Econophysics is a
heterodox
In religion, heterodoxy (from Ancient Greek: , "other, another, different" + , "popular belief") means "any opinions or doctrines at variance with an official or orthodox position". Under this definition, heterodoxy is similar to unorthodoxy, w ...
interdisciplinary research field, applying theories and methods originally developed by
physicist
A physicist is a scientist who specializes in the field of physics, which encompasses the interactions of matter and energy at all length and time scales in the physical universe.
Physicists generally are interested in the root or ultimate caus ...
s in order to solve problems in
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, usually those including uncertainty or
stochastic process
In probability theory and related fields, a stochastic () or random process is a mathematical object usually defined as a family of random variables. Stochastic processes are widely used as mathematical models of systems and phenomena that appea ...
es and
nonlinear dynamics
In mathematics and science, a nonlinear system is a system in which the change of the output is not proportional to the change of the input. Nonlinear problems are of interest to engineers, biologists, physicists, mathematicians, and many other ...
. Some of its application to the study of financial markets has also been termed
statistical finance Statistical finance, is the application of econophysics to financial markets. Instead of the normative roots of finance, it uses a positivist framework. It includes exemplars from statistical physics with an emphasis on emergent or collective prop ...
referring to its roots in
statistical physics
Statistical physics is a branch of physics that evolved from a foundation of statistical mechanics, which uses methods of probability theory and statistics, and particularly the Mathematics, mathematical tools for dealing with large populations ...
. Econophysics is closely related to
social physics Social physics or sociophysics is a field of science which uses mathematical tools inspired by physics to understand the behavior of human crowds. In a modern commercial use, it can also refer to the analysis of social phenomena with big data.
Soci ...
.
History
Physicists' interest in the
social sciences
Social science is one of the branches of science, devoted to the study of societies and the relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the original "science of soci ...
is not new (see e.g.,);
Daniel Bernoulli
Daniel Bernoulli FRS (; – 27 March 1782) was a Swiss mathematician and physicist and was one of the many prominent mathematicians in the Bernoulli family from Basel. He is particularly remembered for his applications of mathematics to mechan ...
, as an example, was the originator of
utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
-based preferences. One of the founders of
neoclassical economic theory
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, former Yale University Professor of Economics
Irving Fisher
Irving Fisher (February 27, 1867 – April 29, 1947) was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt def ...
, was originally trained under the renowned Yale
physicist
A physicist is a scientist who specializes in the field of physics, which encompasses the interactions of matter and energy at all length and time scales in the physical universe.
Physicists generally are interested in the root or ultimate caus ...
,
Josiah Willard Gibbs
Josiah Willard Gibbs (; February 11, 1839 – April 28, 1903) was an American scientist who made significant theoretical contributions to physics, chemistry, and mathematics. His work on the applications of thermodynamics was instrumental in t ...
. Likewise,
Jan Tinbergen
Jan Tinbergen (; ; 12 April 19039 June 1994) was a Dutch economist who was awarded the first Nobel Memorial Prize in Economic Sciences in 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis of ...
, who won the first
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
in 1969 for having developed and applied dynamic models for the analysis of economic processes, studied physics with
Paul Ehrenfest
Paul Ehrenfest (18 January 1880 – 25 September 1933) was an Austrian theoretical physicist, who made major contributions to the field of statistical mechanics and its relations with quantum mechanics, including the theory of phase transition an ...
at
Leiden University
Leiden University (abbreviated as ''LEI''; nl, Universiteit Leiden) is a Public university, public research university in Leiden, Netherlands. The university was founded as a Protestant university in 1575 by William the Silent, William, Prince o ...
. In particular, Tinbergen developed the
gravity model of international trade that has become the workhorse of international economics.
Econophysics was started in the mid-1990s by several physicists working in the subfield of
statistical mechanics
In physics, statistical mechanics is a mathematical framework that applies statistical methods and probability theory to large assemblies of microscopic entities. It does not assume or postulate any natural laws, but explains the macroscopic be ...
. Unsatisfied with the traditional explanations and approaches of economists – which usually prioritized simplified approaches for the sake of soluble theoretical models over agreement with empirical data – they applied tools and methods from physics, first to try to match financial data sets, and then to explain more general economic phenomena.
One driving force behind econophysics arising at this time was the sudden availability of large amounts of financial data, starting in the 1980s. It became apparent that traditional methods of analysis were insufficient – standard economic methods dealt with homogeneous agents and equilibrium, while many of the more interesting phenomena in financial markets fundamentally depended on
heterogeneous agents
In economic theory and econometrics, the term heterogeneity refers to differences across the units being studied. For example, a macroeconomic model in which consumers are assumed to differ from one another is said to have heterogeneous agents.
U ...
and far-from-equilibrium situations.
The term "econophysics" was coined by
H. Eugene Stanley
Harry Eugene Stanley (born March 28, 1941) is an American physicist and University Professor at Boston University. He has made seminal contributions to statistical physics and is one of the pioneers of interdisciplinary science. His current r ...
, to describe the large number of papers written by physicists in the problems of (stock and other) markets, in a conference on statistical physics in
Kolkata
Kolkata (, or , ; also known as Calcutta , the official name until 2001) is the capital of the Indian state of West Bengal, on the eastern bank of the Hooghly River west of the border with Bangladesh. It is the primary business, comme ...
(erstwhile
Calcutta
Kolkata (, or , ; also known as Calcutta , List of renamed places in India#West Bengal, the official name until 2001) is the Capital city, capital of the Indian States and union territories of India, state of West Bengal, on the eastern ba ...
) in 1995 and first appeared in its proceedings publication in
Physica A
Physica may refer to:
* Physics (Aristotle)
The ''Physics'' (Ancient Greek, Greek: Φυσικὴ ἀκρόασις ''Phusike akroasis''; Latin: ''Physica'', or ''Naturales Auscultationes'', possibly meaning "Natural philosophy, lectures on ...
1996. The inaugural meeting on econophysics was organised in 1998 in Budapest by
János Kertész
János Kertész is a Hungarian physicist. He is one of the pioneers of econophysics, complex networks and application of fractal geometry in physical problems.
He is the director of the Institute of Physics in Budapest University of Technology a ...
and Imre Kondor. The first book on econophysics was by R. N. Mantegna & H. E. Stanley in 2000.
The almost regular meeting series on the topic include: ECONOPHYS-KOLKATA (held in Kolkata & Delhi), Econophysics Colloquium, ESHIA/ WEHIA.
In recent years
network science
Network science is an academic field which studies complex networks such as telecommunication networks, computer networks, biological networks, cognitive and semantic networks, and social networks, considering distinct elements or actors repre ...
, heavily reliant on analogies from
statistical mechanics
In physics, statistical mechanics is a mathematical framework that applies statistical methods and probability theory to large assemblies of microscopic entities. It does not assume or postulate any natural laws, but explains the macroscopic be ...
, has been applied to the study of productive systems. That is the case with the works done at the
Santa Fe Institute
The Santa Fe Institute (SFI) is an independent, nonprofit theoretical research institute located in Santa Fe, New Mexico, United States and dedicated to the multidisciplinary study of the fundamental principles of complex adaptive systems, includ ...
in European Funded Research Projects as Forecasting Financial Crises and the Harvard-MIT
Observatory of Economic Complexity
If "econophysics" is taken to denote the principle of applying statistical mechanics to economic analysis, as opposed to a particular literature or network, priority of innovation is probably due to Emmanuel Farjoun and
Moshé Machover
Moshé Machover ( he, משה מחובר; born 1936) is a mathematician, philosopher, and socialist activist, noted for his writings against Zionism. Born to a Jewish family in Tel Aviv, then part of the British Mandate of Palestine, Machover move ...
(1983). Their book ''Laws of Chaos: A Probabilistic Approach to Political Economy'' proposes ''dis''solving (their words) the
transformation problem
In 20th-century discussions of Karl Marx's economics, the transformation problem is the problem of finding a general rule by which to transform the "values" of commodities (based on their socially necessary labour content, according to his labou ...
in Marx's political economy by re-conceptualising the relevant quantities as random variables.
If, on the other hand, "econophysics" is taken to denote the application of physics to
economics, one can consider the works of
Léon Walras
Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the developmen ...
and
Vilfredo Pareto
Vilfredo Federico Damaso Pareto ( , , , ; born Wilfried Fritz Pareto; 15 July 1848 – 19 August 1923) was an Italian polymath (civil engineer, sociologist, economist, political scientist, and philosopher). He made several important contribut ...
as part of it. Indeed, as shown by Bruna Ingrao and Giorgio Israel,
general equilibrium theory
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...
in economics is based on the physical concept of
mechanical equilibrium
In classical mechanics, a particle is in mechanical equilibrium if the net force on that particle is zero. By extension, a physical system made up of many parts is in mechanical equilibrium if the net force on each of its individual parts is zero ...
.
Econophysics has nothing to do with the "physical quantities approach" to economics, advocated by
Ian Steedman
Ian Steedman (born 1941, in London) was for many years a professor of economics at the University of Manchester before moving down the road to Manchester Metropolitan University. He retired from there at the end of 2006, but was appointed as an eme ...
and others associated with
neo-Ricardianism
The neo-Ricardian school is an economic school of thought
that derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's critique of neoclassical economics as presented in his ''The Production of Com ...
. Notable econophysicists are
Jean-Philippe Bouchaud
Jean-Philippe Bouchaud (born 1962) is a French physicist. He is co-founder and chairman of Capital Fund Management (CFM), adjunct professor at École Normale Supérieure and co-director of the CFM-Imperial Institute of Quantitative Finance at Im ...
, Giulio Bottazzi,
Bikas K Chakrabarti
Bikas Kanta Chakrabarti (born 14 December 1952 in Kolkata (erstwhile Calcutta) is an Indian physicist. Since January 2018, he is emeritus professor of physics at the Saha Institute of Nuclear Physics, Kolkata, India.
Biography
Chakrabarti re ...
,
J. Doyne Farmer
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 Baillie Gifford Professor of Mathematics at Oxford University, where he is also Dir ...
,
Tiziana Di Matteo, Diego Garlaschelli,
Dirk Helbing
Dirk Helbing (born January 19, 1965) is Professor of Computational Social Science at the Department of Humanities, Social and Political Sciences and affiliate of the Computer Science Department at ETH Zurich.
Biography
Dirk Helbing studied phy ...
,
János Kertész
János Kertész is a Hungarian physicist. He is one of the pioneers of econophysics, complex networks and application of fractal geometry in physical problems.
He is the director of the Institute of Physics in Budapest University of Technology a ...
, Rosario N. Mantegna, Matteo Marsili,
Joseph L. McCauley
Joseph L. McCauley (born 1943) is Professor of Physics at the University of Houston. He was Lars Onsager's last graduate student.
His main research fields are economics and finance (econophysics), nonlinear dynamics, and statistical physics. He h ...
, Enrico Scalas, Angelo Secchi,
Didier Sornette
Didier Sornette (born June 25, 1957 in Paris) is a French researcher studying subjects including complex systems and risk management. He is Professor on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH ...
,
H. Eugene Stanley
Harry Eugene Stanley (born March 28, 1941) is an American physicist and University Professor at Boston University. He has made seminal contributions to statistical physics and is one of the pioneers of interdisciplinary science. His current r ...
, Victor Yakovenko and Yi-Cheng Zhang. Particularly noteworthy among the formal courses on econophysics is the one offered by Diego Garlaschelli at the Physics Department of the
Leiden University
Leiden University (abbreviated as ''LEI''; nl, Universiteit Leiden) is a Public university, public research university in Leiden, Netherlands. The university was founded as a Protestant university in 1575 by William the Silent, William, Prince o ...
. From September 2014 King's College has awarded the first position of Full Professor in Econophysics (
Tiziana Di Matteo).
Basic tools
Basic tools of econophysics are
probabilistic
Probability is the branch of mathematics concerning numerical descriptions of how likely an Event (probability theory), event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and ...
and
statistical
Statistics (from German: ''Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industria ...
methods often taken from statistical physics.
Physics models that have been applied in economics include the
kinetic theory of gas
Kinetic (Ancient Greek: κίνησις “kinesis”, movement or to move) may refer to:
* Kinetic theory, describing a gas as particles in random motion
* Kinetic energy, the energy of an object that it possesses due to its motion
Art and ente ...
(called the
kinetic exchange models of markets
Kinetic exchange models are multi-agent dynamic models inspired by the statistical physics of energy distribution, which try to explain the robust and universal features of income/wealth distributions.
Understanding the distributions of income ...
),
percolation
Percolation (from Latin ''percolare'', "to filter" or "trickle through"), in physics, chemistry and materials science, refers to the movement and filtering of fluids through porous materials.
It is described by Darcy's law.
Broader applicatio ...
models,
chaotic
Chaotic was originally a Danish trading card game. It expanded to an online game in America which then became a television program based on the game. The program was able to be seen on 4Kids TV (Fox affiliates, nationwide), Jetix, The CW4Kid ...
models developed to study cardiac arrest, and models with
self-organizing criticality
Self-organized criticality (SOC) is a property of dynamical systems that have a critical point as an attractor. Their macroscopic behavior thus displays the spatial or temporal scale-invariance characteristic of the critical point of a phase ...
as well as other models developed for
earthquake prediction
Earthquake prediction is a branch of the science of seismology concerned with the specification of the time, location, and magnitude of future earthquakes within stated limits, and particularly "the determination of parameters for the ''next'' s ...
. Moreover, there have been attempts to use the mathematical theory of
complexity
Complexity characterises the behaviour of a system or model whose components interaction, interact in multiple ways and follow local rules, leading to nonlinearity, randomness, collective dynamics, hierarchy, and emergence.
The term is generall ...
and
information theory
Information theory is the scientific study of the quantification (science), quantification, computer data storage, storage, and telecommunication, communication of information. The field was originally established by the works of Harry Nyquist a ...
, as developed by many scientists among whom are
Murray Gell-Mann
Murray Gell-Mann (; September 15, 1929 – May 24, 2019) was an American physicist who received the 1969 Nobel Prize in Physics for his work on the theory of elementary particles. He was the Robert Andrews Millikan Professor of Theoretical ...
and
Claude E. Shannon
Claude Elwood Shannon (April 30, 1916 – February 24, 2001) was an American mathematician, electrical engineer, and cryptographer known as a "father of information theory".
As a 21-year-old master's degree student at the Massachusetts Institu ...
, respectively.
For
potential games, it has been shown that an emergence-producing equilibrium based on information via Shannon information entropy produces the same equilibrium measure (
Gibbs measure In mathematics, the Gibbs measure, named after Josiah Willard Gibbs, is a probability measure frequently seen in many problems of probability theory and statistical mechanics. It is a generalization of the canonical ensemble to infinite systems.
Th ...
from statistical mechanics) as a stochastic dynamical equation which represents noisy decisions, both of which are based on
bounded rationality
Bounded rationality is the idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
Limitations include the difficulty of ...
models used by economists. The fluctuation-dissipation theorem connects the two to establish a concrete correspondence of "temperature", "entropy", "free potential/energy", and other physics notions to an economics system. The statistical mechanics model is not constructed a-priori - it is a result of a boundedly rational assumption and modeling on existing neoclassical models. It has been used to prove the "inevitability of collusion" result of
Huw Dixon
Huw David Dixon (/hju: devəd dɪksən/), born 1958, is a British economist. He has been a professor at Cardiff Business School since 2006, having previously been Head of Economics at the University of York (2003–2006) after being a professor ...
in a case for which the neoclassical version of the model does not predict collusion. Here the demand is increasing, as with
Veblen good
A Veblen good is a type of luxury good for which the demand increases as the price increases, in apparent (but not actual) contradiction of the law of demand, resulting in an upward-sloping demand curve. The higher prices of Veblen goods may mak ...
s, stock buyers with the
"hot hand" fallacy preferring to buy more successful stocks and sell those that are less successful,
[
] or among short traders during a
short squeeze
In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when there is a lack of supply and an excess of d ...
as occurred with the
WallStreetBets
r/wallstreetbets, also known as WallStreetBets or WSB, is a subreddit where participants discuss stock and Option (finance), option trading. It has become notable for its colorful and profane jargon, aggressive trading strategies, and for playin ...
group's collusion to
drive up GameStop stock price in 2021.
[
]
Quantifiers derived from
information theory
Information theory is the scientific study of the quantification (science), quantification, computer data storage, storage, and telecommunication, communication of information. The field was originally established by the works of Harry Nyquist a ...
were used in several papers by econophysicist Aurelio F. Bariviera and coauthors in order to assess the degree in the informational efficiency of stock markets. Zunino et al. use an innovative statistical tool in the financial literature: the complexity-entropy causality plane. This Cartesian representation establish an efficiency ranking of different markets and distinguish different bond market dynamics. It was found that more developed countries have stock markets with higher entropy and lower complexity, while those markets from emerging countries have lower entropy and higher complexity. Moreover, the authors conclude that the classification derived from the complexity-entropy causality plane is consistent with the qualifications assigned by major rating companies to the sovereign instruments. A similar study developed by Bariviera et al. explore the relationship between credit ratings and informational efficiency of a sample of corporate bonds of US oil and energy companies using also the complexity–entropy causality plane. They find that this classification agrees with the credit ratings assigned by Moody's.
Another good example is
random matrix theory
In probability theory and mathematical physics, a random matrix is a matrix-valued random variable—that is, a matrix in which some or all elements are random variables. Many important properties of physical systems can be represented mathemat ...
, which can be used to identify the noise in financial correlation matrices. One paper has argued that this technique can improve the performance of portfolios, e.g., in applied in
portfolio optimization Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimi ...
.
There are, however, various other tools from physics that have so far been used, such as
fluid dynamics
In physics and engineering, fluid dynamics is a subdiscipline of fluid mechanics that describes the flow of fluids— liquids and gases. It has several subdisciplines, including ''aerodynamics'' (the study of air and other gases in motion) an ...
,
classical mechanics
Classical mechanics is a physical theory describing the motion of macroscopic objects, from projectiles to parts of machinery, and astronomical objects, such as spacecraft, planets, stars, and galaxies. For objects governed by classical ...
and
quantum mechanics
Quantum mechanics is a fundamental theory in physics that provides a description of the physical properties of nature at the scale of atoms and subatomic particles. It is the foundation of all quantum physics including quantum chemistry, ...
(including so-called
classical economy,
quantum economics Quantum economics is an emerging research field which applies mathematical methods and ideas from quantum physics to the field of economics. It is motivated by the belief that economic processes such as financial transactions have much in common wi ...
and
quantum finance
Quantum finance is an interdisciplinary research field, applying theories and methods developed by quantum physicists and economists in order to solve problems in finance. It is a branch of econophysics.
Background on instrument pricing
Financ ...
),
and the
path integral formulation
The path integral formulation is a description in quantum mechanics that generalizes the action principle of classical mechanics. It replaces the classical notion of a single, unique classical trajectory for a system with a sum, or functional in ...
of statistical mechanics.
There are also analogies between finance theory and
diffusion
Diffusion is the net movement of anything (for example, atoms, ions, molecules, energy) generally from a region of higher concentration to a region of lower concentration. Diffusion is driven by a gradient in Gibbs free energy or chemical p ...
theory. For instance, the
Black–Scholes equation In mathematical finance, the Black–Scholes equation is a partial differential equation (PDE) governing the price evolution of a European call or European put under the Black–Scholes model. Broadly speaking, the term may refer to a similar PDE ...
for
option pricing is a
diffusion
Diffusion is the net movement of anything (for example, atoms, ions, molecules, energy) generally from a region of higher concentration to a region of lower concentration. Diffusion is driven by a gradient in Gibbs free energy or chemical p ...
-
advection
In the field of physics, engineering, and earth sciences, advection is the transport of a substance or quantity by bulk motion of a fluid. The properties of that substance are carried with it. Generally the majority of the advected substance is al ...
equation (see however
for a critique of the Black–Scholes methodology). The Black–Scholes theory can be extended to provide an analytical theory of main factors in economic activities.
Influence
Papers on econophysics have been published primarily in journals devoted to physics and statistical mechanics, rather than in leading economics journals. Some
Mainstream economists
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to ...
have generally been unimpressed by this work. Other economists, including
Mauro Gallegati
Mauro Gallegati (born 8 March 1958) is an Italian New-Keynesian economist, scholar of agent-based economics, and professor at Marche Polytechnic University in Ancona, Italy.
Biography
After having earned his PhD in economics in 1989 at Marche ...
,
Steve Keen
Steve Keen (born 28 March 1953) is an Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking ...
,
Paul Ormerod
Paul Andrew Ormerod (born 20 March 1950) is a British economist who is a partner at Volterra Partners consultancy. Additionally, he is a visiting professor at UCL Centre for Decision Making Uncertainty.
Research
Ormerod has researched complexity ...
, and Alan Kirman have shown more interest, but also criticized some trends in econophysics.
Econophysics is having some impacts on the more applied field of
quantitative finance
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets.
In general, there exist two separate branches of finance that require ...
, whose scope and aims significantly differ from those of economic theory. Various econophysicists have introduced models for price fluctuations in
physics of financial markets
Physics of financial markets is a discipline that studies financial markets as physical systems. It seeks to understand the nature of financial processes and phenomena by employing the scientific method and avoiding beliefs, unverifiable assumption ...
or original points of view on established models.
Main results
Presently, one of the main results of econophysics comprises the explanation of the
"fat tails" in the distribution of many kinds of financial data as a
universal
Universal is the adjective for universe.
Universal may also refer to:
Companies
* NBCUniversal, a media and entertainment company
** Universal Animation Studios, an American Animation studio, and a subsidiary of NBCUniversal
** Universal TV, a t ...
self-similar
scaling
Scaling may refer to:
Science and technology
Mathematics and physics
* Scaling (geometry), a linear transformation that enlarges or diminishes objects
* Scale invariance, a feature of objects or laws that do not change if scales of length, energ ...
property (i.e. scale invariant over many orders of magnitude in the data),
[The physicists noted the scaling behaviour of "fat tails" through a letter to the scientific journal '']Nature
Nature, in the broadest sense, is the physics, physical world or universe. "Nature" can refer to the phenomenon, phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. ...
'' by Rosario N. Mantegna and H. Eugene Stanley: ''Scaling behavior in the dynamics of an economic index'', Nature Vol. 376, pages 46-49 (1995) arising from the tendency of individual market competitors, or of aggregates of them, to exploit systematically and optimally the prevailing "microtrends" (e.g., rising or falling prices). These "fat tails" are not only mathematically important, because they comprise the
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
s, which may be on the one hand, very small such that one may tend to neglect them, but which - on the other hand - are not negligible at all, i.e. they can never be made exponentially tiny, but instead follow a measurable algebraically decreasing power law, for example with a ''failure probability'' of only
where ''x'' is an increasingly large variable in the tail region of the distribution considered (i.e. a price statistics with much more than 10
8 data). I.e., the events considered are not simply "outliers" but must really be taken into account and cannot be "insured away".
It appears that it also plays a role that near a change of the tendency (e.g. from falling to rising prices) there are typical "panic reactions" of the selling or buying agents with algebraically increasing bargain rapidities and volumes.
[See for example Preis, Mantegna, 2003.]
As in quantum field theory the "fat tails" can be obtained by complicated "
nonperturbative
In mathematics and physics, a non-perturbative function (mathematics), function or process is one that cannot be described by perturbation theory. An example is the function
: f(x) = e^,
which does not have a Taylor series at ''x'' = 0. Every c ...
" methods, mainly by numerical ones, since they contain the deviations from the usual
Gaussian approximations, e.g. the
Black–Scholes theory. Fat tails can, however, also be due to other phenomena, such as a random number of terms in the central-limit theorem, or any number of other, non-econophysics models. Due to the difficulty in testing such models, they have received less attention in traditional economic analysis.
See also
*
Bose–Einstein condensation (network theory) Bose–Einstein may refer to:
* Bose–Einstein condensate
** Bose–Einstein condensation (network theory)
* Bose–Einstein correlations
* Bose–Einstein statistics
In quantum statistics, Bose–Einstein statistics (B–E statistics) describe ...
*
Potential game
In game theory, a game is said to be a potential game if the incentive of all players to change their strategy can be expressed using a single global function called the potential function. The concept originated in a 1996 paper by Dov Monderer and ...
*
Complexity economics
Complexity economics is the application of complexity science to the problems of economics. It sees the economy not as a system in equilibrium, but as one in motion, perpetually constructing itself anew.Beinhocker, Eric D. The Origin of Wealth: Ev ...
*
Complex network
In the context of network theory, a complex network is a graph (network) with non-trivial topological features—features that do not occur in simple networks such as lattices or random graphs but often occur in networks representing real s ...
*
Detrended fluctuation analysis In stochastic processes, chaos theory and time series analysis, detrended fluctuation analysis (DFA) is a method for determining the statistical self-affinity of a signal. It is useful for analysing time series that appear to be long-memory process ...
*
Kinetic exchange models of markets
Kinetic exchange models are multi-agent dynamic models inspired by the statistical physics of energy distribution, which try to explain the robust and universal features of income/wealth distributions.
Understanding the distributions of income ...
*
Long-range dependency Long-range dependence (LRD), also called long memory or long-range persistence, is a phenomenon that may arise in the analysis of spatial or time series data. It relates to the rate of decay of statistical dependence of two points with increasing t ...
*
Network theory
Network theory is the study of graphs as a representation of either symmetric relations or asymmetric relations between discrete objects. In computer science and network science, network theory is a part of graph theory: a network can be defi ...
*
Network science
Network science is an academic field which studies complex networks such as telecommunication networks, computer networks, biological networks, cognitive and semantic networks, and social networks, considering distinct elements or actors repre ...
*
Thermoeconomics
Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
*
Quantum finance
Quantum finance is an interdisciplinary research field, applying theories and methods developed by quantum physicists and economists in order to solve problems in finance. It is a branch of econophysics.
Background on instrument pricing
Financ ...
*
Sznajd model
The Sznajd model or United we stand, divided we fall (USDF) model is a sociophysics model introduced in 2000 to gain fundamental understanding about opinion dynamics. The Sznajd model implements a phenomenon called social validation and thus exten ...
References
Further reading
*
Rosario N. Mantegna
Rosario () is the largest city in the central Argentine province of Santa Fe. The city is located northwest of Buenos Aires, on the west bank of the Paraná River. Rosario is the third-most populous city in the country, and is also the most po ...
,
H. Eugene Stanley
Harry Eugene Stanley (born March 28, 1941) is an American physicist and University Professor at Boston University. He has made seminal contributions to statistical physics and is one of the pioneers of interdisciplinary science. His current r ...
, ''An Introduction to Econophysics: Correlations and Complexity in Finance''
Cambridge University Press (Cambridge, UK, 1999)*Sitabhra Sinha, Arnab Chatterjee, Anirban Chakraborti,
Bikas K Chakrabarti
Bikas Kanta Chakrabarti (born 14 December 1952 in Kolkata (erstwhile Calcutta) is an Indian physicist. Since January 2018, he is emeritus professor of physics at the Saha Institute of Nuclear Physics, Kolkata, India.
Biography
Chakrabarti re ...
. ''Econophysics: An Introduction''
Wiley-VCH (2010)*
Bikas K Chakrabarti
Bikas Kanta Chakrabarti (born 14 December 1952 in Kolkata (erstwhile Calcutta) is an Indian physicist. Since January 2018, he is emeritus professor of physics at the Saha Institute of Nuclear Physics, Kolkata, India.
Biography
Chakrabarti re ...
, Anirban Chakraborti, Arnab Chatterjee, ''Econophysics and Sociophysics : Trends and Perspectives''
Wiley-VCH, Berlin (2006)*
Joseph McCauley, ''Dynamics of Markets, Econophysics and Finance''
Cambridge University Press (Cambridge, UK, 2004)*
Bertrand Roehner, ''Patterns of Speculation - A Study in Observational Econophysics''
Cambridge University Press (Cambridge, UK, 2002)*
Surya Y.,
Situngkir, H., Dahlan, R. M., Hariadi, Y., Suroso, R. (2004). ''Aplikasi Fisika dalam Analisis Keuangan (Physics Applications in Financial Analysis''. Bina Sumber Daya MIPA.
* Arnab Chatterjee, Sudhakar Yarlagadda,
Bikas K Chakrabarti
Bikas Kanta Chakrabarti (born 14 December 1952 in Kolkata (erstwhile Calcutta) is an Indian physicist. Since January 2018, he is emeritus professor of physics at the Saha Institute of Nuclear Physics, Kolkata, India.
Biography
Chakrabarti re ...
, ''Econophysics of Wealth Distributions''
Springer-Verlag Italia (Milan, 2005)*
Philip Mirowski
Philip Mirowski (born 21 August 1951 in Jackson, Michigan) is a historian and philosopher of economic thought at the University of Notre Dame. He received a PhD in Economics from the University of Michigan in 1979.
Career
In his 1989 book ''More ...
, ''More Heat than Light - Economics as Social Physics, Physics as Nature's Economics''
Cambridge University Press (Cambridge, UK, 1989)* Ubaldo Garibaldi and Enrico Scalas, ''Finitary Probabilistic Methods in Econophysics''
Cambridge University Press (Cambridge, UK, 2010)
* Emmanual Farjoun and Moshé Machover
Verso (London, 1983)
* Marcelo Byrro Ribeiro
''Income Distribution Dynamics of Economic Systems: An Econophysical Approach''Cambridge University Press (Cambridge, UK, 2020)
* Nature Physics Focus issue: Complex networks in finance March 2013 Volume 9 No 3 pp 119–128
* Mark Buchanan, ''What has econophysics ever done for us?''
*
Martin Shubik
Martin Shubik (1926-2018) was an American mathematical economist who specialized in game theory, defense analysis, and the theory of money and financial institutions. The latter was his main research interest and he coined the term "mathematical ...
and Eric Smith, ''The Guidance of an Enterprise Economy'', MIT Press
MIT Press (2016)
* Abergel, F., Aoyama, H., Chakrabarti, B.K., Chakraborti, A., Deo, N., Raina, D., Vodenska, I. (Eds.), ''Econophysics and Sociophysics: Recent Progress and Future Directions''
New Economic Windows Series, Springer (2017)
* Anatoly V. Kondratenko. ''Physical Modeling of Economic Systems. Classical and Quantum Economies.'' Novosibirsk, Nauka (Science) (2005), ; ''Probabilistic Theory of Stock Exchanges.'' Novosibirsk, Nauka (Science) (2021),
Lectures
* Economic Fluctuations and Statistical Physics: Quantifying Extremely Rare and Much Less Rare Events,
Eugene Stanley
Harry Eugene Stanley (born March 28, 1941) is an American physicist and University Professor at Boston University. He has made seminal contributions to statistical physics and is one of the pioneers of interdisciplinary science. His current resea ...
,
Videolectures.net* Applications of Statistical Physics to Understanding Complex Systems,
Eugene Stanley
Harry Eugene Stanley (born March 28, 1941) is an American physicist and University Professor at Boston University. He has made seminal contributions to statistical physics and is one of the pioneers of interdisciplinary science. His current resea ...
Videolectures.net* Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis,
Didier Sornette
Didier Sornette (born June 25, 1957 in Paris) is a French researcher studying subjects including complex systems and risk management. He is Professor on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH ...
,
Videolectures.net* Financial crises and risk management,
Didier Sornette
Didier Sornette (born June 25, 1957 in Paris) is a French researcher studying subjects including complex systems and risk management. He is Professor on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH ...
,
Videolectures.net* Bubble trouble: how physics can quantify stock-market crashes,
Tobias Preis
Tobias Preis is Professor of Behavioral Science and Finance at Warwick Business School and a fellow of the Alan Turing Institute. He is a computational social scientist focussing on measuring and predicting human behavior with online data. At Warw ...
,
Physics World Online Lecture Series
* An Elementary Humanomics Approach to Boundedly Rational Potential Games, Michael J. Campbell and
Vernon L. Smith
Vernon Lomax Smith (born January 1, 1927) is an American economist and professor of business economics and law at Chapman University. He was formerly a professor of economics at the University of Arizona, professor of economics and law at Georg ...
Harvard Growth Lab
External links
Is Inequality Inevitable?; Scientific American, November 2019When Physics Became Undisciplined (& Fathers of Econophysics): Cambridge University Thesis (2018)Econophysics Forum*
ttp://www.econophysics-colloquium.org/ Econophysics Colloquium
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Applied and interdisciplinary physics
Mathematical finance
Schools of economic thought
Statistical mechanics
Interdisciplinary subfields of economics