Utrecht complexity research: The madness of people

Complex systems can be found as a driving force behind many of the events we encounter in daily life, and they play an important role in the social challenges we face today. In this newsletter, Professor of Finance Utz Weitzel provides some food for thought on complex systems in his research.

Complex social systems

In 1720, Sir Isaac Newton was heavily invested in the South Sea bubble. When the stock bubble burst he lost a fortune of about £2.4 million (in present day terms) and was quoted as stating: “I can calculate the movement of the stars, but not the madness of people”.

Indeed, complex systems in human interaction often appear to produce chaos and madness, on financial markets, in politics, in economics, and in many other social systems. Complex systems tend to resist complete prediction or control, even with a deterministic microstructure. In social systems the underlying individual decisions are often stochastic if not “unknowable”. Nevertheless, some progress can be made, for example, with the help of game theory, a scientific field that attempts to logically explain human interaction by mathematically studying interactive decision making.

Beliefs and expectations

One of the exciting areas of complexity research is the role of humans’ beliefs and expectations. As we cannot know what other people think, we have to form beliefs and expectations about their intentions and actions. Sometimes humans (and other species) deliberately create uncertainty as a best response. Think of the game rock-paper-scissors, where being unpredictable is the best response and an equilibrium strategy. Once out of equilibrium, individual beliefs about the real intentions of others introduce significant randomness into otherwise quite simple and deterministic situations of interaction.

My research addresses how this individual behavior develops and how it is exacerbated or mitigated by certain aggregation mechanisms, such as markets. On financial markets, for example, speculation on the beliefs and expectations of others can create feedback loops, price bubbles and crashes, as we recently saw in bitcoins or during the last global financial crisis. In financial systems, small events can trigger a critical change in beliefs and sudden collective action: a bank run, a sudden hike in interest rates on ailing government debt, or a crash in stock prices on a day without significant news. Complexity research and its toolkit is important in the analysis of these dynamics. 

Collaborating with other disciplines

One of the fascinating aspects of complexity research is its integrative nature across disciplines. It lies at the intersection of more fundamental sciences and numerous applications fields. This interdisciplinary nature enabled a joint supervision of a PhD student in mathematics and in finance (on the stability of banking systems), but also research collaborations with psychologists, sociologists and neuroscientists.

Together, we hope to better understand and maybe even mitigate what Newton called the “madness of people”.