Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-12-05T03:20:27.787Z Has data issue: false hasContentIssue false
  • English
  • Français

Explaining Financial Markets in Terms of Complex Systems

Published online by Cambridge University Press:  01 January 2022

Meinard Kuhlmann
Get access Rights & Permissions [Opens in a new window]

Abstract

Large changes of financial market prices without exogenous causes deviate significantly from the Gaussian behavior of random variables. This indicates that financial markets should be treated as complex systems, for which nonlinear interactions of its subunits/agents are crucial. I focus on how the complex systems perspective impacts the notion of explanations in economics. The mechanistic model seems to fit the bill, but problems surface on closer scrutiny. One characteristic of complex systems is that their behavior is surprisingly independent from microscopic details. Thus, mechanistic explanations in the microreductionist manner seem unavailable. Despite these conflicts, I defend a modified structural mechanistic approach.

Type
Complex Systems
Information
Philosophy of Science , Volume 81 , Issue 5 , December 2014 , pp. 1117 - 1130
Copyright
Copyright © The Philosophy of Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

†

I would like to thank Mark Bedau, Paul Humphreys, and Margaret Morrison, as well as an anonymous referee and my colleagues at Bielefeld University, in particular Martin Carrier, Stephan Kopsieker, and Christian Nimtz, for very helpful feedback and discussions.

References

Batterman, Robert W. 2002a. “Asymptotics and the Role of Minimal Models.” British Journal for the Philosophy of Science 53:21–38.10.1093/bjps/53.1.21CrossRefGoogle Scholar
Batterman, Robert W. 2002b. The Devil in the Details. Oxford: Oxford University Press.Google Scholar
Bechtel, William, and Abrahamsen, Adele. 2005. “Explanation: A Mechanist Alternative.” Studies in History and Philosophy of the Biological and Biomedical Sciences 36:421–41.10.1016/j.shpsc.2005.03.010CrossRefGoogle ScholarPubMed
Bechtel, William, and Richardson, Robert C.. 2010. Discovering Complexity: Decomposition and Localization as Strategies in Scientific Research. 2nd ed. Cambridge, MA: MIT Press.10.7551/mitpress/8328.001.0001CrossRefGoogle Scholar
Bedau, Mark. 2014. “Testing Bottom-Up Models of Complex Citation Networks.” Philosophy of Science, in this issue.CrossRefGoogle Scholar
Binney, James J., Dowrick, N. J., Fisher, A. J., and Newman, M. E. J.. 1992. The Theory of Critical Phenomena: An Introduction to the Renormalization Group. Oxford: Oxford University Press.Google Scholar
Bishop, Robert. 2011. “Metaphysical and Epistemological Issues in Complex Systems.” In Handbook of the Philosophy of Science, Vol. 10, Philosophy and Complex Systems, ed. Hooker, Clifford, 105–36. New York: Elsevier.Google Scholar
Butterfield, Jeremy. 2011. “Emergence, Reduction and Supervenience: A Varied Landscape.” Foundations of Physics 41:920–59.10.1007/s10701-011-9549-0CrossRefGoogle Scholar
Chowdhury, Debashish, and Stauffer, Dietrich. 1999. “A Generalized Spin Model of Financial Markets.” European Physical Journal B 8:477–82.CrossRefGoogle Scholar
Dowe, Philip. 2000. Physical Causation. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Frigg, Roman. 2003. “Self-Organised Criticality—What It Is and What It Isn’t.” Studies in History and Philosophy of Science 34:613–32.CrossRefGoogle Scholar
Glennan, Stuart S. 2002. “Rethinking Mechanistic Explanation.” Philosophy of Science 69 (Proceedings): S342–S353.10.1086/341857CrossRefGoogle Scholar
Goldberger, Ary L. 2006. “Giles F. Filley Lecture: Complex Systems.” Proceedings of the American Thoralic Society 3:467–72.Google Scholar
Humphreys, Paul. 2014. “Explanation as Condition Satisfaction.” Philosophy of Science, in this issue.10.1086/677698CrossRefGoogle Scholar
Johnson, N. F., Jeffries, P., and Hui, P. M.. 2003. Financial Market Complexity: What Physics Can Tell Us about Market Behavior. Oxford: Oxford University Press.10.1093/acprof:oso/9780198526650.001.0001CrossRefGoogle Scholar
Kuhlmann, Meinard. 2011. “Mechanisms in Dynamically Complex Systems.” In Causality in the Sciences, ed. Illari, Phyllis McKay, Russo, Frederica, and Williamson, Jon, 880–906. Oxford: Oxford University Press.10.1093/acprof:oso/9780199574131.003.0041CrossRefGoogle Scholar
Illari, Phyllis McKay, Russo, Frederica, and Williamson, Jon Forthcoming. “A Mechanistic Reading of Quantum Laser Theory.” In Why Is More Different? Philosophical Issues in Condensed Matter Physics and Complex Systems, ed. Brigitte Falkenburg and Margaret Morrison. Berlin: Springer.Google Scholar
Lawson, Tony. 1989. “Abstraction, Tendencies and Stylised Facts: A Realist Approach to Economic Analysis.” Cambridge Journal of Economics 13:59–78.Google Scholar
Lux, Thomas, and Marchesi, Michele. 1999. “Scaling and Criticality in a Stochastic Multi-agent Model of a Financial Market.” Nature 397:498–500.10.1038/17290CrossRefGoogle Scholar
Machamer, Peter, Darden, Lindley, and Craver, Carl. 2000. “Thinking about Mechanisms.” Philosophy of Science 67:1–25.CrossRefGoogle Scholar
Mantegna, R. N., and Stanley, H. Eugene. 2000. An Introduction to Econophysics: Correlations and Complexity in Finance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Morrison, Margaret. 2012. “Emergent Physics and Micro-ontology.” Philosophy of Science 79:141–66.10.1086/663240CrossRefGoogle Scholar
Morrison, Margaret 2014. “Complex Systems and Renormalization Group Explanations.” Philosophy of Science, in this issue.10.1086/677904CrossRefGoogle Scholar
Norton, John. 2012. “Approximation and Idealization: Why the Difference Matters.” Philosophy of Science 79:207–32.10.1086/664746CrossRefGoogle Scholar
Rickles, Dean. 2008. “Econophysics and the Complexity of the Financial Markets.” In Handbook of the Philosophy of Science, Vol. 10, Philosophy and Complex Systems, ed. Hooker, Clifford, 1–40. New York: Elsevier.Google Scholar
Samanidou, Egle, Zschischang, Elmar, Stauffer, Dietrich, and Lux, Thomas. 2007. “Agent-Based Models of Financial Markets.” Reports on Progress in Physics 70:409–50.CrossRefGoogle Scholar
Sornette, Didier. 2003. Why Stock Markets Crash: Critical Events in Complex Financial Systems. Princeton, NJ: Princeton University Press.Google Scholar
Strevens, Michael. 2003. Bigger than Chaos: Understanding Complexity through Probability. Cambridge, MA: Harvard University Press.Google Scholar
Weisberg, Michael. 2013. Simulation and Similarity: Using Models to Understand the World. New York: Oxford University Press.CrossRefGoogle Scholar
Wimsatt, William C. 1987. “False Models as Means to Truer Theories.” In Neutral Models as a Biological Strategy, ed. Nitecki, M. H. and Hoffman, A., 23–55. Oxford: Oxford University Press.Google Scholar
Hoffman, A. 1994. “The Ontology of Complex Systems: Levels of Organisation, Perspectives, and Causal Thickets.” Canadian Journal of Philosophy 20:S207–S274.Google Scholar