"The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypothesis that future prices are predicted perfectly. Suppose that the solution to the difference equations characterizing the solution exhibits chaotic behavior. Is it realistic to assume that the future, even though deterministic, is in fact predictable? Clearly, part of the lessons drawn by natural scientists, especially meteorologists, from nonlinear dynamics is precisely the opposite; chaotic behavior implies that small errors of observation in the starting position may lead to virtually total unpredictability after some period of time. This creates no difficulties of consistency when the predictor is not part of the system being predicted. But when the predictors are the economic agents being examined, there is a fundamental inconsistency. This epistemological antinomy is reinforced by the empirical observation that actual behavior of prices of assets such as securities could never reasonably have been predicted; if it had, there would have been much more buying or selling at earlier stages."
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Academics from the United StatesPeople from New York CityMathematicians from the United StatesEconomists from the United StatesNobel laureates in Economics
Original Language: English
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"Workshop on the Economy as an Evolving Complex System: Summary," in P. W. Anderson, K. J. Arrow and D. Pines (eds.) The Economy as an Evolving Complex System: The Proceedings of the Evolutionary Paths of the Global Economy Workshop, Held September, 1987, in Santa Fe, New Mexico (1988)
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Kenneth Arrow
Kenneth Joseph Arrow (August 23, 1921 – February 21, 2017) was an American economist, who was Professor Emeritus of Economics in Stanford, and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972.
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