- Econophysics
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 orstochastic elements and nonlinear dynamics. Its application to the study of financial markets has also been termedstatistical finance referring to its roots instatistical physics .Etymology
The correct name from an etymological viewpoint should be "economophysics" since economics is a Greek word formed from "oikos", meaning home and transformed into "eco", and "nomos", meaning law and transformed into "nomy". Thus, "economophysics" would mean "home-law-physics", while "econophysics" is not meaningful from a strictly etymological viewpoint. Nevertheless, the term "econophysics" has gained currency, as opposed to "economophysics", probably because it is shorter.
History
Econophysics was started in the mid 1990s 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 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 and far-from-equilibrium situations.
The term “econophysics” was coined by
H. Eugene Stanley in the mid 1990s, to describe the large number of papers written by physicists in the problems of (stock) markets, and first appeared in a conference onstatistical physics inCalcutta in 1995 and its following publications. The inaugural meeting on Econophysics was later organised inBudapest .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 "dis"solving (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 toeconomics, one can already consider the works of
Léon Walras andVilfredo Pareto as part of it. Indeed, as shown by Ingrao and Israel,general equilibrium theory in economics is just based on the physical concept ofmechanical equilibrium .It should be noted that econophysics has nothing to do with the "physical quantities approach" to economics, advocated by Ian Steedman and others associated with
Neo-Ricardianism .Basic tools
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 withself-organizing criticality as well as other models developed forearthquake prediction . [cite book |author=Didier Sornette |title=Why Stock Markets Crash? |publisher=Princeton University Press|date= 2003 |accessdate=2008-02-19 |format= |work=] Moreover, there have been attempts to use the mathematical theory ofcomplexity andinformation theory , theories developed by many scientists among whomMurray Gell-Mann andClaude E. Shannon , respectively.Since economic phenomena are the result of the interaction among many heterogeneous 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, various other tools from physics that have so far been used with mixed success, such as
fluid dynamics ,quantum mechanics (including so-calledquantum economy ), and thepath integral formulation of statistical mechanics.There are also analogies between finance theory and
diffusion theory. For instance, the Black-Scholes equation for option pricing is a diffusion-advection equation.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 [cite journal |author=Philip Ball |title=Econophysics: Culture Crash |journal=Nature |volume=441
pages=686–688 |date=2006 |accessdate=2007-08-27 |format= |work= |doi=10.1038/441686a] . Some Heterodox economists, including Mauro Gallegati,Steve Keen andPaul 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 infinancial markets or original points of view on established models [cite book |author=Jean-Philippe Bouchaud, Marc Potters |title=Theory of Financial Risk and Derivative Pricing |publisher=Cambridge University Press|date= 2003 |accessdate=2007-08-27 |format= |work=] []References
ee also
*
Sociophysics
*Thermoeconomics
*Further reading
*
Rosario N. Mantegna ,H. Eugene Stanley , "An Introduction to Econophysics: Correlations and Complexity in Finance", [http://www.cambridge.org/uk/catalogue/catalogue.asp?isbn=0521620082 Cambridge University Press (Cambridge, 1999)]*
B. K. Chakrabarti ,A. Chakraborti ,A. Chatterjee , "Econophysics and Sociophysics : Trends and Perspectives", [http://www.wiley-vch.de/publish/en/books/bySubjectPH00/bySubSubjectPH95/3-527-40670-0/?sID=d05b Wiley-VCH, Berlin (2006)]*
Joseph McCauley , "Dynamics of Markets, Econophysics and Finance", [http://www.cambridge.org/catalogue/catalogue.asp?isbn=0521824478 Cambridge University Press (Cambridge, 2004)]*
Bertrand Roehner , "Patterns of Speculation - A Study in Observational Econophysics", [http://www.cambridge.org/catalogue/catalogue.asp?isbn=0521675731 Cambridge University Press (Cambridge, 2002)]*
A. Chatterjee ,S. Yarlagadda ,B. K. Chakrabarti , "Econophysics of Wealth Distributions", [http://www.springer.com/sgw/cda/frontpage/0,,5-165-72-52121089-0,00.html Springer-Verlag Italia (Milan, 2005)]*
Hagen Kleinert , "Path Integrals in Quantum Mechanics, Statistics, Polymer Physics, and Financial Markets", 3rd edition, [http://www.worldscibooks.com/physics/5057.html World Scientific (Singapore, 2004)] (also available online [http://www.physik.fu-berlin.de/~kleinert/b5 here] )* Emmanuel Farjoun and Moshe Machover, "Laws of Chaos; A Probabilistic Approach to Political Economy", London: Verso, 1983. [http://www.probabilisticpoliticaleconomy.net]
*
Philip Mirowski , "More Heat than Light - Economics as Social Physics, Physics as Nature's Economics", [http://www.cambridge.org/catalogue/catalogue.asp?isbn=0521426898 Cambridge University Press (Cambridge, UK, 1989)]* 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).
External links
* [http://www.jstage.jst.go.jp/article/eier/4/1/143/_pdf Yuri Yegorov, article Econo-physics: A Perspective of Matching Two Sciences, Evol. Inst. Econ. Rev. 4(1): 143–170 (2007)]
* [http://www.yaleeconomicreview.com/issues/2006_spring/financephysical.html Finance Gets Physical] - Yale Economic Review
* [http://www.unifr.ch/econophysics/ Econophysics Forum]
* [http://www.libreriauniversitaria.it/BIT/8889404752/Introduzione_alla_econofisica_in_logica_complementare.htm Introduzione alla Econofisica in logica complementare]
* [http://mpra.ub.uni-muenchen.de/6123/ Quantum economy]
* [http://www2.physics.umd.edu/~yakovenk/econophysics/ Econophysics Research in Victor Yakovenko's group]
Wikimedia Foundation. 2010.