A Small-World Network Tames Financial Complexity and Opens a New Gateway to Financial Education

Abstract

We show how the financial information of any business can be mapped by 4 highly-clustered nodes that are connected by 12 short-path links (Watts & Strogatz, 1998), see fig. 1. Here, the nodes are the accounts of a business and the links are the double-entries that connect them. From the collection of microscopic interactions, or double-entries, an emergent macroscopic structure heralds the financial condition of a business for a given period of time (Johnson, 2011, Loc. 185). The new map condenses thousands of pages of information into a single small-world network. This vast reduction in complexity allows people to learn in less than 24 hours what would normally take at least one year with the traditional scheme (Pacioli, 1494). Results are based on solid empirical evidence. This shows that network structures are indeed the key to understand the complex world around us (Barabasi & Frangos, 2014) as this solution demystifies accounting and business finance, providing a unique gateway to financial education.

Keywords: small-world network, complexity theory, phase transition diagram, double-entry information, financial education