Doyne Farmer is pretty much a genius. And a very engaging speaker. This is a talk he gave a couple of months ago, reviewing ten years of physicists’ work on finance. I saw Farmer speak at one of the first conferences that I went to, on econophysics in Canberra – and he was absolutely captivating. He started out as a physicist, making substantial contributions to the study of chaos and complex systems, and he was one of key people in founding the Sante Fe Institute. More recently, he formed a hedge fund which uses physics-based approaches to investing. The firm has always been pretty cagey about releasing results, but by all accounts he’s done very well in this endeavour as well. In short, he’s well worth listening to.
The talk is from a conference organised by the Perimeter Institute called The Economic Manhatten Project, in which a group of scientists discuss whether or not science might be able to make a significant contribution to the study of finance. The website includes links to talks by Nassim Nicholas Taleb and Nouriel Roubini, two of the few people studying finance to accurately predict the onset of the economic crisis, along with a great panel of scientists including Farmer.
I find the econophysics approach to finance interesting for a few reasons. One is that it is a useful example of how interdisciplinary research can by useful. While many of the economists involved with econophysics think that it still needs to beef up the ‘econo’ part of the research, there have still been some useful results derived from this approach. In particular, the work on power-law scaling in economic systems is based on reasonably robust results, as is that on the fat-tailed nature of financial returns (e.g. the work of Benoit Mandelbrot and Taleb). The approach is fairly innovative. And not just a bit ironic, in that much of the orthodox view of the economy is modelled on early 20th century physics – given that, you’d expect something called ‘econophysics’ to maybe fit a bit better with the orthodox models. In any case, while I’m still skeptical about the ability of science to transform economics, I think this is a very intriguing area of research, and worth looking into.
I saw a great example of how economic power laws are perpetuated this week at The Louvre. The Louvre pulls in over 20,000 people per day. Why? In large part because it has so many famous works, like the Mona Lisa (above) and Venus de Milo. Even though a lot of those 20,000 people are getting in for free or for something less than the standard 9 euro fee, the Louvre is generating a crazy amount of money each day. Which means that they are much more capable than other museums to go out and acquire works that fit there, which makes the collection even more attractive, which pulls even more people in, and so on. That, in a nutshell, is how we get power-law distributions – when there is some kind of rich-get-richer feedback loop in place. Overall, though, I enjoyed seeing the Louvre as a museum too, not just as a nice example of econophysics in action!