Abstract

“Self-organized criticality” (SOC) is the mechanism by which complex systems are spontaneously driven towards, or even across, a} critical point \textit{at the edge between stability and chaos. These special points are characterized by fat-tailed fluctuations and long-memory correlations. Such a scenario can explain why insignificant perturbations may generate large disruptions, through the propagation of “avalanches” across the system. This short review discusses 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. (1993) and, in a different language, by Hyman Minsky. I argue that in general the quest for efficiency and the necessity of resilience may be mutually incompatible and require specific policy considerations.

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