Behavioral finance FAQ / Glossary (Percolation)

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This is a separate page of the P-Q section of the Glossary.

 

Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

Percolate, Percolating, percolation threshold

 

 




00/12i - 03/8i,9i,12i - 04/1i,3i
-05/8i - 07/3i + see accumulation,

diffusion, epidemic, emergence,
contagion, weak signal, chaos,
under/overreaction,  cluster,
dynamical systems, bandwagon,
cascade, herding, trend following,
self organization, bifurcation,
nonlinear + bfdef2



Rocketing through the roof, into space.

Better be ready for the take off! Or the dive!

You will face it sometimes in life ...and in market life.

Definition:

In a rough definition, a percolation is a breakthrough
due to an accumulated pressure or infiltration.

More academically, a percolation is

a major change in the state of a system when a
quantitative or qualitative accumulation
crosses
a critical threshold / critical step / critical mass.

Percolations take place in the physical world, but also in social areas,
such as politics or economics.Here are examples detailed

in this article:

=> A new industry that emerges after a slow and hesitant
        start can be said to percolate.

=> A new market price trend that, after a transition
        phase,
starts to settle in and then to snowball, can be said to have
        percolated.

Non linearity and percolation

Leaking through the crockery or breaking it?

A percolation is a disruption, transformation, mutation,

break from the previous situation, a  "big bang"
that pertains to nonlinear
(see that word) phenomena.

But not all disruptions / breaks or other non linear moves are
percolations
.

Some disruptions and mutations can be caused, without prior

accumulation, by erratic and extreme shocks, either internal
or external 

Others can be just transient zigzagging / fractal-like
   adjustments,

Others still can be minor porosities / slow infiltrations or

valve effects instead of decisive breakthroughs.

The percolation process

Crossing the line at once,
or after ...sneakily scraping off a few bites from it.


A percolation starts as a slow-diffusing, hardly visible, process,a silent
and stealthy underground evolution, that suddenly erupts and "breaks
through".

Once the "critical" threshold / critical mass /
cluster
(or, colloquially, a tipping point) is crossed:

The move accelerates and snowballs
   (chain-reaction),

or in some cases change direction.


And/or the system mutates. It changes its

state and often its nature by showing new
traits called "emerging properties"
(see emergence).

The time parameter

Fast food or slow cooking?

This change happens:

Either suddenly / abruptly (a percolation is a major
   bifurcation
, see that word),

Or progressively, rising slowly at first, then accelerating past
   an inflexion point
,

Or after a transition phase, either a flat period of uncertainty

or a phase of chaotic agitation without clear direction,

This is as if the system was hesitating about the direction to take
(see chaos theory) or was restrained by some temporary barrier.

In that case there is a kind of S curve that is

     Either

1) ascending, => 2) then horizontal, =>

3) then breaking through the ceiling and ascending again.

    Or

1) going down, => 2) then horizontal, =>

3) then breaking through the floor and going farther down.

Some traits of the transformation
    brought by percolation

Speeding or mutating.

The change brought via the breakthrough can be:

Either quantitative or qualitative:

* Either the speed and/or direction (increase or decrease)
   changes dramatically.

* Or the nature of the subject is changed, the egg
   becomes a chicken.
Traits that were not present before
   appear.

Those new attributes are usually called "emerging
properties"
or emerging
behaviors (see emergence),


Either positive or negative:

* Usually a progression to a more organized state
   (self-organization,
negentropy),

* Or, in some cases, a regression to a less organized
   one (entropy).

We have here, to take a physical allegory, an energy accumulation
or depletion.

Or - for historical storytelling or garden party small talk - the Rise
and Fall of the Roman empire.


More or less deep and decisive:

This is the difference between weak or strong emergences:
see the "emergence" article.

What if the percolation threshold is not reached?

Rocket failure.

If the threshold is not reached and crossed, the phenomenon usually:

Either pauses, freezes and hibernates,

Or - a possibility for example in social and economic

fields, as major changes are not too frequent -

it decreases and aborts. Game over!

Percolation applied to economic
     and financial markets

Social mental mutation.

1) In social fields, and among them economic and financial

markets, we observe percolations when individual phenomena
cluster into collective ones.

An example is an overlooked idea or fact (or investment) that
becomes suddenly the craze.

As if people suddenly discover America,
ignoring it was already discovered.

But, mind you, not every overlooked idea or fact reaches
stardom one day!
Far from it!

2) In marketing, percolation is seen when an innovative product,

which up to now was used only by "early adopter", succeeds in
reaching the general public.

3) In asset markets, it occurs for example when a lackluster

stock becomes suddenly a market star.

A tipping point is reached when underreaction turns into overreaction.

Then the mass of people who change idea and join the bandwagon
becomes sizable enough to change or accelerate the trend.

If that mass of players (and money) stays too small
   to reach this "triggering"
point, the new trend aborts, as seen
   above.


If it grows enough to reach that point, not only that trend

settles in (as a self replicating phenomena, see epidemic),
but usually it snowballs.

Here comes a phase of extreme overreaction,
mimicry, trend-following / herding
.

Mathematically, it goes
* from a phase in which the statistical
distribution (see
  distribution) of events stayed mostlycentered around  the
  mean (Gaussian law)

* towards a power law phase, as events get asymmetrically
   farther and farther from the mean.

4) In economic development:

Emerging countries are those that break through into industrial
societies with exponential growth and deep structural
changes
(and of course some temporary accidents due to speed
excess).


The same phenomenon took place in developed country at the
time of the "industrial revolution", creating emerging
industries
.


A more recent mutation brought the "postindustrial society"
based on services and on the "knowledge economy"

The big wheel

=> New structures, institutions and businesses emerge then.

=> Others tend to decay

This combination of births and disappearances is Schumpeter's
"creative destruction"
,
which is found not only in the economic
area, but also in many
social / political matters).


Certain changes (mutations) can be irreversible, except if some
crucial shock strikes and brings some backlash.

5) In academia, paradigm shifts (paradigm percolations)

They might get converted, after a while, to the observed material or
mental percolations.

Percolations affect financial / economic paradigms
when the bulk of observers / players adopt new methods
of analysis and valuation, for good or bad, after seeing
a new economic / financial trend to persist.

They decide, rightly or wrongly, that "this time it is different",

that old economic laws don't apply anymore.

=> Beware, here!

It is true that reality tends to change with time, which
justifies a
change of belief.
But beliefs might change also only because of the wish
to find an explanation,whatever its relevancy (see
rationalization, attribution, uncertainty aversion).

Percolation and self-organization

Birth of a new world?

Self-organization (see that phrase), or more precisely and
...elegantly, "self-organized criticality" is an evolutionary
(see evolutionary economics) phenomenon with theoretical links
to the percolation process.

It means that things shape into a new way once the critical
threshold is crossed.
The new ("emerging") properties due to such a mutation are:

Generally irreversible (it seems to be the case with industrialization,
   to take an
economic example, it did not pull back, but it might later
   mutate in its turn
to post-industrial economy / society).

Sometimes reversible (reverting to the previous phase / trend),

Or transient (towards still another phase / trend,),

Note: self organization, which is going from disorder to order ,
is the opposite of "entropy".
Such "negentropy" seems only possible in
"open" systems
, which acquire energy from the outside.

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This page last update: 14/07/15  

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