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“New Learning” Barnard’s Inn Hall Holborn London EC1N 2HH Tel: +44 (0)20 7831 0575 Fax: +44 (0)20 7831 5208

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Presentation on theme: "“New Learning” Barnard’s Inn Hall Holborn London EC1N 2HH Tel: +44 (0)20 7831 0575 Fax: +44 (0)20 7831 5208"— Presentation transcript:

1 “New Learning” Barnard’s Inn Hall Holborn London EC1N 2HH Tel: +44 (0)20 7831 0575 Fax: +44 (0)20 7831 5208 Email : enquiries@gresham.ac.uk www.gresham.ac.uk © Gresham College 2005 Mercers’ School Memorial Professor of Commerce Michael Mainelli Perceptions Rather Than Rules: The (Mis)Behaviour Of Markets

2 www.gresham.ac.uk © Gresham College 2005 Outline It’s All About People Systems Theory At Home Stochastic Systems Theory The Edges of Chaos Complexity Predictably Chaotic Fed-Forward Fat Tails Bubble, Bubble, Toil and Trouble “Get a detailed grip on the big picture.” Chao Kli Ning

3 www.gresham.ac.uk © Gresham College 2005 Governance Monitoring Feed-forward Feed-back Process Output Input Systems Theory - IPOFMFG

4 www.gresham.ac.uk © Gresham College 2005 Governance Monitoring Feed-forward Feed-back Process Output Input Please Don’t Try To Do Systems Theory At Home!

5 www.gresham.ac.uk © Gresham College 2005 Global Warming Goes For A Random Walk

6 www.gresham.ac.uk © Gresham College 2005 Heating System Tries To Hit 20ºC

7 www.gresham.ac.uk © Gresham College 2005 Person Knows Up/Down, Tries To Hit 20ºC

8 www.gresham.ac.uk © Gresham College 2005 Person And Heating System Working Together … hmmm

9 www.gresham.ac.uk © Gresham College 2005 Person With Perfect Foreknowledge, Tries To Hit 20ºC

10 www.gresham.ac.uk © Gresham College 2005 Person And Heating System With Perfect Foreknowledge, Try To Hit 20ºC

11 www.gresham.ac.uk © Gresham College 2005 Looks Like A Market - 1?

12 www.gresham.ac.uk © Gresham College 2005 Looks Like A Market - 2?

13 www.gresham.ac.uk © Gresham College 2005 Looks Like A Market – 3?

14 www.gresham.ac.uk © Gresham College 2005 Looks Like A Market – 4?

15 www.gresham.ac.uk © Gresham College 2005 Governance Monitoring Feed-forward Feed-back Process Output Input Stochastic Systems Theory

16 www.gresham.ac.uk © Gresham College 2005 Husband And Wife In Strife?!?

17 www.gresham.ac.uk © Gresham College 2005 The Edges of Chaos Mandelbrot Set, Z n+1 =Z n 2 +C, image courtesy of Evercat and Wikipedia

18 www.gresham.ac.uk © Gresham College 2005 10 Years Seem Like 10 Days

19 www.gresham.ac.uk © Gresham College 2005 Spot The Fake 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 4.Fake - Mandelbrot multifractal 5.Real - IBM share prices 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 4.Fake - Mandelbrot multifractal 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 4.Fake - Mandelbrot multifractal 5.Real - IBM share prices 6.Real - Dollar-Deutsche Mark 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 4.Fake - Mandelbrot multifractal 5.Real - IBM share prices 6.Real - Dollar-Deutsche Mark 7.Fake - Mandelbrot multifractal 1.Fake – Bachelier random walk 2.Fake – random walk, Mandelbrot adjustments 3.Fake – random walk, Mandelbrot adjustments 4.Fake - Mandelbrot multifractal 5.Real - IBM share prices 6.Real - Dollar-Deutsche Mark 7.Fake - Mandelbrot multifractal 8.Fake - Mandelbrot multifractal

20 www.gresham.ac.uk © Gresham College 2005 Life Is A Bit Complex

21 www.gresham.ac.uk © Gresham College 2005 Dynamic Systems Feed- Back/Feed- Forward Systems Theory Stochastic Systems Theory Emerging Order Chaos Theory Complexity

22 www.gresham.ac.uk © Gresham College 2005 Predictably Chaotic Fractal image courtesy of Noel Giffin, spanky.triumf.ca

23 www.gresham.ac.uk © Gresham College 2005 10,000 Fed-Forward Maniacs

24 www.gresham.ac.uk © Gresham College 2005 Leptokurtic Fat Tails

25 www.gresham.ac.uk © Gresham College 2005 Once In 300 Years? 99.7% 68% 95%  

26 www.gresham.ac.uk © Gresham College 2005 Bubbles

27 www.gresham.ac.uk © Gresham College 2005 Discussion 1. Can you suggest a market with no feed- forward? 2. Is some physical phenomenon a good analogue for markets? 3. How can we share information and retain diverse opinion? “Get a big picture grip on the details.” Chao Kli Ning

28 www.gresham.ac.uk © Gresham College 2005 Perceptions Rather Than Rules Thank you!

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