Paper: arXiv 2407.10284

Authors: Jean-Philippe Bouchaud

Abstract

Self-Organised Criticality'' (SOC) is the mechanism by which complex systems spontaneously settle close to a *critical point*, at the edge between stability and chaos, and characterized by fat-tailed fluctuations and long-memory correlations. Such a scenario may explain why insignificant perturbations can generate large disruptions, through the propagation of avalanches’’ across the system. In this short review, we discuss how SOC could offer a plausible solution to the excess volatility puzzle in financial markets and the analogue ``small shocks, large business cycle puzzle’’ for the economy at large, as initially surmised by Per Bak et al. in 1993. We argue that in general the quest for efficiency and the necessity of resilience may be mutually incompatible and require specific policy considerations.

Complexity vs Empirical Score

  • Math Complexity: 4.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: This paper is a concise narrative review exploring the Self-Organized Criticality (SOC) paradigm in economic and financial context by a pioneering researcher in the field. It provides high clarity and conceptual synthesis with simple pedagogical math models (e.g., branching processes, OU processes), but lacks direct empirical backtests or proprietary code datasets.

Research Flowchart

  flowchart TD
    A[Research Goal: Explain economic/financial excess volatility via SOC] --> B[Input: Financial & Economic Data with Fat Tails and Long Memory]
    B --> C[Methodology: Apply Bak et al. SOC Framework to Complex Markets]
    C --> D[Model Avalanches: Analyze shock propagation across networks]
    D --> E[Outcome 1: SOC resolves excess volatility and business cycle puzzles]
    D --> F[Outcome 2: Trade-off identified between market efficiency and resilience]

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2 of 410 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.