What
is Chaos Theory? Description
The Chaos Theory method from Lorenz and Poincaré is a technique that can
be used for studying complex and dynamic systems to reveal patterns of order
(nonchaos) out of seemingly chaotic behaviors.
"Chaos Theory is the qualitative study of unstable aperiodic behavior
in deterministic nonlinear dynamical systems" (Kellert, 1993, p. 2). Aperiodic
behavior is observed when there is no variable, describing the state of the
system, that undergoes a regular repetition of values. Unstable aperiodic
behavior is highly complex: it never repeats and it continues to manifest
the effects of any small perturbation.
As per the current mathematical theory a chaotic system is defined as showing
"sensitivity to initial conditions". In other words, to predict the future
state of a system with certainty, you need to know the initial conditions
with infinite accuracy, since errors increase rapidly with even the slightest
inaccuracy.
This is why the weather is so difficult to forecast. The theory also has been
applied to business cycles, and dynamics of animal populations, as well as
in fluid motion, planetary orbits, electrical currents in semiconductors,
medical conditions (like epileptic seizures), and the modeling of arms races.
During the 1960s Edward Lorenz, a meteorologist at MIT, worked on a
project to simulate weather patterns on a computer. He accidentally stumbled
upon the butterfly effect after deviations in calculations off by thousandths
greatly changed the simulations. The Butterfly Effect reflects how changes
on the small scale, can influence things on the large scale. It is the classic
example of chaos, where small changes may cause large changes. A butterfly,
flapping its wings in Hong Kong, may change tornado patterns in Texas.
Chaos Theory regards organizations/businesses as complex, dynamic, nonlinear,
cocreative and farfromequilibrium systems. Their future performance cannot
be predicted by past and present events and actions. In a state of chaos,
organizations behave in ways which are simultaneously both unpredictable (chaotic)
and patterned (orderly).
Origin of Chaos Theory. History
Ilya
Prigogine, Nobel laureate, showed that complex structures could result
from simpler ones. This is like order coming from chaos. Henry Adams previously
described this with his quote "Chaos often breeds life, when order breeds
habit". Henri Poincaré was really the "Father of Chaos [Theory]," however.
The planet Neptune was discovered in 1846 and had been predicted from the
observation of deviations in Uranus' orbit. King Oscar II of Norway was willing
to give a prize to anyone who could prove or disprove that the solar system
was stable. Poincaré offered his solution, but when a friend found an error
in his calculations, the prize was taken away until he could come up with
a new solution that worked. He found that there was no solution. Not even
the laws of Sir Isaac Newton provided a solution to this huge problem. Poincaré
had been trying to find order in a system where there was none to be found.
Chaos theory was formulated during the 1960s. Significant and more practical
work was done by Edward Lorenz in the 1960s. The name chaos was coined
by Jim Yorke, an applied mathematician at the University of Maryland
(Ruelle, 1991).
Calculation of the Chaos Theory? Formula
To apply Chaos Theory, a single measured variable x(n) = x(t0 + nt) with
a starting time, t0, and a lead time, t, provides an ndimensional space,
or phase space, that represents the full multivariate state space of the system;
up to 4 dimensions may be required to represent the phase space for a chaotic
system. Thus, over a long period of time, an observed system will develop
patterns within a nonlinear time series that can be used to predict future
states (Solomatine et al, 2001).
Usage of Chaos Theory. Applications
The principles of Chaos Theory have been successfully used to describe
and explain diverse natural and artificial phenomena. Such as:
 Predicting epileptic seizures.
 Predicting financial markets.
 Modeling of manufacturing systems.
 Making weather forecasts.
 Creating Fractals. Computergenerated images applying Chaos Theory principles.
(See figures on this page.)
In a scenario where businesses operate in a turbulent, complex and
unpredictable environment, the tenets of Chaos Theory can be extremely valuable.
Application areas can include:
Steps in Chaos Theory. Process
To control chaos, the system or process of chaos has to be controlled.
To control a system, what is needed is:
 A target, objective or goal which the system should reach. For a system
with predictable behavior (deterministic) this may be a particular state
of the system.
 A system capable of reaching the target or goal.
 Some means of influencing the system behavior. These are the control
inputs (decisions, decision rules, or initial states).
Strengths of Chaos Theory. Benefits
Chaos theory has wide applicability in modern science and technology era.
Communication and management may see a paradigm shift, as will several other
business areas. Research and study in this area by academics can be extremely
useful for the business and financial world.
Limitations of Chaos Theory. Disadvantages
The limitations of applying Chaos Theory are in due mostly from choosing
the input parameters. The methods chosen to compute these parameters depend
on the dynamics underlying the data and on the kind of analysis intended,
which is in most cases highly complex and not always accurate.
Chaos theory is not as simplistic to find an immediate and direct application
in the business environment, but mapping of the business environment using
the knowledge of chaos definitely is worthwhile studying.
Assumptions of Chaos Theory. Conditions
 Small actions produce rather large consequences, creating a chaotic
atmosphere.
Book: James Geick
 ChaosMaking a new Science 
Book: Ali Bulent
Cambel  Applied Chaos Theory : A Paradigm for Complexity 
Book: Richard Tiplady
 World of Difference 
Book: Garnett P.
Williams  Chaos Theory Tamed 

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Compare with Chaos Theory:
Catastrophe Theory
 Causal Model of Organizational
Performance and Change 
Game Theory 
Ten Schools of Thought
 Scenario Planning
 Dialectical Inquiry
 Analogical
Strategic Reasoning 
Plausibility Theory 
Spiral Dynamics 
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Centralization and Decentralization
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