Thursday, September 22, 2005

Econophysics

Not too long ago I tried to make the argument that physical principles may be useful in the analysis of human behavior, as well as societal and cultural phenomena. Well-known physics concepts such as inertia, momentum, force and impulse seem to have analogs in the social and behavioral sciences. There are other reasons that suggest a deeper connection between the physical realm and social realm, as seen in the fields of network theory and complexity. Common mathematical relationships and structures have been discovered over a remarkable range of systems, from the Internet to social networks to business networks, and even in food webs and metabolic chemical networks.

Further evidence of deep links between physical systems and economic models have also been discovered. In the September issue of Physics Today, an article entitled “Is Economics the Next Physical Science?” is featured. Yale professor Martin Shubik and Santa Fe Institute researchers Doyne Farmer and Eric Smith have been working on econophysics, where well-established mathematical methods used by physicists over many years have been used to establish better dynamical economic models. For example, the study of chaotic systems in physical systems as economic analogs in the sense that an economic market can follow very different paths if there are relatively minor changes in the initial conditions of the market. The mathematics used in this type of analysis follows techniques used in physics. The observation of numerous power laws in physical systems and networks (i.e. scale-free networks) over a number of years has led to more refined analysis tools, which are now being used to understand newly discovered power laws in economic theory. These power laws include analysis of price movement in stocks over short periods of time as well as income distributions in capitalistic economies. Production and distribution networks of large corporations have been shown to follow characteristic power laws associated with scale-free networks. What may seem like random trading patterns in the stock market that lead to market swings and patterns may be analogous to random motions of many-body systems that show emergent behavior. Statistical mechanics relationships are being used to study various types of economic models (since probability distribution functions rule).

While standard physics analyses may provide some leads into the deeper understanding of economics, there is still the difficulty of including human beings into the mix. It is not clear that we will be able to model human responses that are based not on logic or deterministic physical laws, but rather raw emotion and the possibility of random response decisions to evolving market conditions that are built around strategies that may or may not be well thought out. We are not yet at the point of creating a Foundation like Harry Seldon did in Isaac Asimov’s classic ‘Foundation Trilogy,’ but this is a fascinating new way of thinking about the possible universality of physical and social sciences.

7 comments:

Sextus Empiricus said...

Let's try replacing "deep connections" with "superficial connections" and reminding ourselves of the fallacious misuse of analogy. Let's not force things into boxes just because we see similarities.

vonny said...

sextus - You are right about 'superficial' connections in terms of the very different reality of a physical/mechanical system (deterministic) compared to a social/human system (nondeterministic). When I mention 'deep' connections, however, this is in reference to the mathematical descritptions of such systems. The curious thing about the work being done in complexity theory is that the same mathematics keep appearing over and over in entirely different contexts...enough to lead many scientists to suggest the possibility there is more than coincidence at work. This is a relatively new way of thinking and a relatively new area of research, so no one knows where it will lead.

If the fundamental mathematical relationships between seemingly different and unconnected systems have the same structure, there are numerous examples in the history of physics where new insight and understanding have been attained...it may mean some sort of symmetry principle, such as what is seen in electromagnetic theory or even the connection between mechanical systems with certain electronic circuits. Some times the mathematical similarities we see have allowed us to place things in the same box, so it is worth taking a look to see where all this takes us.

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mark said...

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Sextus Empiricus said...

ok. granted if the box is large enough indeed we can fit it all in. end metaphor. but a few last comments.

One, I think many scientists have long suspected or at least had a firm belief in the unification of physics with the social sciences (I think more generally you mean SPECIAL sciences)–that the laws of physics (whatever form they may take) underly the special sciences, that the special sciences supervene on the physical. I take it that most scientists qua scientists are physicalists or at least believe in supervenience, and thus, contra Foder, have a firm belief that somehow what happens at a macro level in the special sciences originates purely from physics (some physicists/philosophers–ahem–Albert and Loewer, have purported to prove this fact: that anything we wish to describe in the language of a particular special science can just as well be described in the language of physics.) So in that sense, yes, it's all in the same box. Physicalists more or less believe that there is one and only one box.

But of course, this is not what you mean by putting things in the same box, and, perhaps it's not even what you mean by the universality of the physical and special sciences. But, nevertheless, let's call things what they are and not what they're not. Economics is economics and physics is physics. And then there's mathematical models. Now, there just seems to be some fallacious reasoning going on here if we can then say that there is a connection between physics and economics through the argument as it is layed out. Let me see if I get it: we observe in both physics and economics emergent behavior. Lo: before economics really got established we discovered mathematical methods that modelled emergent behavior pretty well in physics. Now we see emergent behavior in economics and is it a surprise that the mathematical model for emergent behavior is too different? Further, I would doubt that the exact form of the modelling in economics is equivalent to that of physics. So here is the logic I am seeing: the way we model emergent behavior in both economics and physics takes approximately the same form, therefore, there is a deep connection between physics and economics–they're not so different after all. NO. Through that logic there is no connection between physics and economics. There is only a connection between a particular form of mathematical modelling and emergent behavior.

But I think the entire point that you are trying to assert is none of this: simply that the methods we use in physics can, in a practical manner, be employed in the special sciences. Agreed. But is this a deep connection? Or a connection at all? Or just a coincidence due to the sequence of history? If history had been different might we be putting the methods of economics to practical use in physics? So the gains we have made in developing the tools we use in physics are HELPFUL to the special sciences, like economics, but don't imply any deep connection. The only connection, if any, comes from the belief that the special sciences–economics for example–supervene on the physical.

And so this is why, implicitly, in my original post, I am asking the reader to be vigilant. Do not fall down into the slippery slope where everything is the same. Do not take it too far. Only use this "connection" to the extent that it is practical and never lose sight of the differences and the distinctions.

Bob Klapetzky said...

Econophysics is real. Dr. Shubik’s work with Per Bak is very significant:
“Price Variations in a Stock Market with Many Agents”, and “The Dynamics of Money”

The essence of Econophysics is contained within Per Bak and Maya Paczuski’s:
“Complexity, contingency, and criticality” 1994
Deterministic views could not explain stock price changes having fat tails deviating from the Gaussian distribution. Benoit Mandelbrot: MIT
“The variation of certain speculative prices”, and “Fractals and Scaling in Finance”
Those fat tails correspond to avalanches of volatility that could not be explained by Fundamental economics. Robert Shiller; Yale
“Market Volatility”
Quoting from Complexity, Contingency, and Criticality: Large dynamical systems tend “to organize themselves into a critical state, with avalanches” of all sizes. “Biology, history, and economics can be viewed as dynamical systems”. “In the critical state, events which otherwise be uncoupled become correlated”. “General Equilibrium Theory (Nash), has not been explicitly formulated for biology”
There are countless references for hysteretic behavior of large groups within the social sciences.
The out of hand dismissals regarding econophysics remind me of what my father told me, (tongue in cheek) about numbers and statistics when we lived in Los Alamos. Go to the kitchen, put one hand on the hot stove, and one hand in the freezer. Now, statistically, on average, you should be comfortable, because of the average temperature between the two. Of course there are assumptions to this theory. (1) That everybody has long arms. (2) A teenager would actually listen to a parent. Kind of like the underlying assumptions the efficient market theorists have.
Interestingly, and recently a physicist has explained human heavy tailed behavior albeit not in financial markets. Albert Laszlo Barbaras; Notre Dame.
“The origin of bursts and heavy tails in human dynamics”

Sincerely,
Bob Klapetzky

Sextus Empiricus said...

I'm sorry if somewhere implicitly in what I said I claimed that "econophysics" is not real nor that it's results are insignificant. There is obviously useful analysis going on and this is not an attack on cross-diciplanary study. This is more a warning about the metaphysical slippery slope we risk slipping down–that can confuse even the reasonably intelligent. Just because two phenomena possess similar qualities or methods of explanation does not endow them with them same ontological status, nor does it assert that the phenomena are "the same." But then again, if you get general enough, "the same" can be quite broad. But let me be emphatic in responding to your defensiveness: I am by no means dismissing econophysics. If that's what you think I've said, you've missed my entire point. And my point, in the scientific enterprise, has little value. Econophysics from all I can tell does seem valuable. My point is more pressing and would cause more upset stomachs in the cafeteria of the ivory tower. Or philosophers locked inside their windowless offices.

But again, (repetition repetition repetition), a concrete example to pull from one of vonny's observations (which I also find hard to believe has not been thought of before by many a person) that there exists an "inertia of being" that much like inertia/mass in physics requires force (forceful arguments) to move. That we resist change just like massive objectives. And here's my point: wow, there are similarities here, but: intertia of being (or whatever you'd like to call it) is NOT the same as the inertia of a physical object, even though they share so many "properties" in common. So you see: I am not attacking the validity of physics nor even the phenomenology of being, I am just saying let's not call things the same when their not. Nonetheless, we can make use of the similarities if its useful. This is just semantics. Useless. Let the march of scientific inquiry drudge on!