J. Doyne Farmer

The crisis of 2008 is widely believed to have been an example of a leverage cycle, in which lending first becomes too loose and then becomes too tight. An agent-based model for leveraged value investors shows how the use of leverage can explain the fat tails and clustered volatility observed in financial markets. Similarly, the use of Value at Risk, as embodied in Basel II, can lead to a cycle in which leverage and prices slowly rise while volatility falls, followed by a crash in which prices and leverage plummet while volatility spikes upward, resembling the Great Moderation and subsequent crisis.

Farmer and Packard's work on roulette, along with their adventures in the casinos of Nevada, has been featured in the 2004 Breaking Vegas documentary series, "Beat the Wheel".

Farmer left Prediction Company in 1999 for the Santa Fe Institute, where he did interdisciplinary research at the interface of economics and complex systems, developed a theory of market ecology and was one of the founders of econophysics.

In 1991 Farmer gave up his position at Los Alamos, reunited with Norman Packard and graduate school classmate James McGill, and co-founded the Prediction Company. The prevailing view at the time was that markets were perfectly efficient, so that it was not possible to make consistent profits without inside information. Farmer and Packard were motivated by their desire to prove this wrong. The trading strategy that was developed was an early version of statistical arbitrage, and made use of a variety of signals that derived from processing essentially all quantitative inputs related to the US stock market. It also included a high-frequency forecasting model as an overlay that reduced transaction costs. From 1996 onward, trading was completely automated. Farmer was one of the chief architects of the trading system as it existed in 1999. Prediction Company was sold to UBS in 2006 and in 2013 was re-sold to Millenium Management, where it is their second largest fund.

After the roulette project Farmer switched his dissertation topic to chaotic dynamics and joined together with James P. Crutchfield, Norman Packard, and Robert Shaw to found the Dynamical Systems Collective (subsequently known by others as the Chaos Cabal). Although they had the blessing of faculty members William L. Burke and Ralph Abraham, they essentially co-advised each other's PhD theses. Their most important contribution was a method for state space reconstruction, that made it possible to visualize and study chaotic attractors based only on a single time series. This has now been used to identify chaotic attractors and study their properties in a wide variety of physical systems. In his PhD thesis in 1981 Farmer showed how varying a parameter of an infinite dimensional system could give rise to a sequence of successively more complicated chaotic attractors, resembling the transition to turbulence. He later developed a method for nonlinear time series forecasting that has been used for exploiting low dimensional chaos to make better short term forecasts. Other work included an improved method for state space reconstruction, and a derivation of the fundamental limits in which this becomes impossible, so that the dynamics become inherently random. He and colleagues also developed a method for determining when chaos can be distinguished from the null hypothesis of a correlated linear random process.

After finishing his doctorate in 1981, Farmer took a post-doctoral appointment at the Center for Nonlinear Studies at Los Alamos National Laboratory and received an Oppenheimer Fellowship in 1983. He developed an interest in what is now called complex systems and co-organized several seminal conferences in this area. In 1988 he founded the Complex Systems Group in the Theoretical Division and recruited a group of postdoctoral fellows who subsequently became leaders in the field, including Kunihiko Kaneko, Chris Langton, Walter Fontana, Steen Rasmussen, David Wolpert, James Theiler and Seth Lloyd.

Though born in Houston, Texas, Farmer grew up in Silver City, New Mexico. He was strongly influenced by Tom Ingerson, a young physicist and Boy Scout leader who inspired his interest in science and adventure. Scout activities included searching for an abandoned Spanish goldmine to fund a mission to Mars, a road trip to the Northwest Territories and backcountry camping in the Barranca del Cobre. Farmer graduated from Stanford University in 1973 with a BS in Physics and went to graduate school at the University of California, Santa Cruz, where he studied physical cosmology under George Blumenthal.

J. Doyne Farmer (born 22 June 1952) is an American complex systems scientist and entrepreneur with interests in chaos theory, complexity and econophysics. He is a Professor of Mathematics at Oxford University, where he is Director of the Complexity Economics at the Institute for New Economic Thinking at the Oxford Martin School, and is also an external professor at the Santa Fe Institute. His current research is on complexity economics, focusing on systemic risk in financial markets and technological progress. During his career he has made important contributions to complex systems, chaos, artificial life, theoretical biology, time series forecasting and econophysics. He co-founded Prediction Company, one of the first companies to do fully automated quantitative trading. While a graduate student he led a group that called itself Eudaemonic Enterprises and built the first wearable digital computer, which was used to beat the game of roulette.