Now I knew there were physicist working on Wall Street, but Econophysics... really? I was similarly amazed to find the Hyperion International Journal of Econophysics & New Economy and that in June this year the International Conference on Econophysics (ICE) was convened (strangely one website indicates that it was held in Greece and another in China, perhaps they didn’t think Greece’s current economic state made for a good backdrop.)
I stumbled upon the term while investigating the applications of random walks in economics, mentioned briefly in section 4.3.2 (within which Nelson flatteringly calls investors independent biological subunits.) Initially I was sceptical that analysing economics from a physics perspective could be very useful, but after reading some discussion papers on the topic I think it probably is.
The first attempts to develop econophysics models focused on trying to find direct analogues for fundamental physical concepts such as the thermodynamic laws, but these attempts failed miserably. However, when the tools physics has developed (or borrowed from pure mathematics) to understand phenomenon such as noise, chaos, non-equilibrium dynamics etc. are used with caution, they seem to be very useful. The difficulty is of course that “there are no universal rules” in the behaviour of markets; any apparent stability can only be metastability. A point nicely illustrated by David Viniar, Goldman’s chief financial officer: “We are seeing things that were 25-standard deviation events, several days in a row.” (Note that 25-sigma events are only supposed to happen about once every 100,000 years.) Mr Viniar, I suspect your models may not be entirely accurate...
The most convincing argument I came across for the legitimacy of econophysics was made by Doyne Farmer: “The typical view among social scientists is that one should focus on documenting and explaining differences. Physicists have jumped in and said, ‘Before we do that, let’s spend some energy on first trying to understand if there is any way in which everything is the same’.” An argument which I think has direct relevance to biophysics.
There are many mathematical connections. Apparently there was a lot of activity many years back when people realised that the Black-Scholes(sp?) equation for the spread of options prices was just the diffusion equation. This prompted a lot of physicists to jump in (some of whom actually made money). For example, Nigel Goldenfeld was head of the econophysics discipline at Illinois when I was there; he brought up a lot of connections during his stat. mech. course.
ReplyDeleteI actually had a college friend that took a route from polymer physical chemistry to become a wall street trader, and this worked for a while. Unfortunately, most of what he was trading were bundled mortgage securities. The rest is history...