Making Sense of Chaos: A Better Economics for a Better World

Turbulence corresponds to complicated chaos, with many degrees of freedom. Like financial markets, fluid turbulence exhibits clustered volatility and fat tails.

Games converge to a static equilibrium if they are non-competitive or simple; conversely, if they are both competitive and complicated, they are unlikely to converge – instead, their dynamics will be chaotic.

The second 10 per cent drop drives leverage up infinitely more than the first. We will see later in this chapter how the strongly nonlinear nature of leverage is a powerful amplifier that can cause booms and busts in the economy.

were priced on the assumption that the risk that any particular mortgage would default was independent of other default risks, whereas when things got bad, many households defaulted on their mortgages at the same time.

favoring heuristics that have been successful recently and abandoning those that have performed poorly. Gigerenzer calls this way of solving problems ecological rationality.

each product is produced via a ‘recipe’ (called a production function in economics) that specifies how much of each input is needed to make the output.

the learning dynamics were overwhelmingly likely to be chaotic. That is, the players never coordinated on an equilibrium; instead, they chased each other around the space of possible strategies in an unpredictable manner.

‘Homo economicus’,

complexity economics replaces ‘as-if’ reasoning with ‘as-is’ reasoning, providing