Tuesday, August 17, 2010

Why Econophysics Will Never Work

First we have the issue of the debate about the differences between Economics and Econophysics. Then there's an argument on why Economics will never be like Physics. Now comes an argument on why Econophysics will never work!

The markets are not physical systems. They are systems based on creating an informational advantage, on gaming, on action and strategic reaction, in a space that is not structured with defined rules and possibilities. There is feedback to undo whatever is put in place, to neutralize whatever information comes in.

The natural reply of the physicist to this observation is, “Not to worry. I will build a physics-based model that includes feedback. I do that all the time”. The problem is that the feedback in the markets is designed specifically not to fit into a model, to be obscure, stealthy, coming from a direction where no one is looking. That is, the Knightian uncertainty is endogenous. You can’t build in a feedback or reactive model, because you don’t know what to model. And if you do know – by the time you know – the odds are the market has changed. That is the whole point of what makes a trader successful – he can see things in ways most others do not, anticipate in ways others cannot, and then change his behavior when he starts to see others catching on.

It will be interesting to see if the writer has actually read Christophe Schinckus AJP's paper (my guess is he hasn't), and if Schinckus has a response to this.

The question whether something works or is valid in field of studies such as economics, social science, politics, etc. is rather interesting. In the physical sciences, there's usually no ambiguity because we can either test it out, or go look for it. Something works when what it predicts can be observed and reproducible. So how does one determines if the various principles and models in economics, social science, politics, etc. are valid and do work? Simply based on previous data and observation that somehow fit into the model? But as this writer has stated, there's no model to fit because the model keeps changing due to such model-changing feedback. It appears that the whole field is more based on "intuition" than on any rational reasoning.

If that's the case, then it truly isn't a science but more of an art. So why do people who graduate with a degree in economics, social "science", or politics, sometime get a "Bachelor of Science" degree?


1 comment:

T. said...

However, there are some fascinating remarks by Yuri I. Manin, at the end of this article on something like new accounting systems inspired by physics.