Hysteresis and economics

2009 IEEE Control Systems  
Cross, Rod and Grinfeld, Michael and Lamba, Harbir (2009) Hysteresis and economics -taking the economic past into account. IEEE Control Systems, 29 (1). The Strathprints institutional repository (http://strathprints.strath.ac.uk) is a digital archive of University of Strathclyde research outputs. It has been developed to disseminate open access research outputs, expose data about those outputs, and enable the management and persistent access to Strathclyde's intellectual output. Merely
more » ... ut. Merely accepting that economic structures evolve is not sufficient to single out any 1 particular mechanism of history dependence at work. In many cases an economic agent can be represented by a hysteron, a simple input-output system with weak, passive hysteresis. There are three key facts implying that representing an individual economic agent as a hysteron is relevant to economic analysis. First of all, in many economic decisions the agent is confronted with a binary choice, namely, to keep savings in the local currency or in US dollars, to produce shoes or not to produce shoes, and to buy a particular stock or to sell it. Furthermore, such decisions are translated into action almost instantaneously. Finally, there are frequently sunk costs associated with switching between states. Sunk costs refer to the situation where, when an action is taken such as buying equities or entering a market to produce a commodity, an expense is incurred that cannot be recouped on reversing the action. Examples are transaction costs when buying equities and the payment of local taxes when deciding to open a production line. When sunk costs are present, a reversal of strategy is not expected to occur under exactly the same circumstances that led to the original strategy being adopted. If such circumstances can be described in terms of a single control parameter, such as the price of an equity or the production cost of a commodity, a way to model decision making in the presence of sunk costs is to postulate the existence of different threshold values of the control parameter for switching from one strategy to the other. As is shown below, this is precisely what a hysteron does. Economic agents, such as individual consumers or firms, differ with respect to their economic preferences, ease with which they can be spurred into action, and the range of economic activities available to them. In terms of hysterons, taking the heterogeneity of agents into account corresponds to postulating different threshold values for each economic agent, and points toward Preisach-type hysteresis models as a vehicle for describing economic systems. In particular, the viewpoint described above makes it possible to understand the provenance of hysteresis loops
doi:10.1109/mcs.2008.930445 fatcat:5e6jtlpfpfgenctlx5ei44sija