International Journal Bioautomation (Dec 2011)
Interacting Psycho-economic Expectations Ratios with Equity/debt Realities Suggests a Crisis Warning Method
Abstract
The recent April 2011 meeting of the G20 countries considered possible development of a global early warning system to avoid any future financial crisis. Psycho-economic factors are strong drivers of greed, fear and non-rational behavior and experience shows that they should not be excluded from such a project. Rational, logical behavior for attitude and actions has been an assumption in most financial models prior to the advent of the 2008 crisis. In recent years there has been an increasing interest in relating financial activity to phenomena in physics, turbulence, neurology and recent fMRI experiments show that cortical interactions for decisions are affected by previous experience. We use an extension of two Lotka-Volterra (LV) interactive equations used in a model for the 2008 crisis but now with fluctuation theory from chemical physics to interact the two previously used heterogenous interacting agents, the psycho-economic ratio CE of investor expectations (favourable/unfavourable) and the reality ratio of equity/debt. The model provides a variable, M, for uncertainties in CE arising from the ability of the economy to affect the financial sector. A condition obtained for keeping rates of change in M small to avoid divergence of spontaneous fluctuations, provides a quantifiable time dependent entity which can act as a warning of impending crisis. The conditional expression appears to be related to an extension of Ohm's law as in a recently discovered "chip" and memory; the memristor. The possible role of subthreshold legacies in CE from the previous crisis appears to be possible and related to recent neurological findings.
