Schuldberg, in Encyclopedia of Creativity (Second Edition), 2011 IntroductionĬhaos theory, more technically nonlinear dynamical systems (NLDS) theory, is an exciting, rapidly developing area of mathematics with increasing application in the physical, biological, and social sciences. While the evidence is weak for the presence of chaos that can be short term predicted, there does seem to be useful evidence in favor of a nonlinear structure which can be predicted in the short term, conditional on appropriate information sets.ĭ. More interesting is whether there is evidence in economic and financial time series data for the presence of chaos. Since economic theory generates nonlinear dynamics it is theoretically easy to produce economic models that generate chaotic dynamics when outside shocks are zero. Even though a small error in measurement of the system state leads to degradation of predictability at an exponential rate, and thus prediction by any method is futile in the long term, nonlinear prediction methods can do a good job on short term prediction when chaos or other nonlinearity is present. Brock, in International Encyclopedia of the Social & Behavioral Sciences, 2001Ĭhaos theory is the study of deterministic difference (differential) equations that display sensitive dependence upon initial conditions (SDIC) in such a way as to generate time paths that look random.

Chaos theory gleick