Chaos Theory and Economic Emergence

This book is a compilation of my pre-dissertation work towards my Ph.D. in finance at Walden University.  The book is broken into breath, depth and application components to convey a overall theme.  For example, to convey the developmental economics theme chapters 1 through 3 cover developmental economics.  These three components makeup a Knowledge Assessment Model (KAM) during my Ph.D. studies.  For scholarly researchers I highly recommend continuing your studies using a breath, depth and application approach.

This book is intended for individuals with a deep interest in economics and finance coming from a graduate level background.  The research presented in this book can be applied in either a academic setting or a applied environment.  The main goal is to convey that there are complex dynamics in economics and finance which contain reflexive principles.  These system, due to there reflexive nature, are hard to predict.  It is the hope of this author to provide insight in complex system thinking and the idea of economic emergence and chaos theory.



Chapter 1 - Breadth

The purpose of this section on developmental economics is to analyze different economic philosophies on this field of study.  Each major theory will be compared and contrasted to economic nationalism.  The first major philosophy on developmental economics explored in this research will consist of economic nationalism from the viewpoint of Hamilton and List. The second describes mercantilism in the context of Colbert.  The third major philosophy on developmental economics pertains to industrial development, whereby Rodan and Nurkse will be cited.  The next major philosophy on this economic field will be linear-stage-of-growth which was proposed by Rostow.  The fifth major theory will introduce structural-change whereby Lewis and Chenery are explored.  International dependency theory will follow with insights by Mahler.  Lastly, neo-classical perspectives will be investigated through the perspective of Krueger and Hunt.


Chapter 2 - Depth

The purpose of this section on developmental economics is to analyze the contemporary research in this field.  Fifteen selected research studies were compared and contrasted to get a better understanding on how Central Banks and other Official Financial Institutions can promote or inhibit economic development.  In addition, an investigation and evaluation of recent trends with central banking and other institutions will be discussed in the context of economic development.  In the conclusion of this Depth component a discussion on the synthesis of relevant research related to developmental economics through central banking or international financial institutions is conducted.  Comments on IMF and World Bank effectiveness with developing economies and recommendations to improve economic development will be proposed.  Thoughts by Stiglitz will be coupled with some of these recommendations. 


Chapter 3 - Application

To investigate professional practice in societal and cultural development this application paper will provide generalized recommendations on policies of international finance institutions (IFI) to promote economic development domestically and internationally.  The next section will propose models on IFI policies that effect social change in the context of developmental economics.  A formulated conclusion about how IFI policies are instrumental to social change regarding economic development will be presented.  Fiscal adjustments by countries entering an economic union are important to prevent beggar-thy-neighbor phenomenon.  Understanding that investments in improved infrastructure and human capital can promote long-term growth trends in emerging economies is important; cutting fiscal spending to just meet budget constraints long-term may be detrimental.  Therefore, the international financial institutions should promote lending policies that consider the complex dynamics of fiscal adjustment in emerging countries in the short-term and long-term to improve economic growth.   But in-turn countries need to realize that social entitlements might not be sustainable in the long-term when productivity growth is low or negative.  These are extremely complex situations to ponder and it is the hope that through research in developmental economics that positive social change will result globally.


Chapter 4 - Breadth

In this Breadth component an analysis of prospect theory, inter-temporal choice theory, and other prevailing behavioral finance theories in terms of economic systems that can explain human development and economic decision making will be put forth. These different theories will be compared and contrasted from the perspectives on human development using behavioral economic quantitative and qualitative models.  In the conclusion section some important questions are examined.  Why is there such a large mental weighting on loss aversion?  What are some of the dynamics of asset bubbles and crashes?  Can the collective actions of individual agents produce a systemic collapse? It’s within the intent of this paper to answer these important questions on human decision making by using theoretical frameworks within prospect theory, inter-temporal choice theory, and contemporary behavioral finance theories. 


Chapter 5 - Depth

In the Depth component an examination of current research in human development relative to behavioral finance theories will be performed.  Within this examination a comparison and contrast on market bubbles and bursts are created in the context of behavioral finance to understand the decision making of a market participant.  An investigation and evaluation of recent trends in behavioral finance regarding market formation of excessive asset appreciation and declines will be conducted.  And finally a synthesis of relevant research will be compiled of peer-reviewed articles related to behavioral finance within the context of market pricing of assets.


Chapter 6- Application

In the Application component we will develop a model that can be used to explain the behavior of financial markets. The main reason to investigate behavior of market bubbles is due to the effects on society when the burst happens.  The damage to the economy can be extreme, whereby unemployment rate rises, real estate prices collapse, and tax revenues plummet.  The lost productivity within the society during the adjustment period of a recession and the fiscal realignment at the private and public levels are long lasting dynamics which are not easily nullified when GDP growth resumes.  Therefore it’s the intellectual duty of academia and of government officials to understand and curtail asset bubbles.  The model being presented below can be the foundation for central banks to diagnose and plan intervention to reduce speculation in asset markets.