Diversity keeps you warm. At least that is true while you're having a shower in youth hostels. If you like, this sums up the research project just published by scientists from the Universities of Fribourg and Bonn. Their result is not as trivial as it sounds. Ultimately it shows that heterogeneity provides stability, whether this is in a shower, in power grids or even on the stock market.
Having a shower in a youth hostel can be risky when there is not enough hot water for everybody. If only one visitor turns up the hot tap during the early morning shower, everyone else is threatened by an icy gush of water. This unwanted form of hydrotherapy is particularly likely to happen when all the shower taps have the same possible settings, in other words if cold and hot water can be adjusted to exactly the same amount in all showers. But if the water taps in each shower have their individual quirks, the risk of extreme fluctuations is less.
At least that is what the Bonn economist Christina Matzke and her colleague Damien Challet, a physicist at the University of Fribourg, say. They modelled the temperature profile of showers in a youth hostel on the computer. 'All in all, heterogeneous taps offer advantages – they prevent the average shower temperature of all guests from suddenly dropping or rising,' Christina Matzke explains. 'From the perspective of the individual they also have disadvantages, as it's more difficult for each person to set the right temperature.'
The problem sounds comical, but in principle it can be applied to all situations where people compete for a scarce resource, whether this is hot water, electricity or equities. One thing is always true, the more individualistic the behaviour of those involved in the market is, the more stable the whole system becomes. Put simply, the only reason why our electricity grid does not break down is that not all the inhabitants of Germany switch on the tumble drier at the same time. And if all shareholders made strictly rational decisions on their investments, there would probably be a lot more turbulence on the stock market.
The result is also significant from a theoretical point of view. 'We show what different results economic models can produce, depending on whether they are based on homogeneous or heterogeneous behaviour,' Christina Matzke emphasises. Accordingly, it is important to account for differences in individual behaviour when making forecasts. Although it sounds obvious, economists long ignored this insight. For decades their models were dominated by 'homo economicus', an imaginary standardised market investor who always made rational decisions rather than deciding according to individual criteria.
You can get this paper (pdf) from the Bonn Graduate School of Economics.
You might also be interested in the Econophysics Hub, here at MoneyScience.
A Profile of Professor Alexander Lipton-Lifschitz, former New York head of foreign exchange product development, Deutsche Bank.
By Gary Stix. Financial engineering can lessen exposure to the perils of running a multibillion-dollar business or a small household. But mathematical models used by this discipline may present a new set of hazards.
Emanuel Derman in the SLAC Colloquium Series: Quantitative financial modeling seems to employ both the language and techniques of physics, but how similar are the two disciplines in theory and practice? This talk discusses the move from physics to finance, the nature of financial modeling and its deceptive similarity with theoretical physics, what it's like to work in the financial arena, and some of the open problems of interest.
Be the first to rate this link:
This blog is dedicated to exploring the application of quantitative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences.
An international and interdisciplinary conversation about human organizations as complex systems and the implications of complexity science for those organizations. With a unique format blending the integrity of academic inquiry and the impact of business practice, E:CO integrates multiple perspectives in management theory, research, practice and education.
Be the first to rate this link:
Advances in Complex Systems is a quarterly journal that aims to provide a unique medium of communication for multidisciplinary approaches, either empirical or theoretical, to the study of complex systems. Its goals is to promote cross-fertilization of ideas among all the scientific disciplines having to deal with their own complex systems, including biology, physics, engineering, economics, cognitive science and the social sciences.
Be the first to rate this link:
An international and interdisciplinary conversation about human organizations as complex systems and the implications of complexity science for those organizations. With a unique format blending the integrity of academic inquiry and the impact of business practice.
Be the first to rate this link:
Physica A publishes research in the field of statistical mechanics and its applications. Statistical mechanics sets out to explain the behaviour of macroscopic systems by studying the statistical properties of their microscopic constituents. Applications of the techniques of statistical mechanics are widespread, and include applications to physical systems such as solids, liquids and gases; applications to chemical and biological systems (colloids, interfaces, complex fluids, polymers and biopolymers, cell physics); and other interdisciplinary applications to for instance biological, economical and sociological systems.
This site is developed by a research group interested in modelling processes in applied sciences (physics, engineering, finance, biology, ...) via mathematical methods based on fractional calculus. The name fracalmo originates from fractional calculus modelling.
Deep thoughts about physics, statistics and all that.
Be the first to rate this link:
Nassim Taleb writes: Outside the Platonic world of financial models, assuming the underlying distribution is a scalable "power law", we are unable to find a consequential difference between finite and infinite variance models - a central distinction emphasized in the econophysics literature and the financial economics tradition.
Be the first to rate this link:
In this interview Akash Bandyopadhyay explains how he made the transition from Natural Science to Financial Economics and become a faculty member atone of the world's top business schools in a short span of only five years.
Be the first to rate this link:
