Conference proceedings article

Adaptive and rational anticipations in risk management systems and economy

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Publication Details

Author list: Holmberg, Stig C.

Publisher: American Institute of Physics (AIP)

Place: Liege

Publication year: 2010

Start page: 398

End page: 407

Number of pages: 10

ISBN: 978-073540858-6

DOI: http://dx.doi.org/10.1063/1.3527178


Abstract

The global financial crisis of year 2009 is explained as a result of uncoordinated risk management decisions in business firms and economic organisations. The underlying reason for this can be found in the current financial system. As the financial market has lost much of its direct coupling to the concrete economy it provides misleading information to economic decision makers at all levels. Hence, the financial system has moved from a state of moderate and slow cyclical fluctuations into a state of fast and chaotic ones. Those misleading decisions can further be described, but not explained, by help of adaptive and rational expectations from macroeconomic theory. In this context, AE, the Adaptive Expectations are related to weak passive Exo-anticipation, and RE, the Rational expectations can be related to a strong, active and design oriented anticipation. The shortcomings of conventional cures, which builds on a reactive paradigm, have already been demonstrated in economic literature and are here further underlined by help of Ashbys ""Law of Requisite Variety"", Weavers distinction between systems of ""Disorganized Complexity"" and those of ""Organized Complexity"", and Klirs ""Reconstructability Analysis"". Anticipatory decision-making is hence here proposed as a replacement to current expectation based and passive risk management. An anticipatory model of the business cycle is presented for supporting that proposition. The model, which is an extension of the Kaldor-Kalecki model, includes both retardation and anticipation. While cybernetics with the feedback process in control system deals with an explicit goal or purpose given to a system, the anticipatory system discussed here deals with a behaviour for which the future state of the system is built by the system itself, without explicit goal. A system with weak anticipation is based on a predictive model of the system, while a system with strong anticipation builds its own future by itself. Numerical simulations on computer confirm the feasibility of this approach. Hence, functional differential equations with both retardation and anticipation are found to be useful tools for modelling financial systems. © 2010 American Institute of Physics.


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