Regulating complex dynamics in firms and economic systems

Abstract

The decisions of economic firms are often guided by simple routines. We demonstrate that such a routine may generate suboptimal chaotic dynamics, where the suboptimality is due to the fact that decision outcomes are in regions of low performance. We discuss a simple, but effective, method to regulate such dynamics in order to improve the performance. The method works as follows: In a first step, from time series information one has to identify critical starting areas which may lead to a crash or an outcome with low performance. In a second step, one has to perturb the system when it enters these critical areas. Due to sensitive dependence on initial conditions, already minor interventions suffice to prevent harmful events and to obtain better results. (C) 2007 Elsevier Ltd. All rights reserved.