Using Physics to Explain Economic Phenomenon: Econophysics

Ever since my chance-and-curiosity-driven discovery of econophysics, I have become nothing short of fascinated with this highly applicable yet incredibly shrouded field of study. Indeed, besides a handful of brave physicists, few academics know anything about econophysics, and most economists tend to dismiss it as voodoo nonsense. 

Econophysics gets its name from the mergence of economics and physics, and is a novel way to dissect complex and dynamic economic phenomenon via statistical physics. Econophysics is a multidisciplinary approach that enables us to answer burning questions like when the next recession might occur, or even exploring societal inequities between classes. 

VIDEO: What Causes Inequality? An Econophysics Approach

A slide from Victor Yakovenko’s lecture, “Statistical Mechanics of Money, Income, and Wealth”

To better define econophysics, I have extracted the following excerpt from ScienceDirect:

A link between the two completely separate disciplines that lies within the characteristic behavior exhibited by financial markets similar to other known physical systems. The aim of econophysics is to describe and realize models of the universal behaviors of a market, as an open system, where new external information is mixed with new investments, rather like energy/particle inputs in quantum physics.

A Google search of econophysics will inevitably result in the name “Didier Sornette,” a brilliant Swedish academic who has made immense contributions to the field. For the amount of research that this one mind has contributed to financial analysis (over 500 papers and 7 books), one would assume it to be the work of a prolific economist. However, Sornette was first a physicist and geophysicist (or earthquake scientist) long before he was ever handed a copy of Econ 101. It was through his studies of seismology and earthquakes that Sornette realized the equivalent math could be repurposed for the field of economics to predict recessions.

VIDEO: How we can predict the next financial crisis

Econophysics works because a simple decomposition of the stock market reveals a dynamic system that is more or less equivalent to any other dynamic system, including biological and physical systems (hence the concept of universality). The purpose of this article isn’t to make you a one-stop expert in all things econophysics. Rather, my objective is to begin the popularization of this largely dismissed yet incredible evidence-based field, and inspire individuals to understand and dissect the powerful reality of universality. We tend to preach the message that “everything is connected.” Econophysics is one step in the right direction to substantiating this sentiment. 

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