Understanding Markets with Data Science

Networks, Complex Systems, and Sustainability

Chris Gu
Scheller College of
Business Georgia
Institute of Technology
Networks are Everywhere

E-Commerce
Labor Market
Financial Network
Global Economy
Social Network
The Internet
Human Biology
Human Brain as Neural
Network
Artificial Neural Network
...
Recap

The architecture of networks emerging in

various domains are more similar to each other
than one would have expected
We can apply a common set of tools to study
these networks
The study of networks is at the frontier of data
science
There are many success stories in business,
public health, organization management,
and so on
Today’s Class

Bird’s eye view of networks as complex

systems
Vulnerability
High level approaches to handle these
vulnerabilities
Implications for sustainability
Socially responsible behaviors
Current understanding of the issue on
sustainability from different perspectives
Open to different opinions and directions of
improvement
Complex Systems

Complex Systems Systems that

are difficult to derive their
collective behaviors from the
knowledge of its components in
isolation
Behind each complex system, there is an
intricate network that encodes the interactions
between the system’s components
We need to map out the network
behind in order to understand the
system
Examples of small change in a complex
system that poses a threat of systematic
vulnerability
Vulnerability I

August 14, 2003: August 15, 2003:

9:29pm EDT 9:14pm EDT
20 hours before 7 hours aLer

The 2003 blackout left ~45 million people (in

eight US states) and ~10 million (in Canada
Ontario) without power
The world’s second most widespread blackout in
Vulnerability I

Internet traffic overwhelm due to the “denial of

service attacks”
Cascades in financial systems in 1997
The US housing bubble crisis in 2008
Vulnerability I

Traditional reductionism view of complex

system
A complex system is nothing but the sum of its
parts and a complex phenomenon can be
explained completely in terms of the
interactions between more fundamental
phenomena
Linearity and Additivity
If we add the small individual parts together,
the complexity will increase in a linear manner
resulting in the same original complex system
In reality, these assumption might be
violated due to the amplification of small
effect
In terms of sustainability, this view holds that if
each individual is doing OK, then the entire
system is doing OK; if each company is
maximizing its own profit, the economy is OK
Vulnerability I: Prisoner’s Dilemma

Two members of a criminal gang are arrested

and investigated
Each prisoner is in solitary confinement
with no means of communicating with the
other
The prosecutors lack sufficient evidence to
convict the pair on the principal charge, but
they have enough to convict both on a lesser
charge
Each prisoner can either betray the other, or to
cooperate with the other by remaining silent
Vulnerability I: Prisoner’s
Dilemma
Vulnerability I: Prisoner’s Dilemma
in Markets
Advertise or not? That is the
question.
Vulnerability I: Saving Grace

Experiment of Prisoner’s
Dilemma

The fraction of people who cooperated at least

once makes up 2/3 of the experiments
There are more to real people than what game
theory model predicts
Lessons

If individuals or firms make decisions based only

on their own benefit, their behaviors will have
unintended consequences that spillover to
others
Government policies or regulations are meant
to impose extra costs onto the individuals so
that they will internalize these unintended
consequences
The design of these policies is one of the
main focuses of economic research
In a larger complex system where the
mechanisms of the system is opaque, it is much
harder to make this point obvious
It is also difficult for policies to cover every
aspect of the complex systems that we live
in
It is important that individuals and firms
Lessons

Interconnectivity induces a remarkable non-

locality, which creates vulnerability that may
surface at a remote space or time
The vulnerability caused by
interconnectivity can only be addressed by
holistic understanding of the system
Vulnerability II
Pierre-Simon Laplace (23 March 1749 – 5 March
1827)
One of the greatest scientists of all time in
mathematics, statistics, physics and
astronomy
Laplace (1814). A Philosophical Essay on
Probabilities.
We may regard the present state of the universe
as the effect of its past and the cause of its future.
An intellect which at a certain moment would know
all forces that set nature in motion, and all
positions of all items of which nature is composed,
if this intellect were also vast enough to submit
these data to analysis, it would embrace in a
single formula the movements of the greatest
bodies of the universe and those of the tiniest
atom; for such an intellect nothing would be
uncertain and the future just like the past would be
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Vulnerability II

Laplace (1814). A Philosophical Essay on

Probabilities.
We may regard the present state of the universe
as the effect of its past and the cause of its future.
An intellect which at a certain moment would
know all forces that set nature in motion, and all
positions of all items of which nature is
composed, if this intellect were also vast enough
to submit these data to analysis, it would
embrace in a single formula the movements of the
greatest bodies of the universe and those of the
tiniest atom; for such an intellect nothing would
be uncertain and the future just like the past
would be present before its eyes.
Vulnerability II

Edward Lorenz. Butterfly Effect (1960s)

3 very simple equations (FYI)

X˙ = −σX + σY

Y˙ = −XZ + rX − Y Z˙ = XY − bZ
https://www.youtub
e.com/watch?v=Hp8wGQW-Y48
The Butterfly Effect (Movie; 2004)

https://www.youtub
e.com/watch?v=B8_dgqfPXFg
(trailer; watch at home)
Lessons

Vulnerability II stems from our limitations

in measuring, modeling, and
understanding
Quantities
Unknown
Known but not measurable
Measurable but with error
Model error
All things are connected over space and time
Causality works without error
Random variables and the theory of
probabilities are only substitutes for the
unknown quantities and parts of the true
mechanism
Lessons

Even for simple 3 dimensional model, the

model depends sensitively on the initial
state
This holds more strongly on more
complicated model with higher dimensional
states
Because of all the unknowns in the quantities
Lessons

Scientific research usually studies

problems in a highly restricted context
Be open to unknown unknowns
Be open to improve the model
Understand the structure of the network
Model the dynamical processes taking place on
these networks
Discover structures of the network that are
resilient to shocks, and hence more sustainable
Simulate the system outcome with different initial
conditions
to study the range of possible outcomes

Do not hang on one realized outcome

Simulate many outcomes to understand its
distribution (return to this below)
Lessons

In real life, individuals and firms deals with far

more complex and unconstrained environment
We are connected
What we do at this moment, no matter how
small it is, will have an impact on the world and
the future self in a nonlinear way
We have limited knowledge of the the value or
impact of our
actions, and how they will influence others and future
self

Good intention
Be modest and open to different views
Even though we may have lots of understanding
in one area, when we transfer the knowledge to
another area, we still need to be open to
differences and modifications
Example of Simulation Based System

Simcity
https://www.youtub
e.com/watch?v=6Mb
zb1rU7xE
Example of Simulation Based System

Kindler, Golo and Solomon (2016). “Stochastic

Agent-Based Simulation of the Role of Labor.”
Simulate a large number of firms, workers,
and banks as individual agents in the labor
economy
Study the effects of policies dealing with
minimum wages, unemployment wages, hiring
regulation, and the role of finance on
Sustainability in the Labor Market

Survey with the applicants of the Universities

and Colleges Admissions Service (UCAS) in
UK (2008) revealed that
Students are very concerned about the
environmental crises and the future of the
world
Around two thirds of students said they
wanted more sustainability in their
syllabus
42% students thought that learning about
sustainability would
help their future careers

Over three quarters think significant changes

are necessary now regarding how the world
operates or is organized
The Independent (2009) reported that
Sustainability from the Consumer Perspective

Epstein-Reeves (2010). “Consumers

Overwhelmingly Want CSR”, Forbes.
More than 88% of consumers think companies
should try to achieve their business goals
while improving society and the environment
83% of consumers think companies should
support charities and nonprofits with financial
donations
Employees would seriously consider leaving their
job
If their employer used child labor in sweatshop
factories: 83%
If their company harmed the environment: 65%
If their company gave no / little money to charity:
32%
Kardashian (2013). “When Retailers Do Good,
Are Consumers More Loyal?”, Dartmouth Tuck
Business School.
Sustainability in the Tech Sector

Nowadays, many entrepreneurs

consider profit and social-
environmental benefit to be
inseparable
Almost all tech startups
Change the world for the better
Social media platforms
Facilitate democracy and the free exchange of
information
Renewable energy companies
Make money by selling sustainable solutions
Sharing economy apps
Cut down on the waste and inefficiency
Corporate Social Responsibility (CSR)

Corporate social responsibility includes six

types of corporate social initiatives
Corporate philanthropy: Company
donations to charity, including cash,
goods, and services
Community volunteering: Company-
organized volunteer activities
Socially-responsible business practices: Ethically
produced
products which appeal to a customer segment

Cause promotions: Company-funded advocacy

campaigns
Cause-related marketing: Donations to
charity based on product sales
Corporate social marketing: Company-funded
behavior-change
campaigns
Triple Bottom Line

One way to evaluate CSR is the triple bottom

line: "People, planet and profit"
"People" refers to fair labour practices
"Planet" refers to sustainable environmental
practices
"Profit" is the economic value created by the
organization
Sustainability as International Public Policy

Earth Summit in 1992

Sustainable development has been a focus of
international public policy
Economic growth, social inclusion, and
environmental sustainability are essential to
achieve human development that meets the
needs of the present without compromising the
ability of future generations to meet their own
needs
Views of Sustainability in Economics

Most views of sustainability are concerned

with the resource stock left for future
generations
Classical classifications of resources
Natural capital (Kn), human capital (Kh), and
man-made production capital (Kp)
There is a large spectrum of different
thinkings on sustainability among
economists
Views of Sustainability in Economics

Very weak view

The aggregate quantity of all resources is
constant or increasing such that

∆Kn + ∆Kh + ∆Kp ≥ 0

The depletion of Kn is acceptable as a result of

the development of Kh and Kp, as long as their
increases are large enough to compensate for
the decrease of Kn
Very limited view of the life-supporting role of the
ecosystem
Views of Sustainability in Economics

Weak view
Other resources remain substitutable for natural
capital, but keystone elements and processes
that are essential for the survival of ecosystems
must be protected
Pays only grudging attention to the most obvious
susceptible elements of ecosystems
Strong view
Acknowledges the lack of the understanding of
the complex ecosystems
Adopts the precautionary principle by
incorporating minimum safety standards
The reduction in Kn must be limited
Herman Daly

American ecological economist

Professor emeritus at the School of Public
Policy at the University of Maryland
Senior Economist in the Environment
Department of the World Bank
Developed policy guidelines related to
sustainable development
Herman Daly

Theories of a steady-state economy (Daly

(1973). Towards steady-state economy.)
Against the view of growthmania
The price mechanism and technological
development is capable of overcoming any
scarcity ever to be faced on earth
All human wants should be treated as
absolutes, from the most basic necessities to
the extravagant and insatiable craving for
luxuries
There is absolute scarcity, imposed by nature in
an absolute form by the laws of
thermodynamics and the finitude of earth
Some human wants are only relative and
not worthy of satisfying
Once we recognize these, then we are all well on
the way to
the paradigm of a steady-state economy
Views of Sustainability in Economics

Very strong view

Herman Daly’s four operating principles
Renewable resources: the rate of harvest should
be less than or equal to the resource growth
rate
Pollution: waste discharges should be below
assimilative capacity, and cumulative
pollutants should be reduced to almost zero
Non-renewables: the benefits from exploitation
should be split between distributed profits and
investment for finding a renewable substitute
Macroeconomic controls: minimize physical
material and energy throughput in the
economy and control population growth
Final Takeaway
Due to interconnectivity, our behavior will have
an impact not only on the local and temporary
environment of ours (the part), but also on the
global and future environment of everyone (the
whole)
The study of complex systems and networks
illustrates this in
theory

Numerous empirical studies reveal the social

demand on CSR, as well as the positive impact
of CSR on the people, planet and profit
Prospectus of Google’s 2004 IPO
Don’t be evil. We believe strongly that in the
long term, we will be better served—as
shareholders and in all other ways—by a
company that does good things for the world
even if we forgo some short term gains
Ancient proverb
Do not think any vice trivial, and so practice it;
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