Behavioral finance FAQ / Glossary (Emergence)
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Behavioral-Finance group (*):
Year/month, d: developed / discussed,
See bifurcation, percolation,
The wormy stock breaks through its cocoon.
It emerges as a butterfly stock.
Stay flat on your belly
and be ready to detect such crucial evolution!
Emergences are apparitions of new traits in dynamical / evolutionary
systems (see dynamical systems), such as life, the universe and ...markets
In complex dynamical systems particularly (compared to simpler
dynamical systems), multiple interactions and bifurcations (see that
word), might give birth to:
In other words, a superior, more organized / complex
order (negentropy) and (dynamic) equilibrium instead
of chaos / disorder / entropy.
Evolving, phases after phases, from simple amoebas in
the primitive soup
* to complex sophisticated beings such as Albert Einstein
or Lady Gaga.
* to common behaviors, not just a collection of individual
Simultaneously with self-organization, or as a step
further, emerging traits / behaviors.
Here, new characteristics appear that were not there
This phenomenon is the opposite of entropy as it goes from chaos (or at
least from a low state of organization) to more organized patterns and
clearer directions (physicists call it "negentropy" and mathematicians
You can play with the Langton Ant as a basic example
of self organization / emergence
Crossing the threshold
The newer side of things.
That newly found order, and those new traits, emerge after the system reaches
a critical threshold.
At this point it has accumulated either enough energy, or a large enough mass
(critical mass), or enough individual components (allowing for more complexity)
so as to break through some barrier.
Then the system enters a new and quite different phase of its evolution
Sometimes the change / transformation is robust or even irreversible (mutation).
This phenomenon, which was shown by Ilya Prigogine (Nobel prize of chemistry)
is studied mostly:
In physical sciences (self-organization, percolation, negentropy),
In human and social sciences.
One condition in some cases is for the system to be open, so as to draw energy
But also it can use the energy accumulated before reaching the critical point.
See the "percolation" article for more details
Emergences as a factor in
economic and financial evolutions
What can emerge when your money is at stake.
That phenomenon has its place in economic evolutions, for example in:
Diffusion of innovations
The diffusion of new gizmos or innovative practices
either abort after reaching a limited segment of people,
or become widely popular once the acceptance threshold is crossed
beyond "early adopters".
Emerging countries or industries,
Last but not least, crucial changes in asset market price
Investors need some knowledge of how dynamical
systems (see that phrase) work.
It helps them detect such crucial shifts among more
Those emergences can be categorized into:
Weak emergences (the new traits existed potentially
in the previous state or phase).
An example is when a stock changes its profile from growth to
Strong emergences (the system is fully transformed
into something else).
For example emerging countries show a break from a traditional
economy, or from a rigid, autarchicand hierarchy-based state
economy. They enter a more complex and more adaptable type
of economy which is market- based and network-based
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