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363-0564-00L  Entrepreneurial Risks

SemesterSpring Semester 2016
LecturersD. Sornette
Periodicityyearly recurring course
Language of instructionEnglish

Abstract-General introduction to the different dimensions of risks with
emphasis on entrepreneurial, financial and social risks.

-Development of the concepts and tools to understand these risks,
control and master them.

-Decision making and risks; human cooperation and risks
ObjectiveWe live a in complex world with many nonlinear
negative and positive feedbacks. Entrepreneurship is one of
the leading human activity based on innovation to create
new wealth and new social developments. This course will
analyze the risks (upside and downside) associated with
entrepreneurship and more generally human activity
in the firms, in social networks and in society.
The goal is to present what we believe are the key concepts
and the quantitative tools to understand and manage risks.
An emphasis will be on large and extreme risks, known
to control many systems, and which require novel ways
of thinking and of managing. We will examine the questions
of (i) how much one can manage and control these risks,
(ii) how these actions may feedback positively or negatively
and (iii) how to foster human cooperation for the creation
of wealth and social well-being.

Depending on the number of students and of the interest, the exam
will consist in a project, one for each student or in small groups,
focused on the application of the concepts and tools developed in this
class to problems of practical use to the students in their varied fields.
The choice of the subjects will be jointly decided by the
students and the professor.
ContentThis content is not final and is subjected to change
and adaptation during the development of the course
in order to take into account feedbacks from the
students and participants to the course.

1- Risks in the firm and in entrepreneurship
-What is risk? The four levels.
-Conceptual and technical tools
-Introduction to three different concepts of probability
-Useful notions of probability theory
(Frequentist versus Bayesian approach,
the central limit theorem and its generalizations, extreme value theory)
-Where are the risks for firms? Downside and upside
-Diversification and market risks

2-The world of power law risks
-Stable laws
-power laws and beyond
-calculation tools
-scale invariance, fractal and multifractals
-mechanisms for power laws
-Examples in the corporate, financial and social worlds

3-Risks emerging from collective self-organization
-concept of bottom-up self-organization
-bifurcations, theory of catastrophes, phase transitions
-the hierarchical approach to understanding self-organization

4-Measures of risks
-coherent and consistent measures of risks
-origin of risks
-dependence structure of risks
-measures of dependence and of extreme dependences
-introduction to copulas

5-Conceptual and mathematical models of risk processes
-self-excited point processes of economic and financial shocks
-agent-based models applied to collective emergent behavior
in organization of firms and societies and their risks

6-Endogenous versus exogenous origins of crises
-mild crises versus wild catastrophes: black swans and kings
-the dynamics of commercial sales
-the dynamics of Youtube views and internet downloads
-the dynamics of risks in the financial markets
-strategic management and extreme risks

7-Why do markets burst and crash?
-collective behavior, imitation and herding
-humans as social animals and consequence of risks
-bubbles and crashes in human affairs, innovation, new technologies

8-Limits of predictability, of control and of management
-the phenomenon of ``illusion of control''
-the world is a whole: irreducible risks from lack of diversification
-intrinsic limits of predictability
-the concept of pockets of predictability

9-Human-made risks
-political, financial, economics, natural risks
-elements on theories of decision making
-Human cooperation and its lack thereof, mechanisms and design
Lecture notesThe lecture notes will be distributed a the beginning of
each lecture.
LiteratureI will use elements taken from my books

-D. Sornette
Critical Phenomena in Natural Sciences,
Chaos, Fractals, Self-organization and Disorder: Concepts and Tools,
2nd ed. (Springer Series in Synergetics, Heidelberg, 2004)

-Y. Malevergne and D. Sornette
Extreme Financial Risks (From Dependence to Risk Management)
(Springer, Heidelberg, 2006).

-D. Sornette,
Why Stock Markets Crash
(Critical Events in Complex Financial Systems),
(Princeton University Press, 2003)

as well as from a variety of other sources, which will be
indicated to the students during each lecture.
Prerequisites / Notice-A deep curiosity and interest in asking questions and in attempting to
understand and manage the complexity of the corporate, financial
and social world

-quantitative skills in mathematical analysis and algebra
for the modeling part.