Complex Decision-Making in Economy and Finance

Pierre Massotte is the I2D (Institut de l�Innovation et du Développement) Chairman. He was Deputy Director at École des Mines d�Alès within the Nîmes EMA Laboratory, France. He has previously worked for IBM in Quality, Advanced Technologies and Machine Learning. Formerly, he was also the AI Scientific Director at IBM EMEA Manufacturing and Development. Patrick Corsi is a Senior Consultant, an Associate Practitioner with Mines Paris Tech, France, and a member of the Club of Rome EU Chapter. He was for a long time with IBM, THOMSON-CSF, a start-up in AI, and the European Commission in Brussels.

• Introduction xiiiPart 1. Dealing with Complexity 1Chapter 1. Engineering Complexity within Present-Day Industrial Systems 31.1. Introduction 31.1.1. Reference definitions 31.1.2. What are the problems to be solved? 51.1.3. What is the “engineering” approach developed here? 71.2. Basic properties of complex industrial systems 71.2.1. Structure and organization of system functions 81.3. The complexity of systems 91.3.1. The basic principles of complexification 91.3.2. The complexification process 101.3.3. The smoothing property of chaotic characteristics 111.4. Analysis of some industrial dynamic systems 131.4.1. Introduction 131.4.2. Interactions in industrial workshops 141.4.3. Product flow in a flexible production system 161.4.4. Message flows in complex information systems 181.5. Applications of new concepts in industrial systems 201.5.1. New features and functionalities to consider 201.5.2. Design of complex industrial systems management tools 211.5.3. The contribution of chaos and self-organization 221.5.4. Consequences 24Chapter 2. Designing Complex Products and Services 272.1. Complex systems engineering: the basics 272.1.1. Relationship between organization and product: basic principles 272.1.2. Reminder of the operating rules of an organization 282.1.3. The challenges of such organizations 302.1.4. Concepts of sociability and emergence of order 322.1.5. The genesis and evolution of complex systems 342.1.6. How and where do structures emerge? 362.2. The implementation conditions for self-organization 382.2.1. Emergence of self-organized patterns 392.2.2. Best stability conditions: homeostasis 402.3. Advantages and benefits of a complexity approach 41Chapter 3. Engineering and Complexity Theory: A Field Design Approach 433.1. Design approach for a complex system 433.1.1. Methodological elements for the design of a complex system 433.1.2. Example: how can we propose a “customized product”? 453.2. Applications and solutions 463.2.1. Case 1: current approaches based on “design on demand” 463.2.2. Case 2: “design by assembly according to demand” approach 473.2.3. Case 3: product reconfiguration and on-demand adaptation 503.2.4. Case 4: product auto-configuration and adaptation for use 533.2.5. Case 5: designing self-propagating computers 553.3. Application: organization and management in companies 563.4. Main conclusions related to the first three chapters 57Chapter 4. Organizational Constraints and Complexity Theory: Modeling with Agents 614.1. A preamble to modeling 614.2. Introducing collective intelligence 624.3. Studying the agent concept 634.3.1. Some definitions of an agent 644.3.2. The different categories and models of agents available 654.4. Applications using agents 694.4.1. Modeling the behavior of a living organism 694.4.2. Modeling of an industrial management and control system 714.5. Conclusion: information related to the use and usage of modeling 714.5.1. Free Trade considerations 714.5.2. Harmonization of situations and objectives 724.5.3. Emergence of the ecology and “patriotism” 724.5.4. Comments and expectations on modeling expectations 73Chapter 5. Complexity and the Theory of Organizations: Implementation of Collective Intelligence 755.1. Introducing the notion of collective intelligence 755.2. Definition of a multi-agent system 765.2.1. Introduction 765.2.2. What’s in a multi-agent system? 775.2.3. MAS areas of application 785.2.4. Negotiation protocols between agents 795.3. Behavioral and interaction strategies between agents 865.3.1. Applying the above principles 865.3.2. Application example: workshop reconfiguration 895.3.3. Influence of the individual characteristics of agents on the decision process 895.4. Concluding comments 95Chapter 6. Complexity and the Theory of Organizations: The Notion of Collective Patterns 976.1. The emergence of collective patterns 986.1.1. Conditions and method of emergence of patterns 986.2. System complexity factors and their measurement 1026.3. Conclusion: towards the notion of “complex adaptive systems” (CAS) 104Chapter 7. Complexity and Theory of Organizations: Structure and Architecture of an Enterprise 1077.1. Notions of structure in organizations 1077.1.1. The “enabling” environment for Information and Decision Systems 1077.1.2. The structural environment 1087.1.3. The company and the global context 1097.2. Structure of distributed complex systems 1117.2.1. Introduction 1117.2.2. The centralized structure 1137.2.3. The non-centralized structure; the hierarchical structure 1147.2.4. The heterarchical non-centralized structure 1167.2.5. The n-cube structure 1177.3. Conclusion 118Chapter 8. Complexity and the Theory of Organizations: Applications 1198.1. Applications: trends and models 1198.1.1. Application of the principles to steering systems 1198.2. Application and implementation of concepts in the “Fractal Factory” 1258.2.1. The case of the Fractal Factory – organization 1258.2.2. Consequences for production management 126Chapter 9. Complexity and the Theory of Organizations: Complex Systems Reengineering 1299.1. The reengineering of complex systems 1299.1.1. Introduction 1299.1.2. The approach and the initial conditions 1319.1.3. The RECOS reengineering methodology 1349.2. Comments on the technologies used 1369.2.1. Modeling techniques and tools 1369.2.2. Role and contribution of IT in BPR 1389.3. Theory of constraints and complexity management 1409.4. Measurement of the complexity of a new organization. 1419.5. Concluding remark 143Chapter 10. Evaluating and Measuring Complexity: The CINSYS Methodology 14510.1. A brief overview of the CINSYS system 14510.2. What can be found in a CINSYS model? 14710.3. Functional analysis of the method: interpretation by the CINSYS symbolic and structural diagram 14810.3.1. The vertical axis is the axis of the “structure” 14910.3.2. The horizontal axis is the axis of “explanations” 15210.3.3. The ascending bisector axis 15310.3.4. The “descriptive inversion” axis 15510.4. Illustration of the method 15610.4.1. Evaluating project proposals 15610.4.2. The RAGTIME proposal 15710.4.3. The BOLERO proposal 15810.5. What are the advantages of using the method? 15810.6. “The network metaphor” as the general application context of the method 15910.7. Perspectives beyond the CINSYS method 16010.7.1. A generic methodology for dealing with complex problems 16110.7.2. Analysis of how, or design of new systems 16210.7.3. Systems development: organization 16310.8. Conclusion 163Part 2. Dealing with Risk in Complex Environments 165Chapter 11. Underlying Mechanisms in Finance 16711.1. Introduction to finance theory and its evolution 16711.2. What are the best candidates for the so-called econophysics? 16811.3. Action plans in financial regulation and bank regulation: are they ok? 16911.4. Back to physics and matter: their contribution 17011.5. From matter up to living beings: how can big events be generated? 17211.6. The evolution of an economic system – the problem of CRISIS 17611.6.1. Pre-industrial crises 17711.6.2. Industrial crises 17711.7. Role of complexity and diversity in Nature 17811.8. Application: how should we proceed when faced with crises and financial crashes/crises? 18011.8.1. Definition of a crisis and frequencies of occurrence 18011.8.2. Future possible crisis 18211.9. Crisis as the end of an evolution 18211.10. Collapse theory and modeling – a theory of the “end” 18611.10.1. Modeling the collapse 18711.10.2. Application 18811.10.3. Comments 19011.11. Design of financial products: the example of world interconnections 19011.12. Conclusion 192Chapter 12. Physics and Social Networks: Domain Similarities 19512.1. Introducing a similarity of domains 19512.1.1. Problems of complexity and connectivity 19612.2. On the principle of emergence 19812.3. Finance, economics and physics: the quantification of emergence 20012.3.1. Emergence and complexity 20012.3.2. Complexity as a quality – self-organization and emergence 20112.3.3. Emergence and thermodynamics: a general view 20112.3.4. A few applications 20212.4. About Gödel theorems 20412.5. Conclusion 205Chapter 13. Managing Behavioral Risks: Uncertainty and Catastrophes 20913.1. Introduction 20913.1.1. Uncertainty is not disorder 21013.1.2. The different realities 21113.1.3. World time 21313.2. Implications for intellectual approaches 21613.3. The uncertainties 21713.3.1. Social acceptability 21813.3.2. From ordinary risk… 22013.3.3. …To major risk 22113.3.4. Risk management 223Chapter 14. On Managing Risk in the Energy Domain: Conventional Problems Encountered 22514.1. From a new oil crisis (peak oil) and the resulting energy crisis 22514.1.1. At present, what do we mean by energy crisis? 22614.1.2. Energy crisis: impacts on prices and the economy 22814.1.3. Biofuels: how can we prepare for and manage the shortage? 22914.1.4. What about raw materials and resulting products? 23014.2. The future: limit of price increases? Implications of the shortage 23214.3. Modeling the problem correctly 23414.4. Crisis or heuristic tactics? Large-scale oil shock? 23814.5. A few conclusive remarks 239Chapter 15. On Managing Risk in the Financial Domain 24115.1. Taking about disasters – from risks to catastrophes in finance 24115.2. An interesting approach: financial analysis of losses 24215.3. When the drama occurs 24315.4. How to conduct a risk consequence analysis process? 24415.5. Conservatory measures: risk and diversification 24715.6. An additional risk: the decline and inversion rate at the stock exchange 24815.7. Concluding with additional risks of the shared economy 249Chapter 16. Why Current Tools are Inadequate 25116.1. On the shortcomings of current tools: risk and probability 25116.2. A thematic illustration 25216.3. What regularities? 25416.4. Characteristics of rational expectations in economics 25516.5. Risk characteristics in the industry 25616.6. A philosophical summary: chance and necessity 25816.7. The environment’s new challenge 262Chapter 17. How to Manage Crises? 26517.1. The fundamental principles of crisis management 26517.2. Early warning risk signals and the basics of risk management 26717.2.1. Several families of crises 26817.2.2. Mechanisms and crisis preparation 26917.2.3. Detecting early warning signals and containing damage 27117.3. Five fundamental elements that describe a company 27217.4. About stakeholders 273Chapter 18. Managing Crises in Finance and Other Domains 27518.1. Reorienting company aims 27518.1.1. The growing importance of the shareholder 27618.1.2. The specialization of companies in the new economy 27618.1.3. The advantages and consequences of this evolution 27718.1.4. Cultivating diversity 27918.2. Interactions: towards a crisis model? 27918.2.1. Effects of the crisis of confidence 28018.2.2. Banks’ subprime exposure 28018.2.3. Subprime effects within banks and the stock exchange 28118.2.4. Subprime effects, at the level of individuals 28118.2.5. Subprime effects, at bank level 28118.2.6. Effects of changes in securities 282Chapter 19. Technological, Monetary and Financial Crashes 28319.1. Yet another view to complexity 28319.1.1. Global complexity of economy 28519.2. The reference financial systems are continuously changing 28919.2.1. The US Dollar and Chinese Yuan 28919.2.2. Lifetime of a currency. Importance of gold? 29119.2.3. Distribution of GDP around the world 29219.2.4. In terms of economical and overtime evolution 29219.3. Conclusive discussion 29419.3.1. Problem of gold and rare earth materials 29419.3.2. Summary and main conclusions 29519.3.3. T-bonds versus Eurobonds and Chinese bonds, etc. 29719.3.4. Application and comments 297Conclusion 299List of Abbreviations 305References 313Index 327