Instability and crisis in financial complex systems

In this paper I set out to contrast the Efficient Markets Hypothesis (EMH) with the Financial Instability Hypothesis (FIH) upheld by Hyman Minsky taking into account the dynamic complexity of financial markets. In my opinion this approach may in fact offer analytical tools to account for crisis through processes endogenous to contemporary economics. The relevance of complex dynamics has recently been stressed in particular by Barkley Rosser (2004; 2005) who sees in complex dynamics a strong foundations for Keynesian models and results. In fact group dynamics enter into the analysis in at least two ways: it provides an independent source of fundamental uncertainty which, as discuss by Keynes himself (1936, 1937), can lead to speculative bubbles in assets markets and it causes over-reactions in both lender’s and borrower’s attitudes toward risk. These aspects can lead to financial fragility and instability following a variety of complex dynamics. Actually, as I shall endeavour to argue a financially complex system is, according to the FIH, inherently flawed and instable: in the absence of adequate economic policy, booms and busts phenomena in financial markets fuelled by credit booms and busts, may generate endogenous instability and systemic crisis as in the case of the so-called “sub-prime crisis”.