Overview and Perspectives of Chaos Theory and Its Applications in Economics

Andrés Fernández-Díaz ()
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Andrés Fernández-Díaz: Faculty of Economics, Complutense University of Madrid, Campus of Pozuelo of Alarcón, 28223 Madrid, Spain

Mathematics, 2023, vol. 12, issue 1, 1-20

Abstract: Starting from the contribution of such thinkers as the famous Giordano Bruno (1583) and the great mathematician and physicist Henri Poincaré (1889) and the surprising discovery of the meteorologist Edward Lorenz (1963), we consider the expansion of the mathematics of chaos in this article, paying attention to topology, qualitative geometry, and Catastrophe Theory, on the one hand, and addressing the possibilities derived from the new Computer Science as Quantum Algorithms and the advances in Artificial Intelligence, on the other. We especially highlight the section on computing chaos, which we consider to be new calculation and analysis instruments, such as machine learning and its algorithm called reservoir computing, through which we can know the dynamics of a chaotic system. With past data, with equations like Karamoto–Sivashinsky, one can improve predictions of the system eight times further ahead than in previous methods. Integrating the machine learning approach and traditional model-based prediction, one could obtain accurate predictions twelve Lyapunov times. As we know, in the framework of chaos theory, it is habitually accepted that the idea of long-term prediction seems impossible because we live under a veil of uncertainty. But with technological advances, the landscape begins to change, both in chaos theory and in its applications, especially in the field of economics, to which we devote particular attention, carrying out as an example the analysis of the evolution of the Madrid Stock Exchange in the 2006–2013 crisis. Above all this, a reflection of a general nature is necessary to enlighten us on the possibility of opening a new horizon.

Keywords: chaos theory; economics; computing chaos; machine learning; reservoir algorithm; topology (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
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