Econophysics

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Econophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic elements and nonlinear dynamics. Its application to the study of financial markets has also been termed statistical finance referring to its roots in statistical physics.

Basic tools of econophysics are probabilistic and statistical methods often taken from statistical physics.

Physics models that have been applied in economics include percolation models, chaotic models developed to study cardiac arrest, and models with self-organizing criticality developed for earthquake prediction.[citation needed] Moreover, there have been attempts to use the mathematical theory of complexity and information theory, theories developed by many scientists among whom Murray Gell-Mann and Claude E. Shannon, respectively.

Since economic phenomena are the result of the interaction among many heterogenous agents, there is an analogy with statistical mechanics, where many particles interact; but it must be taken into account that the properties of human beings and particles significantly differ. There are, however, many other fields and tools from physics that have so far been used in econophysics with mixed success, such as fluid dynamics, quantum mechanics, and the path integral formulation of statistical mechanics.

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[edit] History

Econophysics was started in the mid 1990's by several physicists working in the subfield of statistical mechanics. They decided to tackle the complex problems posed by economics, especially by financial markets. Unsatisfied with the traditional explanations of economists, 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 availability of huge amounts of financial data, starting in the 1980's. 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 and far-from-equilibrium situations.

The term “econophysics” was coined by H. E. Stanley in the mid 90's, to describe the large number of papers written by physicists in the problems of (stock) markets, and first appeared in a conference on statistical physics in Calcutta in 1995 and its following publications. The inaugural meeting on Econophysics was later organised in Budapest.

Currently, the almost regular meeting series on the topic include: the Nikkei Econophysics Research workshop and symposium, APFA, ECONOPHYS-KOLKATA, ESHIA, Econophysics Colloquium and Bonzenfreies Colloquium.

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 Farjoun and Machover (1983). Their book Laws of Chaos: A Probabilistic Approach to Political Economy proposes dissolving (their words) the transformation problem in Marx's political economy by re-conceptualising the relevant quantities as random variables.

If, on the other side, "econophysics" is taken to denote the application of physics to economics, one can already consider the works of Léon Walras and Vilfredo Pareto as part of it. Indeed, as shown by Ingrao and Israel, general equilibrium theory in economics is just based on the physical concept of mechanical equilibrium.

There are also analogies between finance theory and diffusion theory. For instance, the Black-Scholes equation for option pricing is a diffusion-advection equation.

It should be noted that econophysics has nothing to do with the so-called "physical quantities approach" to economics, advocated by Ian Steedman and others associated with so-called Neo-Ricardianism, which attempts to deduce prices, values and the rate of profit solely from information about physical inputs to the production process. This has been robustly criticised by adherents of the Temporal single-system interpretation of Marx's economics.

[edit] Impact on mainstream economics and finance

Papers on econophysics have been published primarily in journals devoted to physics and statistical mechanics, rather than in leading economics journals. Mainstream economists have generally been unimpressed by this work [1]. Some Heterodox economists, including Mauro Gallegati, Steve Keen and Paul Ormerod, have shown more interest, but also criticized trends in econophysics.

In contrast, econophysics is having some impact on the more applied field of quantitative finance, whose scope and aims significantly differ from those of economic theory. Various econophysicists have introduced models for price fluctuations in financial markets or original points of view on established models [2] [3]

[edit] References

  1. ^ Philip Ball (2006). "Econophysics: Culture Crash". Nature 441: 686-688. Retrieved on 2007-08-27. 
  2. ^ Jean-Philippe Bouchaud, Marc Potters (2003). Theory of Financial Risk and Derivative Pricing. Cambridge University Press. 
  3. ^ Enrico Scalas (2006). "The application of continuous-time random walks in finance and economics". Physica A 362: 225–239. Retrieved on 2007-08-27. 

[edit] See also

[edit] Further reading

  • Emmanuel Farjoun and Moshe Machover, Laws of Chaos; A Probabilistic Approach to Political Economy, London: Verso, 1983. [1]
  • Bruna Ingrao and Giorgio Israel, The Invisible Hand - Economic Equilibrium in the History of Science, The MIT Press (Cambridge, MA, 1990).
  • Didier Sornette, Why Stock Markets Crash: Critical Events in Complex Financial Systems, Princeton University Press (2004).
  • Mauro Gallegati, Steve Keen, Thomas Lux and Paul Ormerod, Worrying Trends in Econophysics, Physica A 370, 1-6 (2006).

[edit] External links

Retrieved from "http://en.wikipedia.org/wiki/Econophysics"
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