Complex Decision-Making in Economy and Finance

13Managing Behavioral Risks: Uncertainty and Catastrophes

The relationships between terms such as chaos, order, disorder and uncertainty originates from various fields of study at the roots of complexity. This chapter provides several illustrations in the ways organizations behave.

13.1. Introduction

New concepts from the physical or social sciences have revolutionized approaches used in economics and finance. They are part of what is called complexity. You have probably already heard of at least two or three of these concepts: systems dynamics, the study of instability and chaos, Ilya Prigogine’s dissipative structures and random fluctuations, René Thom’s catastrophe theory or Benoît Mandelbrot’s fractal geometry, etc.

This subject has already been discussed in our previous book Making Decisions in Complex Worlds [MAS 17b]. Only a few interesting examples, facts and results will be recalled below.

To speak of “complexity” is a priori an admission of powerlessness: complexity simply results from our limited ability to calculate and extract the intrinsic properties of a system about which we can hardly have an overall idea that allows us to recognize and name it. This is due to the fact that detail is ignored: models are not precise enough, and the calculation methods are not powerful enough to integrate the notions of detail and real numbers. With the deterministic chaos and fractals that characterize our world, we must learn to live with non-integral dimensions.

Complexity ...