And we can
see it today in the behaviour of traders on financial markets, where the propensity to follow the herd can lead all too easily to the booms and crashes we have lately experienced. Scientists such as Robin Dunbar have argued that our anomalously large brain (compared to other mammals) evolved precisely because, from an evolutionary perspective, copying is a very successful strategy to follow.This concept is just as crucial for companies and markets as it is for people. In September 2008 Lehman Brothers went bankrupt, precipitating a crisis which almost led to a total collapse of the world economy and a repeat of the Great Depression of the 1930s. It was precisely because Lehman was connected via a network to other banks that made the situation so serious. Lehman’s failure could easily have led to a cascade of bankruptcies across the world financial network, first in those institutions to which Lehman owed money, then spreading wider and wider from these across the entire
network. Incredibly, neither the systems of financial regulations which were in place, nor the thinking of mainstream economics which influenced policy so strongly, took any account of the possibility of such a network effect.A world in which network effects are a driving force of behaviour is completely different from the world of conventional economics, in which isolated individuals carefully weigh up the costs and benefits of any particular course of action. A world in which network effects are important is a much more realistic description of the human social and economic realities which exist in the twenty-first century. It is
the implications of this world which I explore in this book.Incentives have not disappeared as a driver of human behaviour. It is still the case that if, say, Pepsi raises its price compared to Coke, more Coke and less Pepsi will be sold. This is the world which economic theory describes. It is not wrong. But it is often misleading, for it offers only a very partial account of how decisions are made in reality. Network effects can be far more powerful than incentives, and we will see many examples in which network effects have completely swamped the impact of incentives, leading to outcomes completely different from
those intended by policy makers.Network effects require policy makers, whether in the public or corporate spheres, to change radically their view of how the world operates. In part, they make policy much harder to implement successfully, and they help explain many of the failures of policies based on the assumption that incentives and not network effects are the key drivers of behaviour. But they open up the possibility of much more effective and successful policies, ones which harness our knowledge of network effects and how they work in practice. Hence the main title of this book: Positive Linking.
Part a critique of policy makers, part a history of economic thought, this will do much to popularise network economics.
The collapse of Lehman Brothers in 2008 left the global financial system teetering, with cash machines hours away
from becoming unable to dispense banknotes. In the months that followed, world trade slumped. Almost four years on, economic growth remains stagnant.
Last summer, tensions between the UK police and communities boiled over when
WHEN COPYING OTHERS IS THE RATIONAL CHOICE Review by Claire Jones
friends and family of Mark Duggan, killed by a gunshot fired by police, gathered outside a north London police station. Four nights of rioting followed across England.
Technology facilitated both events: in finance, by creating conditions in which globalisation could thrive; during the riots, by enabling those on the streets to communicate using social media. In both instances, the spreading of the mayhem took policy makers by surprise and, as a result, they were woefully unprepared.
Paul Ormerod thinks he knows why policy makers got it so wrong. Not only this; he presents a worldview that makes these events easier to explain and prepare for in future. The root of the inadequacies of current policy making is officials’ reliance on “mainstream” economics for
their view that individuals behave
rationally, making decisions to maximise their monetary and social welfare. Rational man was born in 19th-century economics; he remains alive and well today.
While it was reasonably descriptive back then, however, according to Mr Ormerod, the assumption that people behave in this way now is highly dangerous. This is because it fails to take into account the effects of urbanisation and mass communication on the way people make decisions.
As far as Mr Ormerod is concerned, these lifestyle revolutions have radically changed the way people choose how to act. Life has become increasingly complex and it is no longer as straightforward as it once was to work out what the “optimal” course of action is. Copying others is often the
only viable option. So the assumption that people make choices in isolation is no longer sustainable.
“The choices people make, their attitudes, their opinions, are influenced directly by other people. The medium by which it spreads is the social network,” he says. “Network effects, the fact that a person can and often does decide to change preferences simply on the basis of what others do, pervade the modern world.”
People still occasionally make decisions of their own accord. People still often try to maximise their economic and social welfare. But we are now, more than ever, susceptible to herd-like behaviour. Crises can more easily become national, even global, as local disturbances go “viral” through these network effects. It was, Mr Ormerod says, precisely because Lehman Brothers was so connected to other banks that it ran into trouble.
Yet policy makers fail to take this into account. And so they are often shocked that attempts to incentivise electorates
through tax cuts, benefits or interest rate increases fail to have the desired effect – and, occasionally, make things worse.
Readers of Mr Ormerod’s earlier works will be familiar with his attacks on economic orthodoxy. Barbs on pre-crisis
dogma, such as the efficient markets hypothesis, are now common – if not among policy makers, at least within much economic literature. Others, such as the Bank of England’s Andy Haldane and Robert May, a professor at Oxford university, have written about the role of networks in the financial crisis. George Soros, the investor, has bestowed $50m for a centre based at Oxford, the Institute for New Economic Thinking, to better
understand network effects.Where Positive Linking is more
innovative is in explaining how policy makers can use statistical theory better to predict which social groups, or investors, are more prone to copying one another. This could tell us more about where riots, or big financial crises, are likely to occur.
Another of the book’s strengths is that
Positive Linking has been the object of several reviews and comments in the press - here the Sunday Times
it is accessible. Like Freakonomics, it is peppered with references to religion and prostitution. Hopefully, it will do much to popularise network economics. The book also charts the contributions economists as diverse as John Maynard Keynes and Friedrich Hayek have made to network theory, though it is not a complete guide to the theory’s historical development.
The book is partly a critique of policy makers’ intellectual framework, partly a
history of economic thought, and partly an argument for network theory. Is Positive Linking, like the events it discusses, greater than the sum of these parts? Not quite.
No policy maker will be able to cast aside their existing models just yet. But that is probably because this is an area of economics that is still in its infancy. And it is because of economists such as Mr Ormerod that, one hopes, progress will be made.
BOOKS
Phil Ball’s little book is one of the best summaries I have come across on complexity theory and its applications. This little triumph of clarity argues that society’s problems are those of highly connected systems. The book has been written to support the FuturICT project which seeks to convince that a new interdisciplinary synthesis – a new social physics if you like – is required to unravel such problems of this complexity. Phil says of contemporary social problems “… the consequences … are immense, and yet at this stage are little more than informed guesswork” (page vii). Nice gentle text. If are a newcomer to complexity sciences, then read this first. Lots of references to our own work in CASA here on cities, and to friends of CASA such as Paul Ormerod, Bill Hillier and others.
This comment has been posted by Michael Batty on the blog “Urban Models + Spatial Complexity + Smart Cities”, on the 28th of August 2012, at www.spatialcomplexity.info/
PHIL BALL’S LITTLE MASTERPIECEComment by Michael Batty
Studies of complex systems have attracted significant interdisciplinary interest in recent times. Such studies have had a major impact on disciplines as wide-ranging as physics, biology, economics, the social sciences, computer sciences, electrical, mechanical and civil engineering, etc. Complex systems science has the potential to revolutionize the way we understand and interact with the world.
The ICST Transactions on Complex Systems journal aims to be a platform for interdisciplinary studies of complex systems. The scope includes, but is not limited to: Complex networks, Complex social systems, Complex economic systems, Complex biological systems, Complex engineering systems, Complex system methods, Complexity in arts and music, General complexity sciences, New frontiers of complex systems.
We are looking for innovative ideas and deep insights into complex systems and their applications. We welcome and appreciate contributions in theoretical research and potential and actual real-life applications. On a peer-review basis, we publish full papers, letters and surveys. We will publish brief work-in-progress reports and important preliminary research results. We also welcome comprehensive reports on finished projects. You are cordially invited to join us to make this journal a success.
ICST Transactions aim at devoting certain volumes for specific issues. We therefore welcome special issues proposals at [email protected].
To submit a paper to the journal, submit a manuscript of your work through the e-SCRIPTS portal: http://escripts.icst.org/ Contact the journal: [email protected]
Special Issue on Multidisciplinary Applications of ComplexNetworks Modeling, Simulation, Visualization & Analysis
Complex Network methods for Complex Adaptive Systems (CAS) have a widespread prevalence across literature spanning several disciplines from Biology and Social Sciences to Communication Networks. These network models are primarily developed using interaction data of various components or agents in a CAS. Subsequently analysis of these networks is performed using various network tools. This inaugural special issue of Springer Complex Adaptive Systems Modeling (CASM) comprises of papers in the domain of complex networks modeling, simulation, visualization and analysis.
Deadline for submissions: 1st October 2012 http://www.casmodeling.com/
Network Science is a new journal for a new discipline -- one using the network paradigm, focusing on actors and relational linkages, to inform research, methodology and applications from many fields across the natural, social, engineering and informational sciences. Given growing understanding of the interconnectedness and globalization of the world, network methods are an increasingly recognized way to research aspects of modern society along with the individuals, organizations and other actors within it.
The journal welcomes contributions from researchers in all areas working on network theory, methods and data. With the goal of publishing the first of four annual issues in Spring 2013, the editorial team is currently accepting submissions. Reviews will be double-blind and will be coordinated by the editor for the broad interdisciplinary field to which each member of the editorial team is assigned.
CFP: NETWORK SCIENCE
http://www.indiana.edu/~netsci/
Orthodox economic theory does not capture the behaviour of real markets due to unreasonable assumptions such as the independence of agents, rationality and full information. We believe ideas from NESS can provide better theory. However, it is not currently the case that a coherent set of NESS assumptions have been identified, discussed and agreed by researchers within the area. This is partially due to disciplinary silos but also because real differences exist. Hence in this
workshop we aim to bring together leading researchers in the area to compare assumptions and have the debate to
identify where there are common foundations and where there are differences. This will be focused at the level of micro-foundations and their systemic impacts.
We envisage a two-day event in which the first day will involve invited speakers proposing – based on demonstrable results – foundational abstractions and their dimensions.
CONFERENCES
NESS WORKSHOP ON MICRO-FOUNDATIONS AND SYSTEMIC IMPACTSParco regionale del Conero, Ancona, Italy
27th – 29th September 2012 - http://www.nessnet.eu/events-2/msiw/
The general purpose of the MAFIN workshop series is to discuss the role of the financial sector in determining economic stability, innovation and growth and to devise policy for preventing major financial crisis and to improve resilience of the economy.
The MAFIN 2012 edition will particularly welcome contributions on the following topics: Financialization and inequality; Financial innovation, systemic risk and macroprudential regulation; Debt and asset bubbles, deleveraging and business cycles; Euro sovereign debt crisis; Functional finance and modern monetary theory; Modes of financing innovation and growth.
Unorthodox methodological approaches will be appreciated, e.g. agent-based modeling and simulation, flow-of-fund analyses and stock-flow consistent modeling, networks economics, statistical equilibrium techniques, institutional and evolutionary economics perspectives, data mining techniques.
This three-day event will offer presentations of papers selected by the Scientific Committee after a double-blind review, as well as keynote sessions by Invited
Speakers. Discussions will have a large space in the final program.Invited speakers:Shu-Heng Chen, National Chengchi University, Taipei, TaiwanDomenico Delli Gatti, Catholic University in Milan, ItalyPierre-Cyrille Hautcoeur, Paris School of Economics, FranceHardy Hanappi, University of Technology of Vienna, AustriaAnastasia Nesvetailova, City University London, United KingdomDidier Sornette, ETH Zürich, SwitzerlandAndrea Teglio, University Jaume I, Castellon, Spain
CONFERENCES
MAFIN 2012THIRD INTERNATIONAL WORKSHOP ON MANAGING FINANCIAL INSTA-
BILITY IN CAPITALIST ECONOMIES
Genoa, Italy, September 19th-21st, 2012 - http://mafin2012.dime.unige.it
The 2013 International Conference on Social Computing, Behavioral-Cultural Modeling, and Prediction (SBP) is a multidisciplinary conference with a selective single paper track and poster session. SBP also invites a small number of high quality tutorials and nationally recognized keynote speakers.The SBP conference provides a forum for researchers and practitioners from academia, industry, and government agencies to exchange ideas on current challenges in social computing, behavioral modeling and prediction, and on state-of-the-art methods and best practices being adopted to tackle these challenges. Interactive events at the conference are designed to promote cross-disciplinary contact.Social Computing harnesses the power of computational methods to study social behavior within a social context. Behavioral Cultural modeling refers to
representing behavior and culture in the abstract, and is a convenient and powerful way to conduct virtual experiments and scenario analysis. Both social computing and behavioralcultural modeling are techniques designed to achieve a better understanding of complex behaviors, patterns, and associated outcomes of interest. Moreover, these approaches are inherently interdisciplinary; subsystems and system components exist at multiple levels of analysis (i.e., "cells to societies") and across multiple disciplines, from engineering and the computational sciences to the social and health sciences.
CONFERENCES
SBP 2013 INTERNATIONAL CONFERENCE ON SOCIAL COMPUTING, BEHAVIORAL-
CULTURAL MODELING, AND PREDICTION
University of California DC Center, April 2 - 5, 2013 - http://sbp2013.org/
Real-world entities often interconnect with each other through explicit or implicit relationships to form a complex network. Examples of complex networks are found in many fields of science such as biological systems, engineering systems, economic systems as well as social systems. In line with 's tradition of SITIS promoting interdisciplinary research, the international workshop on Complex Networks and their Applications aims at bringing together researchers and practitioners from different science communities working on areas related to complex networks. The workshop targets two types of contributions from prospective authors: Contributions dealing of theoretical tools and methods to solve practical problems as well as applications solved by tools from network sciences. Both contributions should stimulate interaction between
theoreticians and practitioners.
Authors are encouraged to submit both theoretical and applied papers on their research in complex networks. Topics for the workshop include, but are not limited to:
• Models of Complex Networks • Structural Network Properties and Analysis • Complex Networks and Epidemics • Rumor Spreading • Community Structure in Networks • Formation of Complex Networks • Generation of Complex Networks • Community Detection in Complex Networks • Motif Discovery in Complex Networks • Visualization of Complex Networks • Complex network mining • Dynamics and evolution patterns of complex networks • Community discovery in complex social networks • Visual representation of complex networks • Methodological problems in complex network studies • Applications of complex network analysis
CONFERENCES
COMPLEX NETWORKS 2012WORKSHOP ON COMPLEX NETWORKS AND THEIR APPLICATIONS
International workshop co-located with: The 8th International Conference on SIGNAL IMAGE TECHNOLOGY & INTERNET
BASED SYSTEMS, (SITIS 2012), Sorrento - Naples, Italy, 25-29 November 2012
The relationship of economics with physics through the complex system concept, and in particular the description of systems of "particles" or "agents" in interaction on complex networks is being very intense in the last few years. Complex networks are one of the most studied objects recently in physics, chiefly in statistical physics, and they have become a fundamental paradigm to understand all kinds of systems. These works are already arriving at very important results in problems that go from the stability of the banking system to the structure of the world production of goods. In this way, the field of complex networks appears as an ideal place for the interaction of physics and economics to lead to big advances and new concepts, as has occured
before with quantitative finance (popularly, the "quants"), that originated in this interaction and are nowadays one of the pillars of the international fiscal and financial systems.
On the other hand, the behavior of economic agents, being they persons or financial institutions, is key to understand the manner in which this complex system that economics has become works. In fact, the interplay between the organization of interactions (networks, structure) and the actions of agents (decision making, strategy), is the responsible for the enormous richness of behavior and the non trivial relationship between causes and effects. This makes it very important to address the modeling of the behavior of the economic agents as well as how is that behavior through controlled experiments. In this symposium, oriented both to specialists and to a wider audience, we have selected some of the hottest recent topics
around which the collaboration between economists and physicists revolves, having in its toolbox the concepts of networks, agents, and people.
CONFERENCES
INTERNATIONAL SYMPOSIUM: ECONOMICS IN A COMPLEX WORLD: NETWORKS, AGENTS AND PEOPLE
Fundación Ramón Areces, Madrid, September 27-28, 2012http://tinyurl.com/cw683sw
An international society for the advancement of economic science, called the Society for Economic Science with Heterogeneous Interacting Agents (ESHIA), has been launched in 2006. Accomodating a vibrant interdisciplinary area, the society aims to bring together researchers focusing on agent-based approaches in economics and neighboring fields.
The objectives of ESHIA areto publish the society journal and other publications to hold international conference as well as smaller regional and specialized meetings to recognize, by prizes and awards, the work of outstanding contributors to the field to represent the
interests of its members to various bodies, such as grant-giving organizations to establish and promote relations with related disciplines such as economics, physics, computer science, and othersto establish connections, including membership tie-ins, with other learned societies in related areas to provide centralized information regarding job opportunities, preprint series, bibliographical information and news of interest to members.
To subscribe to the ESHIA Mailing List just send an email [email protected] with the subject: subscribe eshia
WEB RESOURCES
ESHIA - SOCIETY FOR ECONOMIC SCIENCE WITH HETEROGENEOUS INTERACTING AGENTS
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