Have You Ever Heard Econophysics?

Econophysics :

When you hear the word 'econophysics' for the first time it you may be forgiven for thinking that it is some branch of physics concerned with energy efficiency, or indeed, anything else concerned with economising. Econophysics is actually nothing more than the composition of the words 'economics' and 'physics', which is now even more confusing. What does economics have to do with physics?

The link between the two completely separate disciplines lies within the characteristic behaviour exhibited by financial markets similar to other known physical systems. In particular, financial markets, like systems encountered in non-equilibrium physics, are open systems with external information and new investors coming in all the time, rather like energy/particle inputs. Many of the problems faced in developing a mathematical frame work for both markets and non-equilibrium systems are similar. For example, both financial markets and systems that are in a Self-Organised Critical (SOC) state have no characteristic scale (scale invariance), thus, many say markets are also part of and SOC system. Econophysics is mainly concerned with treating the whole market (and agents) like another physical system, unlike financial mathematics which is concerned with a stochastic description of a specific options/bonds/interest rates using analysis of past data. The aim of econophysics is to understand the universal behaviours of a market.

By making quantitative studies of empirical financial data, and then, applying the existing knowledge fertile, ground has been found for a new field of research in recent years. By creating minority games and SOC models of markets and agents alike, many have succeeded to reproduce certain properties of the market dynamics with computer simulations.

Written by Alessio Farhadi