innovation in finance?

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!

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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4 thoughts on “innovation in finance?

  1. In the case of the Louvre, is it that the rich gets richer or the rich needs to do nothing to stay on top and sit on a pile of money? I suppose that even if the Louvre got robbed and the only thing left was the Mona Lisa, people would still flock to it. So I am not sure how much the rest of the gallery contributes.

    If this is correct, then there is, in fact, no point for the Louvre to acquire new works of art except for the infinitesimal chance that the Mona Lisa will fall out of favour (or fall apart) and by acquiring new works, there is a chance that “the next Mona Lisa” is already in the Louvre collection.

    But for this strategy to work, the attraction of the general public to works of art need to be somewhat predictable. That is, the popularity of the work needs to be steadily increasing (or decreasing) over time otherwise the Louvre would not know which potential Mona Lisas to buy.

    But is this assumption correct? Perhaps it is in “classical art”. However it does not appear to be in the case of modern and “pop” art… Who knew a can of soup could be worth so much?

  2. I don’t think it would get nearly as many people if it were just the Mona Lisa. The thing with the Louvre is its size and setting. It is absolutely gigantic. So even though people aren’t necessarily there specifically to see the Gericaults, having more of them definitely helps with the overall ‘Louvreness’ of the experience, which I think is a big part of its attraction. It’s also a big part of why people go there multiple times… The other thing is that with the arts being a power law industry, you don’t necessarily need to know which potential Mona Lisa to buy, you can increase your chances of getting it by buying a lot and seeing what works.

  3. I must agree with you Tim, i think that it would be slightly sort of interest if it were just the Mona Lisa on display. In the huge building, i was quite surprised how big it acctually was when i visited the Louvre in the summer of last year.
    Very good point Marco, in the last paragraph of your text. Who indeed knew that a can of soup could be worth so much, (in regards to the modern art which has become so popular today)
    Do you both think that any modern art will appear in the Louvre over the next 5-10 years or so?

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