Investing: The Last Liberal Art (Columbia Business School Publishing)

by Robert G. Hagstrom

3. Continual adaptation: 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, operates far from equilibrium. An essential element of complex adaptive systems is a feedback loop. That is, agents in the system first form expectations or models and then act on the basis of predictions generated by these models. But over time these models change depending on how accurately they predict the environment. If the model is useful, it is retained; if not, the agents alter the model to increase its predictability. Obviously, accuracy of predictability is a paramount concern to participants in the stock market, and we may be able to achieve broader understanding if we can learn to view the market as one type of complex adaptive system. The whole notion of complex systems