Mercers’ School Memorial Professor of Commerce Michael Mainelli

1. Mercers’ School Memorial Professor of CommerceMichael Mainelli Perceptions Rather Than Rules: The (Mis)Behaviour Of Markets

2. 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. Governance Feed-back Feed-forward Monitoring Input Process Output Systems Theory - IPOFMFG

4. Governance Feed-back Feed-forward Monitoring Input Process Output Please Don’t Try To Do Systems Theory At Home!

5. Global Warming Goes For A Random Walk

6. Heating System Tries To Hit 20ºC

7. Person Knows Up/Down,Tries To Hit 20ºC

8. Person And Heating System Working Together … hmmm

9. Person With Perfect Foreknowledge,Tries To Hit 20ºC

10. Person And Heating System With Perfect Foreknowledge, Try To Hit 20ºC

11. Looks Like A Market - 1?

12. Looks Like A Market - 2?

13. Looks Like A Market – 3?

14. Looks Like A Market – 4?

15. Governance Feed-back Feed-forward Monitoring Input Process Output Stochastic Systems Theory

16. Husband And Wife In Strife?!?

17. The Edges of Chaos Mandelbrot Set, Zn+1=Zn2+C, image courtesy of Evercat and Wikipedia

18. 10 Years Seem Like 10 Days

19. Spot The Fake • Fake – Bachelier random walk • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake - Mandelbrot multifractal • Real - IBM share prices • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake - Mandelbrot multifractal • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake - Mandelbrot multifractal • Real - IBM share prices • Real - Dollar-Deutsche Mark • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake - Mandelbrot multifractal • Real - IBM share prices • Real - Dollar-Deutsche Mark • Fake - Mandelbrot multifractal • Fake – Bachelier random walk • Fake – random walk, Mandelbrot adjustments • Fake – random walk, Mandelbrot adjustments • Fake - Mandelbrot multifractal • Real - IBM share prices • Real - Dollar-Deutsche Mark • Fake - Mandelbrot multifractal • Fake - Mandelbrot multifractal

20. Life Is A Bit Complex

21. Dynamic Systems

22. Predictably Chaotic Fractal image courtesy of Noel Giffin, spanky.triumf.ca

23. 10,000 Fed-Forward Maniacs

24. Leptokurtic Fat Tails

25. Once In 300 Years?        68% 95% 99.7%

26. Bubbles

27. Discussion • Can you suggest a market with no feed-forward? • Is some physical phenomenon a good analogue for markets? • How can we share information and retain diverse opinion? “Get a big picture grip on the details.”Chao Kli Ning

28. Perceptions Rather Than Rules • Thank you!