Independent Study Proposal A Survey of Ecological Models, Network Theory, and Complex Systems: Mental Models for Market

Behavior and Competitive Ecosystems

Purpose
Develop a toolbox of models to frame market behavior and companies competitive ecosystems from analogous frameworks in ecology, network theory, and the science of complexity. Each of these three fields share common concerns for understanding complex systems, particularly complex adaptive systems. Complex adaptive systems are created by a large set of heterogeneous agents, each adapting or reacting to the patterns the system itself creates. Complex adaptive systems are in a constant process of evolving over time. These types of systems are more familiar to biologists and ecologists. As pointed out by a group of scientists at the Santa Fe Institute in the early 1990s, the economy has four central characteristics resembling a more classic complex adaptive system: 1.) Aggregation through Dispersed Interaction: Aggregation is the emergence of complex, largescale behavior from the collective interactions of many less-complex agents. What happens in the economy is determined by the interactions of a great number of individual agents all acting in parallel. The action of any one individual agent depends on the anticipated actions of a limited number of agents as well as on the system they co-create. 2.) No Global Controller: Although there are laws and institutions, there is no one global entity that controls the economy. Rather, the system is controlled by the competition and coordination between agents of the system. 3.) Continual Adaptation: Agents within a complex adaptive system take information from the environment, combine it with their own interaction with the environment, and derive decision rules. In turn, various decision rules compete with one another based on their fitness, with the most effective rules surviving. The behavior, actions, and strategies of the agents, as well as their products and services, are revised continually on the basis of accumulated experience. In other words, the system adapts. It creates new products, new markets, new institutions, and new behavior. It is an ongoing system. 4.) Out-of-Equilibrium Dynamics: Unlike the equilibrium models that dominate the thinking in classical economics, the Santa Fe group believed the economy, because of constant change, frequently operates outside of its equilibrium. The out-of-equilibrium dynamics of a complex adaptive system are influenced by two specific characteristics or dynamics within the system: 1.) Nonlinearity: In a linear model, the whole equals the sum of the parts. In nonlinear systems, the aggregate behavior is more complicated than would be predicted by totaling the parts.

2.) Feedback loops: A feedback system is one in which the output of one iteration becomes the input of the next iteration. Feedback loops can amplify or dampen an effect. By gaining a stronger grasp on some of the tools and models used to understand complex adaptive systems and these given characteristics which emerge in the markets and economy, I hope to enhance my analytical toolbox for understanding the potential economic performance of companies and their valuation.

Structure of the Independent Study

While the amount of material selected to survey will be sizable for a three credit course, I will be scanning and choosing relevant content from a majority of the works cited for sake of efficiency. My goal is to search for fertile, analogous frameworks for understanding the economy and companies ecosystems (not to read or understand the material cited in its entirety). Each week, I will write a summary of my efforts along with a synopsis of those frameworks/concepts selected for further consideration. When possible, I will overlay those frameworks/concepts onto existing economic/company data that I am analyzing to test their feasibility. I will send the summary each week to my faculty sponsor for sake of accountability but without expecting feedback (unless the faculty sponsor has feedback they care to offer). Beyond the weekly summaries, two deliverables will be produced. Each deliverable will be a 2-5 page industry or company analysis, using frameworks or cursory analyses initially developed in weekly summaries. I will meet three times with my faculty sponsor, Professor Weinberg: an initial meeting to discuss planning and the independent study proposal as an evolving map; a second meeting at the mid-point to review the first deliverable and discuss my progress; and a final meeting to review the final deliverable and conclusions from the course.

Material to be Surveyed
Ecological Models A Toolbox of Mental Models:
Ecology: Concepts and Applications by Manuel Molles Chapter 9 Population Distribution and Abundance: i. Distribution Limits ii. Patterns on Small Scales iii. Patterns on Large Scales iv. Organism Size and Population Density Chapter 10- Population Dynamics i. Dispersal ii. Metapopulations iii. Patterns of Survival iv. Age Distribution v. Rates of Population Change Chapter 11- Population Growth i. Geometric and Exponential Population Growth ii. Logistic Population Growth iii. Limits to Population Growth Chapter 12- Life Histories i. Offspring Number versus Size ii. Adult Survival and Reproduction Allocation iii. Life History Classification Chapter 13- Competition i. Intraspecific Competition ii. Competitive Exclusion and Niches iii. Methametical and Laboratory Models iv. Competition and Niches Chapter 14- Exploitative Interactions i. Complex Interactions ii. Exploitation and Abundance iii. Dynamics iv. Refuges Chapter 15- Mutualism i. Plant Mutualism ii. Coral Mutualisms iii. Evolution of Mutualism Chapter 16- Species Abundance and Diversity i. Species Abundance

ii. iii. iv.

Species Diversity Environmental Complexity Disturbance and Diversity

Chapter 17- Species Ineractions and Community Structure i. Community Webs ii. Indirect Interactions iii. Keystone Species iv. Mutualistic Keystones Chapter 18- Primary Production and Energ y Flow i. Patterns of Terrestrial Primary Production ii. Patterns of Aquatic Primary Production iii. Consumer Influences iv. Trophic Levels Chapter 19- Nutrient Cycling and Retention i. Nutrient Cycles ii. Rates of Decomposition iii. Organisms and Nutrients iv. Disturbance and Nutrients Chapter 20- Succession and Stability i. Community Changes during Succession ii. Ecosystem Changes During Succession iii. Mechanisms of Succession iv. Community and Ecosystem Stability Animal Ecology by Elton Why Big Fierce Animals Are Rare by Colinvaux Scaling in Biology by Brown and West

Modeling Networks:
MITs course on Networks by Acemoglu and Ozdalgar (OpenCourseWare) http://ocw.mit.edu/courses/economics/14-15j-networks-fall-2009/index.htm i. ii. iii. iv. v. vi. vii. viii. Lecture 1 (Acemoglu) - Intro to Networks EK Chapter 1, Jackson Chapter 1 Lecture 2 (Ozdaglar) - Graph Theory and Social Networks EK Chapter 2 & 13, Jackson Chapter 2 & 3 Lectures 3 & 4 (Ozdaglar) - Branching Processes and Random Graph Models Jackson Sections 4.1.1, 4.2.1-4.2.5, and 4.3. Lectures 15 & 16 (Acemoglu) - Network Effects, Innovation, Tipping, and Contagion EK Chapters 17 & 19, Jackson Section 9.6-9.7 Lecture 17 & 18 (Acemoglu) - Games of Incomplete Information EK Chapters 9, 15, and 22. Lectures 19 & 20 (Ozdaglar) - Wisdom of the Crowds, Information Aggregation Over Networks Jackson Section 8.3. Lectures 21 and 22 (Acemoglu) - Herding and Informational Cascades EK Chapter 16, Jackson 8.1-8.2 Lectures 23 (Acemogul) - Markets and Networks EK Chapter 10-12

Background Reading for Networks: David Easley and Jon Kleinberg (EK)s Networks, Crowds, and Markets Matthew Jacksons Social and Economic Networks Gary Chartrands Introduction to Graph Theory Stanfords course on Social and Economic Networks by Jackson (Coursera) https://www.coursera.org/#course/networksonline

Social Complex Adaptive Systems:

Complex Adaptive Systems: An Introduction to Computational Models of Social Life by Miller & Page Chapter 7 A Basic Framework Chapter 8 Complex Adaptive Social Systems in One Dimension Chapter 9 Social Dynamics Chapter 10 Evolving Automata Diversity and Complexity by Page Chapter 8 - Diversitys Impact in Complex Systems The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration by Axelrod Harnessing Complexity by Axelrod and Cohen How Nature Works: The Science of Self-Organized Criticality by Bak. Hidden Order: How Adaptation Builds Complexity by Holland The Laws of the Web: Patterns in the Ecology of Information by Huberman Turtles, Termites, and Traffic James by Resnick. Sync: The Emerging Science of Spontaneous Order by Strogatz. Johnson, Norman L. "Biography." http://ishi.lanl.gov. Johnson, Norman L. "Collective Problem Solving: Functionality Beyond the Individual." LA-UR-98-2227, 1998. Johnson, Normal L. "Diversity in Decentralized Systems: Enabling Self-Organizing Solutions." LA-UR-996281, 1999. Johnson, Steven. Emergence: The Connected Lives of Ants, Brains, Cities, and Software. New York: Scribner, 2001. MITs course on Networks, Complexity and its Applications http://ocw.mit.edu/courses/media-arts-and-sciences/mas-961-networks-complexity-and-itsapplications-spring-2011/index.htm Lazer, D., and A. Friedman. "The Network Structure of Exploration and Exploitation." Administrative Science Quarterly 52 (2007): 667-94. Kossinets, G., and D. J. Watts. "Empirical Analysis of Evolving Social Networks." Science 311 (2006): 8890.

Albert, R., H. Jeong, et al. "Error and Attack Tolerance of Complex Networks." Nature 406 (2000): 378482. Dunbar, Robin I. M. "The Social Brain Hypothesis." Evolutionary Anthropology 6, no. 5 (1998): 178-90. Liben-Nowell, David, and Jon Kleinberg. "The Link-Prediction Problem for Social Networks."Journal of the American Society for Information Science and Technology 58, no. 7 (2007): 1019-31. Bechara, Antoine, Hanna Damasio, Daniel Tranel, and Antonio R. Damasio. "Deciding Advantageously Before Knowing the Advantageous Strategy." Science 275 (February 1997): 1293-95. Beinhocker, Eric D. "Robust Adaptive Strategies." Sloan Management Review 40, no. 3 (Spring 1999): 95-106. Blakeslee, Sandra. "Scientist at Work: John Henry Holland; Searching for Simple Rules of Complexity." New York Times, December 26, 1995. Bonabeau, Eric, Marco Dorigo, and Guy Theraulaz. Swarm Intelligence: From Natural to Artificial Systems. New York: Oxford University Press, 1999. Brown, Shona L., and Kathleen M. Eisenhardt. Competing on the Edge: Strategy as Structured Chaos. Boston: Harvard Business School Press, 1998. Dugatkin, Lee Alan. The Imitation Factor: Evolution Beyond the Gene. New York: Free Press, 2000.

Corollaries of Markets / Economies as Complex Adaptive Systems:

More Than You Know: Finding Financial Wisdom in Unconventional Places by Mauboussin Chapter 13 Guppy Love: The Role of Imitation in Markets Chapter 26 Trench Cooperation: Considering Cooperation and Competition Through Game Theory Part IV (Chapters 28-38) Science and Complexity Think Twice: Harnessing the Power of Counterintuition by Mauboussin Chapter 5 - More Is Different: How Bees Find the Best Hive Without a Real Estate Agent The Adaptive Market Hypothesis: Market Efficiency from an Evolutionary Perspective by Lo http://web.mit.edu/alo/www/Papers/JPM2004.pdf The Economy As An Evolving Complex System (Santa Fe Series) edited by Anderson, Arrow, and Pines The Economy As An Evolving Complex System (Santa Fe Series) edited by Arthur, Durlauf, and Lane Increasing Returns and Path Dependence in the Economy by Arthur The Atlas of Economic Complexity by Hausmann, Hidalgo, Bustos, Coscia, Chung, Jimenez, Simoes, and Yildirim http://atlas.media.mit.edu/media/atlas/pdf/HarvardMIT_AtlasOfEconomicComplexity.pdf Foundations of Complex-system Theories (in Economics, Evolutionary Biology, and Statistical Physics) by Auyang The Nature of Economies by Jacobs Discovering Artificial Economics: How Agents Learn and Economies Evolve by Batten J. Doyne Farmer, Market Force, Ecology, and Evolution (working paper, version 4.1, Santa Fe Institute, February 14, 2000). 15. Ibid., 1, 34. 16 J. Doyne Farmer and Andrew W. Lo, Frontiers of Finance: Evolution and Efficient Markets (working paper 9906039, Santa Fe Institute April 11, 1999). Hidalgo, C. A., and R. Hausmann. "The Building Blocks of Economic Complexity." Proc Natl Acad Sci 106, no. 26 (2009): 10570-5. Hidalgo, C. A., B. Klinger, et al. "The Product Space Conditions the Development of Nations." Science 317 (2007): 482-7. Hausmann, R, and C. A. Hidalgo. "Country Diversity, Product Ubiquity and Economic Divergence." CID Working Paper No. 201, 2010. Hidalgo, C. A., and R. Hausmann. "A Network View of Economic Development." Developing Alternatives 12, no. 1 (2008): 5-10.

Neffke, F., M. Henning, et al. "How do Regions Diversify Over Time? Industry Relatedness and the Development of New Growth Paths in Regions." In Papers in Evolutionary Economic Geography (PEEG). Utrecht University, (2009). Axtell, Robert The Emergence of Firms in a Population of Agents: Local Increasing Returns, Unstable Nash Equilibria, and Power Law Size Distributions Brookings Institution, Center on Social and Economic Workings Paper, June 3, 1999. Bikhchandani, Sushil, David Hirshleifer, and No Welch. "Informational Cascades and Rational Herding: An Annotated Bibliography." Working Paper: UCLA/Anderson and Michigan/GSB (June 1996). Bikhchandani, Sushil, and Sunil Sharma. "Herd Behavior in Financial Markets." IMF Staff Papers 47, no. 3 (September 2001). http://www.imf.org/External/ Pubs/ FT/staffp/200 1 /01 /pdf/bikhchan.pdf. Bosch-Domenech, Antoni, and Shyam Sunder. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium." Computational Economics 16, no. 3 (December 2000): 257-84. Bygrave, William D., Julian E. Lange, J. R. Roedel and Gary Wu. "Capital Market Excesses and Competitive Strength: The Case of the Hard Drive Industry, 1984-2000." Journal ofApplied Corporate Finance 13, no. 3 (Fall 2000): 8-19. Campbell, John Y., Martin Lettau, Burton Malkiel, and Yexiao Xu. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk." Journal of Finance 54 (February 2001): 1-43. DeLong, J. Bradford, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation." Journal of Finance 45, no. 2 (June 1990): 379-95. Eguiluz, Victor M., and Martin G. Zimmerman. "Transmission of Information and Herd Behavior: An Application to Financial Markets." Physical Review Letters 85, no. 26 (December 2000): 5659-62. Loest, Robert. "Fitness Landscapes and Investment Strategies, Parts I and 2." Portfolio Manager Commentary-IPS Funds (July-August 1998). Mauboussin, Michael J., Alexander Schay, and Stephen G. Kawaja. "Network to Net Worth: Exploring Network Dynamics." Credit Suisse First Boston Equity Research, May 11, 2000. Madden, Bartley J., Michael J. Mauboussin, John D. Lagerman, and Samuel T. Eddins. "Business Strategy/Life Cycle Framework: Positioning Firm Strategy as the primary Cause of Longer Term CFROIs and Asset Growth Rates." Credit Suisse First Boston Equity Research, April 22, 2003. Maguire, Steve. "Strategy Is Design: A Fitness Landscape Framework." In Managing Complexity in Organizations: A View in Many Directions, ed. M. Lissack and H. Gunz, 67-104. Westport, Conn.: Quorum Books, 1999.

Complexity, Scaling, and Volatility in the Markets:

Financial Market Complexity: What Physics Can Tell Us About Market Behavior edited by Johnson, Jefferies, and Hui Theory of Financial Risk and Derivative Pricing by Bouchaud. The Misbehavior of Markets: A Fractal View of Financial Turbulence by Mandelbrot. Fractals and Scaling in Finance: Discontinuity, Concentration, Risk by Mandelbrot. The 80/20 Principle: The Secret to Success by Achieving More with Less by Koch. Fractal Market Analysis by Peters Nonlinear Dynamics and Chaos by Strogatz The Application of Continuous-Time Random Walks in Finance and Economics by Enrico Scalas Dipartimento di Scienze e Tecnologie Avanzate, Universit del Piemonte Orientale http://www.sciencedirect.com/science/article/pii/S0378437105012069 Scaling Behaviour in the Growth of Companies by M. H. R. Stanley, L. A. N. Amaral, S. V. Buldyrev, S. Havlin, H. Leschhorn, P. Maass, M. A. Salinger, H. E. Stanley. 272. Nature 379, 804 (1996) http://havlin.biu.ac.il/PS/Scaling%20behaviour%20in%20the%20growth%20of%20companies.PDF Scaling and Memory in Volatility Return Intervals in Financial Markets by K. Yamasaki, L. Muchnik, S. Havlin, A. Bunde, and H.E. Stanley 506. PNAS 102, 9424 (2005) http://havlin.biu.ac.il/PS/ymhbs506.pdf Stanley, Eugene, et al. "Scaling Behavior in Economics: I. Empirical Results for Company Growth." Journal de Physique (April 1997): 621-33. Bettencourt, L., et al. "Growth, Innovation, Scaling and the Pace of City Life in Cities." Proc Natl Acad Sci 104 (2007): 7301-6. Zipf, Power-Laws, and Pareto a Ranking Tutorial Information Dynamic Lab, HP Labs, Working Paper. Newman, M. E. J. "Power laws, Pareto Distributions and Zipf's Law." Contemporary Physics 46 (2005): 323-51. Zipf Distribution of US Firm Sizes Science 293, September 2001.

Zips Law of City Sizes: A Microeconomic Explanation Far from Equilibrium Presentation at a RAND workshop, Complex Systems and Policy Analysis: New Tools for a New Millenium, Sept 27-28, 2000. Emergent Cities: A Microeconomic Explanation of Zipfs Law Brookings Institution and Carnegie Mellon University Working Paper, September 2000. Liebovitch, Larry S., and Daniela Scheurle. "Two Lessons from Fractals and Chaos." Complexity 5, no. 4 (2000): 34-43.