Making Sense of Chaos

Farmer — a physicist who came out of chaos theory and early quantitative trading, then spent decades on complexity economics — argues that standard economics fails because it models an economy as equilibrium between rational representative agents. His alternative is complexity economics: simulate the economy agent by agent, with real firms, real balance sheets and real behavioural rules, and let the aggregate behaviour emerge. The book walks through applications to financial crises, supply chains, inequality and climate policy.

Why it’s on the list: The case that better forecasting comes from simulating heterogeneous agents rather than solving for equilibrium — a methodological argument with direct bearing on how any complex system gets predicted.

Where I saw it: Michael Mauboussin’s favourite books of 2024, posted December 31, 2024.

Connections

• Complexity — the research programme the book is arguing for.
• Economics · Behavioral Economics — the discipline it is arguing with, and the strand of it Farmer’s agents are built on.
• Forecasting · Modeling — the practical payoff Farmer claims for agent-based simulation.
• Michael Mauboussin — the curator whose 2024 list this came from.