The Surprising Things About the Economy that “Econophysics” is Revealing

Hybrid disciplines are not only a labor field full of opportunities for the most visionary, but they are also an exciting breeding ground from which new and disruptive theories emerge, revolutionizing the way we conceive our world.

One of these fields of innovation and cutting-edge research is called “Econophysics.” And the changes that it is bringing us can radically alter the way we approach the economy today.

Econophysics” as a hybrid discipline

The concept of econophysics was born of the idea of applying theories and methods originally developed by physicists to solve problems of the economy.

Econophysics’ official birth dates back to the middle of the 90s, and its beginnings were strongly influenced and related to statistics, and more specifically to statistical mechanics. Statistical mechanics aims to be a unified theory that saves the classic gap between classical mechanics and quantum mechanics, two worlds that coexist before our eyes, but have always needed differentiated theoretical models.

There have been studies and theories based on econophysics for many decades. In fact, in the 60s, the father of fractal geometry, Benoit Mandelbrot, had already detected the existence of patterns of distributions( fat tailed distributions) in the economy. Today, they are used in the probabilistic evaluation of risks and potential returns of an investment.Nobel Prize winner Eugene Fama has also written about it in his first research article.

The origins of econophysics are why scientists do not understand economics

A group of physicists started econophysics.They were unhappy with the traditional explanations and approaches of economists, who complained that they often prioritize dmore simplified approaches to facilitate theoretical models that are resolvable.The new econophysicists applied methods of physics to try to fit the models with the available economic data sets, and thus be able to explain phenomena of the economy at a more general level.

There are many more technical and scientific models that are being applied as well. Another example is the theory of the random matrix of mathematical physics. This theory, based on the theory of probability, allows one to identify the “noise” in the matrices that correlate financial data.That is to say, this “noise” can be eliminated, in order to allow easier discrimination of basic trends, which are truly significant in the face of medium and long-term predictions.

Other interesting contributions to econophysics come from the fields of classical mechanics or quantum mechanics, which illuminate new and disruptive concepts such as classical econophysics or quantum economics. And we can not fail to emphasize that the surprising and violent economic-financial events, such as the black Monday crash of 1987, the puncture of the .com bubble, or the subprime crisis are unpredictable and not modelable.

In any case, remember that the future (also that of the markets) always has an important unpredictable component. No one can guess the future infallibly, nor can econophysics. Assuming this point as immutable truth, you can already correctly assess the tangible contributions that econophysics has brought to our world.

The results derived from econophysics are promising

Theoretical models aside, some of the results that econophysics has shown are promising. For example, there is the Index of Economic Complexity illuminated by the MIT physicist César A. Hidalgo and Harvard economist Ricardo Hausman. It is a holistic index, which tries to see the systems as a whole, rather than as an aggregation of different parts of a lower order.

These two academics created this new ECI (Economic Complexity Index), which has the undoubted honor of being able to predict economic growth with estimates much more adjusted to subsequent economic reality, leaving far behind the traditional predictions of the World Bank itself.

Another exciting field in which econophysics is bearing its sweetest fruits is in the models that explain the distribution of inequality. As published by The New York Times, the physicist from the University of Maryland, Víctor Yakovenko, maintains that economic inequality follows patterns of distribution that are unalterable and subject to certain predefined parameters.

According to the NYT, income and wealth may be behaving suspiciously in the same way that atoms do, following different probabilistic distributions that can not only explain their current distribution, but help to understand their mechanisms in the training processes and distribution.

Thus, the dispersion of income below the 97th percentile follows a typically exponential distribution, replicating the distribution of the energy of the atoms in the gases that are in thermal equilibrium. On the other hand, the dispersion of income of the richest 3% follows what’s called “potential law,” which establishes a very long data distribution queue, which would explain how there are huge gaps that separatebillionaires, such as Carlos Slim, from one another.

There are also financial fields with very interesting econophysical conclusions

As you can read in Medium, the fact is that you can not ignore that there are many reactions and market trends that can be explained by applying econophysics.

A good example of this is how it has been detected that one of the key factors in the formation of market dynamics is the diversity of investment strategies of market agents. Markets tend to function without major problems when there are many different strategies being adopted, but nonetheless tend to show harmful behavior when most agents use similar strategies to enter into a few matching values.

This conclusion makes a lot of sense, and also coincides with one of the axioms that we have always stressed: technical analysis, indicators, trends… this is all well and goodBut what I have always stressed is that they can not be applied at the same time across all markets.

We must assume that the markets can not make us all rich at once: when they do it is something totally illusory and transitory, and it is because a bubble has formed that ultimately will end up leaving many more victims than new millionaires.

Econophysics yes, but not as a panacea for all economic ills

I would like to highlight some of the conclusions we have reached. First of all, you should know that not everything is 100% modelable – systems of extreme complexity such as economics pose a challenge for which perhaps (there is still no solution).

Second, remember that the future can always be unpredictable.

Third, econophysics can not make us all rich at the same time, but it can make the living conditions of the citizens of the future look rich as a whole in comparison to everyone in the present.

In conclusion, I believe that economics is science, though many argue that economics is anything but science. In a certain way, they do not lack reason, but they can not deny that with econophysics, the economy is now more science than ever before in its history.

Do not close yourself to new ideas if they are well-founded, even if they question a large part of what you thought up to now. Only with innovation and new approaches can we design new economic policies with an effectiveness never before seen. Welcome to the era of economic science.

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