## Dust flux, Vostok ice core

Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

## Wednesday, November 13, 2013

### Complexity, bifurcations, catastrophe

What makes a system complex?

It is a perplexing problem--both its description and its quantification. One might think that the description of a system as complex would suggest it has many subsystems each acting in accordance with its own rules, and interacting with each of the other subsystems in ways that we find difficult to describe. But there are systems involving very few "parts" which exhibit the kind of behaviour we call complex.

Another possible definition may stem from the notion of the compressibility of the system's information. Is it difficult to describe the sequential outputs in a manner that is simpler than merely listing all of our observations? A good random number generator would exhibit such behaviour, but we would not describe that as complex.

John Casti has proposed that the complexity of a system is at least partially dependent on the observer. He uses an example of a rock lying on the ground. To the layperson, there are only a limited number of ways to interact with the rock (kicking it, breaking it, throwing it, etc.) . To a trained geologist, there are more (as before, as well as mass-spectral geochem, x-radiography, electron probe, etc.). So the rock seems more complex to the geologist, but that additional complexity actually stems from the observer.

Another example can be share prices, where the complexity depends on the timing of your observations. If you look at the price of, say, Anadarko Petroleum over the past year, using closing prices only. (for disclosure--no position).

Then we can look at one-minute increments on a daily chart (Nov. 6, 2013).

Note that the variability within the two charts doesn't seem all that different despite the changes of scale. Lastly we could look at how trading in Anadarko looks over one second. One particular second, that is, between 3:59:59 and 4:00:00 on May 17 of this year.

You probably wouldn't expect a lot of change over 1 s, but in this case you would be wrong: the price fell from about \$90 to \$0.01 in less than 50 ms. That's a loss of \$1 billion in market capitalization per millisecond--keep losing money at that rate and before long you're talking real money!

This all seems to trigger a philosophical debate--is the complexity present when none of the observers are capable of seeing it? In the case of Anadarko, if you were a pension fund, your losses would have been real (although the trades were all cancelled and reversed after market close).

If the complexity of a system arises from within, then what characteristics do we ascribe to complexity. One characteristic is discontinuous behaviour, particularly when the inputs to the system are continuous. For instance, tectonic processes gradually cause stresses to accumulate in an area in a fairly uniform fashion, until a critical threshold is reached and the earthquake occurs.

The branch of mathematics that investigates the sudden onset of convulsions wrought by a slow change is called catastrophe theory. Catastrophe theory is generally considered to be a branch of bifurcation theory. By bifurcation we normally mean some change in the operations of a complex system. It could represent a transition from one stable state to another. It could also represent the development of new areas of stability in phase space (or their disappearance) or simply a change in the nature of a chaotic attractor.

In particular, sometimes the sudden appearance of a new mode of stability is brought about by the changing value of a slowly migrating parameter past a critical threshold. Such behaviour is called a catastrophe, in the mathematical sense.

In the past few years we have seen a major change in the mode of operations in the markets. In particular, the rapid growth of high-frequency trading has added complexity at timescales where such behaviour did not previously exist. This is another example of a catastrophe.