Econophysics

20 Aug, 2018 at 15:15 | Posted in Economics | 1 Comment

Unfortunately, nothing is more dangerous than dogmas donned with scientific feathers. The current crisis might offer an excellent occasion for a paradigm
change, previously called for by prominent economists like John Maynard Keynes, Alan Kirman and Steve Keen. They have forcefully highlighted the shortcomings
and contradictions of the classical economic theory, but progress has been slow. The task looks so formidable that some economists argue that it is better to stick with the implausible but well-corseted theory of perfectly rational agents than to venture into modelling the infinite number of ways agents can be irrational.

miracle_cartoonPhysicists, however, feel uncomfortable with theories not borne out by (or even blatantly incompatible with) empirical data. But could the methodology of physics really contribute to the much-awaited paradigm shift in economics? …

Econophysics is in fact a misnomer, since most of its scope concerns financial markets. To some economists, finance is a relatively minor subfield and any contribution, even the most significant, can only have a limited impact on economics science at large. I personally strongly disagree with this viewpoint: recent events confirm that hiccups in the financial markets can cripple the entire economy.

From a more conceptual point of view, financial markets are an ideal laboratory for testing several fundamental concepts of economics. Are prices really such that supply matches demand? Are price moves primarily due to news? (The answer to both these questions seem to be clear “no”) … As I will try to illustrate, the very choice of the relevant questions, which ultimately leads to a deeper understanding of the data, is often sheer serendipity: more of an art than a science. That intuition, it seems to me, is well nurtured by an education in the natural sciences, where the emphasis is on mechanisms and analogies, rather than on axioms and theorem proving.

Jean-Philippe Bouchaud

1 Comment

  1. Good quote. I would only quibble that if the understanding of ‘rationality’ is wrong then some apparent biases might be ‘extra-rational’ in the sense that bias is good for you!


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