Does Economics need Physics in order to Create Models?

 

All economies and markets are set in motion with relativity and opposite forces that set them towards the unitary goal of all entrepreneurs – Profit. In a market the common goal doesn’t seem common. A unit voting structure will not work as a unit to give aggregated common results. Hence forms the basis of the theorization of economic theories, the theorization which is its own predicament.

The DSGE (Dynamic Stochastic General Equilibrium) Models fail to accurately interpret and consider the thorough non-linear dynamics that are inherent and give counter results to the implied results of DSGE Models. Incorporation of all variables, externalities and thus satisfying the Lucas Critique seems to be the only muddle DSGE has cleared. The failure in forecasting of the many recessions makes DSGE Modeling and Macro Economic Modeling in the larger picture, obsolete and incorrect. On the lighter side, DSGE Models may have worked if political affiliations or corporate friendliness were taken as variables.

The failure of one opens the doors to others. Economics today needs a scientific understanding of working models, than statistical models. Recent publications cite to an interesting process where Pearson’s Product-Moment Correlation Co-Efficient is inefficient in computing flow variables like financial stocks. The longer time series distribution provides inaccurate correlation estimates against the common practice of stock brokers and actuaries. Stark instabilities by using statistical models in economics, while the same statistical models are excellently used to produce accurate results in Physics or Biostatistics have only pointed the fingers back at the economists.

Economists should be looking at the way physicists work. The premise of all economic theories can be summed at as an assumption- finding approach. Hence we see no finding, no transitory phases and no result that is concrete enough in order to draw practically viable solutions but each theory in economics only seems like a feed for another economist to debunk. Through all the debunking of one another or introducing models for curriculum understanding, the universality of application seems a far off fling after 250 years of the evolution of economics.

Ever since the name was coined in Kolkata two decades ago, the use of Econophysics to predict and model the financial system has not culled into a force . Econophysics is the results of research in application of the theories in Physics to Economics. The Macro-Economic system is a system where a large group of loosely connected entities interact with each other, interacting in collision and interacting in unison. To evaluate the outcomes of such a large number of entities the Laws of Thermodynamics can be used to obtain satisfactory predictive results. Similarities and proofs are there to research.

There is a surprising commonality between the Adiabatic Equations and Money Flow Equations and the random matrix techniques to evaluate the change in arrays of distinct financial data. Econophysics is theoretically equipped to deal with the concepts of externalities, interpret polynomial distributions and adjust the lags in longer period time series distributions. This can be the elixir to the unbalanced financial markets and optimize portfolio selections. Econophysics can thus establish definitive and undoubtedly genius culmination of two distinct fields therefore finding a new meaning to the words like “quantum”, limiting the needs to find “approximation” or even ending the jinx of equilibrium vs equilibria.

©2013-2014, The Idea Bucket. Written by A.S. Prashanth (Mikky).

 

 

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3 Comments

  1. Modeling the market is like simultaneously modeling all seven billion water molecules in a beaker while heating them. The sheer volume of information would require a computer of unimaginable power and it would require that every economic decision on earth be logged with the computer.

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    1. You may model “seven billion water molecules in a beaker while heating them”. The relevant branch of physics is called “classic thermodynamics” and it’s an almost 300 year old idea. To learn about certain aspect of this phenomenon, this may not be enough and then one needs to resort to other well established branches of physics like “statistical physics” or perhaps to even less established fields like “thermohydrodynamics”.

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