Sentiment-driven Limit Cycles and Chaos

Orlando Gomes1 J. C. Sprott2

1Lisbon Accounting and Business School (ISCAL-IPL) and Business Research Unit (BRU-IUL),
ISCAL, Av. Miguel Bombarda 20, 1069-035 Lisbon, Portugal

2Department of Physics, University of Wisconsin-Madison, Madison, WI 53706, USA

Published online: 24 April 2017

ABSTRACT

A recent strand of macroeconomic literature has placed sentiment fluctuations at the forefront of the academic debate about the foundations of business cycles. Waves of optimism and pessimism influence the decisions of investors and consumers, and they might therefore be interpreted as a driving force for the performance of the economy in the short term. In this context, two questions regarding the formation and evolution of psychological moods in an economic setting gain relevance: First, how can we model the process of transmission of sentiments across economic agents? Second, is this process capable of generating endogenous and persistent fluctuations? This paper answers these two questions by proposing a simple and intuitive continuous-time dynamic sentiment spreading model based on the rumor propagation literature. As agents contact with one another, endogenous fluctuations are likely to emerge, with trajectories of sentiment shares potentially exhibiting periodic cycles and chaotic behavior.

Ref: G. Gomes and J. C. Sprott, Journal of Evolutionary Economics 27, 729-760 (2017)

The complete paper is available in PDF format.

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