Econophysicists

Given recent discussions here, and given that I can't even agree with the claim in the opening sentence that "Predicting financial markets is more of a gamble than traditional economists will admit," I think I'll just present this without further comment:

It's a gamble: UH econophysicists meld science, economics, by Joseph McCauley, Eurekalert: Predicting financial markets is more of a gamble than traditional economists will admit, and making sense of such numbers is more like trying to decipher noise blasting from a loudspeaker, says one University of Houston econophysicist, who leads one of the world's most preeminent groups of its kind.

Joseph McCauley, a UH physics professor with a dual appointment as a senior fellow in the economics department at the National University of Ireland, Galway, leads the UH group. The team's main discovery, backed up by empirically based modeling of market dynamics, is that financial markets are unstable. Associate Professor Kevin Bassler, Professor Gemunu Gunaratne and Professor George Reiter – all of the physics department – round out the UH econophysics group that applies their newly discovered models and methods to solve problems in economics.

McCauley will be the only invited physicist to speak in an economic workshop – "Financial fragility and technological progress with heterogeneous agents and social interactions" – Dec. 14-15 in Trento, Italy. He will weigh in with his perspective on the subjects of macroeconomics (the overall aspects and workings of a national economy) and microfoundations (in which the macroeconomic model is built up from the actions of individual agents).

McCauley and his colleagues contend that a market is made up of "noise" in the strictest mathematical sense of a random and persistent disturbance that obscures clarity. Using techniques developed in physics such as entropy – the study of randomness or disorder – challenges the common belief in economics that market statistics have structure and tend toward equilibrium.

"Traditional economics is based far less on empirical studies than its econophysics counterpart," McCauley said. "For instance, deregulation is an example of economists relying on a belief and not hard analyses. Also, histograms – a traditional economist's tool – do not represent normal distributions. Even Nobel Prize-winning economists approach market statistics with a wrong mathematical model already in mind, and the model always fails. Physics helps us understand the information that goes into these models better."

Gunaratne uses the analogy of a pollen grain being heated up in water to illustrate how the randomness of motion is analogous to what happens in a market. Just as a physicist observes the increase and decrease in the temperature of water as variables that agitate or slow the motion of a pollen grain in an experiment, an econophysicist applies these sorts of principles to other such variables in a financial market. In trying to understand this randomness, he said, it is apparent that markets are not bell-shaped curves with symmetry and normal distribution. Instead, financial markets are more like radio static, but with non-bell-shaped noise, with stock prices continually moving up and down in ways that puzzle standard statisticians.

Focusing primarily on the foreign exchange (FX), a 24-hour-a-day traded world market, McCauley, Gunaratne and Bassler say studying the FX yields better information as the largest, most liquid market that dominates other markets because of its sheer volume and volatility. They model both the market dynamics and option pricing by deducing correct models from real market statistics, which is the opposite of what economists do. Broadening the UH econophysics program, their colleague Reiter focuses more on models of the economy, including production and consumption with results that show how individuals' preferences adapt to economic circumstances, a part of reality he said is missing from standard economic models.

"Whatever the specific focus, this relatively young subfield that merges the two disciplines of physics and economics helps us move toward applicable models for use in analyzing markets and economies more effectively and accurately," Bassler said.

Having established one of only a handful of Ph.D. programs across the globe with a specialization in econophysics, UH's physics department in the College of Natural Sciences and Mathematics has recognized a need for educating physics students in this area since the modeling, analytical and computational skills of physicists are exactly the skills needed to study financial markets and the dynamics of the economy in a practical way.

"We realize this is still met with skepticism in more traditional arenas, but we're convinced econophysics will play the leading role as world economies become increasingly more complex and harder to decipher, and the misleading notion of ‘self-regulating markets' will be slaughtered," McCauley said. "To the extent possible in the social realm, we want to create economic theory as science and avoid the ‘mathematized ideology' – as I've coined it – of mainstream economics that is currently the ideology used in the unregulated free market."

Okay, one comment besides the fact that economics is not the stock market. If the econophysicists have something better to offer, great. I'm listening. But until they do have something better, a little less criticism of the models we use would be appreciated (e.g. "Nobel Prize-winning economists approach market statistics with a wrong mathematical model already in mind, and the model always fails. Physics helps us understand..."). Because when your "main discovery, backed up by empirically based modeling of market dynamics, is that financial markets are unstable," I'm not sure that a condescending attitude has yet been earned.

Comments

[evagrius]

Well, could you give a refutation of their argument?

[Dave Schuler]

The physicist Ernest Rutherford is quoted as saying All science is either physics or stamp collecting. I see the attitude hasn't changed much in nearly 100 years.

[Bruce Hall]

"I believe the task of the economist is far more difficult that that of a physicist. A physicist can build upon verified observations and testing to improve knowledge. An economist must deal with human behavior and institutions that are constantly changing and where the rules of interaction are, at best, chaotic. What appears reasonable and verifiable based on a small slice of human interaction considered to be economic in nature may well be just a "special case" situation that can be explained any number of ways... not just by the dynamics of trading or consuming."

http://hallofrecord.blogspot.com/2006/11/no-respect.html

[Idaho_Spud]

Physicists (in general) are a bit arrogant, and this is quite understandable. They've developed theories, mathematics, and predictions that validate todays understanding of some of the universe' most fundamental mysteries.

Witness the crossover success of Luis Alvarez at explaining a cosmic impact to the mystery of the dinosaur extinction - something that had paleontologists mystified for a century or more. Needless to say there was much gnashing of teeth in the Paleo community about this outsider stepping on their toes... OK class, what killed off 90% of all life on earth when the dinosaurs went extinct???

I do think that physicists are too new to the game of attempting to understanding human behavior to be so confident at this point. On the other hand, if a Nobel Laureate class physicist puts his mind to the task, I would expect theories, insights and verifiable predictions on economic hypotheses.

The burden of proof (of theorems) will lie with the physics community of course, but neither should the economic community summarily dismiss them, as the Paleo community did with Alvarez

[steve]

Remember this information is being processed through a journalist, so the signal to noise ratio is degraded.

The comment "Nobel Prize-winning economists approach market statistics with a wrong mathematical model already in mind..." is, I believe, referring to the fact that Black-Scholes uses a log-normal distribution to model fluctuations, which is known to be wrong empirically. Of course, financial economists also know it's wrong (although probably practitioners were first to figure this out, and the Nobelists Merton and Scholes lost their shirts with LTCM, which tended to assume log-normality in their strategies) - but it makes a tractable first approximation.

Yes, physicists are arrogant and often stick their noses into other fields. But sometimes they make important contributions. Fischer Black was trained in physics, as was Francis Crick, as was Luis Alvarez (already mentioned), as were many Turing Award winners in computer science.

The jury is still out on econophysics. At minimum, it adds to the number of smart people studying finance, though.

[Stormy]

Self-regulating markets? Free, unrestricted markets? A market place in which the multitude of choices always results in the greatest good for the greatest number?

You really believe this, don't you?

First, the idea of a free market place is a fiction. Second, even if it could possibly exist, it would result in chaos. No regulations? Gimme a break.

Personally, the econophysics have my vote to give new models a try. The present ones, c/o Friedman, are too simplistic and immature.

[Winslow R.]

The confusion seems to be intentional.

It's not that complicated if you focus on the unnatural money creation system.

The Fed inverted the yield curve because that is the power they hold.
-about August.

An inverted yield curve shuts down lending.
-lending has slowed from from above 7% growth to a little above 0%.

A reduction in lending leads to loss of aggregate demand and job losses.
-the jobs part we haven't seen yet, but may soon start.

The unknowns arise from how those in power in other currency zones respond. Will they allow the dollar to depreciate sufficiently to allow the U.S. to find aggregate demand abroad now that U.S. domestic aggregate demand is being extinguished?

Failing to find sufficient foreign aggregate demand will Bernanke continue to wield his power to drive the U.S. into recession/depression with an inverted yield curve or will he drastically cut rates even if core inflation remains untamed?

Will Bush find an excuse to invade Iran or find some other fiscal stimulus sufficient to overcome opposition in congress?

Those that hold power, their future reactions are unknown yet their power is obvious to those that bother to pay attention.

Watch what happens when Paulson and Bernanke go to China. These are not random events, these guys are trying to get others to create economic events favorable for the U.S. so they don't have to.

[econoskeptic]

Physicists arrogant? There is pretty much a consensus among climate scientists that pumping carbon dioxide into the atmosphere will cause it to warm. Their models are based on physics and chemistry. Following their a-priori, empiricist lite models, different schools of economists could argue forever over what effects a limit on CO2 emissions or acarbon tax will have on the economy. The fact that they don't agree with their colleagues doesn't seem to stop them from sticking the aggregate curve of their noses into this or any other societal debate. In the meantime the planet warms. Friedman, Hayek, Karl Marx -- none were shy about telling us how it is, or ought to be, even if it isn't, or shouldn't. Racial discrimation can't exist! Why? Friedman says it isn't possible, economically. Regulation is bad! Why? Because Hayek concludes, economically, that governments are evil. Freakonomics seems to be the latest effort of the great sages to tell us how it all works. Forget what the psychologists and others who conduct the double blind studies have to say about the matter. Really, apart from Edward Teller, I can't think of a single physicist who is as eager to inject him/herself into important societal debates, as is the average economist. I don't have anything against economics. It's a legitimate and fascinating field of study. I just wish the economists would follow the lead of the physicists and chemists and stay in the lab until they actually prove something.

[JamesG]

I agree it is about the market not about economics. Also it should be by now common knowledge that markets move around due to greed and fear. The traders themselves may be 25 year old's, high on cocaine, motivated more by hefty commissions than risk. The violent swings are often caused by huge amounts of money being poured in to force a particular outcome.

Hence I think a model based on human psychology is a bit more relevant than energized pollen grains. This is another classic case of starting from a bad analogy and trying to prove it.

[himagine]

Maybe it's worthwhile to see what Keynes wrote about Planck's remark on economics, which one commentator quoted in "Neoclassical Theory under Fire from the Sciences" entry.

Professor Planck, of Berlin, the famous originator of the Quantum Theory, once remarked to me that in early life he had thought of studying economics, but had found it too difficult! Professor Planck could easily master the whole corpus of mathematical economics in a few days. He did not mean that! But the amalgam of logic and intuition and the wide knowledge of facts, most of which are not precise, which is required for economic interpretation in its highest form is, quite truly, overwhelmingly difficult for those whose gift mainly consists in the power to imagine and pursue to their furthest points the implications and prior conditions of comparatively simple facts which are known with a high degree of precision.(Keynes, Essays in Biography 1951 158n)

BTW, "Complexity: The Emerging Science at the Edge of Order and Chaos", by Mitchell M. Waldrop, may also worth referring. The meeting between top economists(including Larry Summers!) and physicists depicted in this book is quite interesting. But what did Santa fe Institute accomplished in economics since then, beside making Prof. Krugman angry?

[supersaurus]

in the fundamental physics department, physicists have been talking about string theory for 35 years or more, today it is the "mainstream", and yet thousands of person-years of work have not produced any testable new predictions. a theory that isn't falsifiable isn't a theory. maybe the physicists have a little work to do at home.

[Roger]

As a former Physicist I would explain this as marketing. Physics Ph.D. provides excellent analytical training, but few jobs. So many physicists have sought and found work in the fiancial industry. University of Houston, which is a second tier Physics school, sees this as a way of attracting physics graduate students. With shortage of jobs for physicists, there is a shortage of graduate students, especially for a second tier school. You should judge this report as you would judge any marketing press release.

[Jeffrey Miller]

I suspect that Roger is right.

There are some very good physicists working in
this area. Bouchaud is one of the best.

See for example,

http://arxiv.org/PS_cache/cond-mat/pdf/0504/0504079.pdf

(Mark, I'd be interested in what you think of the
above paper.)

For more of his papers, search bouchaud on

http://arxiv.org/find/cond-mat

[Jeffrey Miller]

Here are some more papers. To avoid
having to resgister, click on the "e-print"
link below the abstracts to get the papers:

http://www.cfm.fr/us/publications.php?subject=2

Bouchaud and his colleagues also run a sucessful hedge fund.

[calmo]

Roger leads me astray.

I'm waiting for the blackhole analysis where it is explained by former cross-over econophysicists unable to find gainful employment in either Physics or Economics that one's ubiquitous housekeeping chores can be accomplished by judicious application of anti-entropic analysis (AEAE)[pronounced like the primal scream].

So Economics accepts physicists. Prolly mathematicians. A few chemists and the odd biologist. What about historians? No, what about body-builders, especially body-builders who call economists names like 'girlie men'? The line is drawn there, yes?
So Economics has standards: not everybody gets in. What about Physics, Mathematics, etc are these fields as gracious as Economics?

[T.R. Elliott]

I haven't read through the reference entirely yet, but a couple initial observations:

1. I appreciate the attention to this topic.

2. Observation on physics and arrogance. I have a double BS in physics and math, an MS in applied physics & electrical engineering, and 20 years high tech experience, for what it's worth. My experience in physics as an educational pursuit: I found those studying physics to have a more singular focus on trying to understand how something works, how one can model the world, and studying the field because they wanted to study it. As one moves to other majors, I detected honest inquiry, but often combined with pragmatics (engineers who don't give a darn about engineering but want a good job and psychology majors who dropped out of engineering because they couldn't handle the material).

This is not meant to malign the other majors. But I think 20 or so kids I studied physics with were absolutely dedicated to truly understanding the phenomena of the world. One will find that in economics as well, but I would bet that there are also many--at least at the undergraduate level--who find their way into economics because--"well, I'd kind of like to do something in business someday" or something like that.

3. Though I'm sure there are many counterarguments, my particular course of study--physics, math, electrical engineering--has given be a broad set of conceptual tools to address problems across a wide range of problem domains. The two technology companies I worked for (BBN and QUALCOMM) both looked favorably on the hiring of physicists because of their ability to apply themselves to a host of problems.

I think the environment described in #2 and the general abiliites described in #3 can create a level of arrogance that is not warranted but is understandable. Economists build models that sort of kind of work and physicsts build bombs that evoporate cities. Not a fair comparison, but the movement of physicsts into areas like finance, neuroscience, and other fields has brought with them their obsessive desire to understand and solve problems.

4. On the comment that economics is not the stock market: I think that is unfair. If I'm not mistaken, physicists looking at economics focus on the stock market because that is the place in which economics is supposed to work best. If you can't model the stock market, then the economics is even more suspect in other areas. The stock market is the best example of a market in practice. If what I am saying is true, then the physicists are in fact focusing in exactly the place they should be focusing.

[Jane Galt]

God, I hope no one's told Burton Malkiel how much he missed . . .

[im1dc]

I'm very critical of Economics and Economists but I wholly side with them over the arrogant invasion of their turf by Physicists.

The Social Sciences are not the Physical Sciences.

Social Sciences need the flexible always evolving mind set and approach brought by the Economists to their field of study.

At best, imo, the approach brought by the Physicist to Economics is a niche subset of the tools of the Professional Economists.

The rigor of the Physicist is admirable but at the same time it is their limitation, i.e., the world of physics studies a relatively small number of phenomena but against our vast limitless universe/space while the world of economics studies a limitless number of constantly evolving phenomenon against a decidedly limited universe/space in comparison.

In other words physics once defined is easily universally generalizable while in economics once defined it is not easily generalizable (too many uncontrolled variables that change over time).

At least that's my perspective.

[im1dc]

And, for the record, I must say that I am neither an Economist or Physicists.

[c roast]

If the physicist's assumptions are well grounded in theology, then perhaps, economists can become the long sought-after nexus between religion and science. They can then all go on to star at Cato and AEI and drop pithy algorithms on the great unwashed from NPR to Fox, and we can all rightly worship the free-market without any inconveient leaps of faith.
Are these guys from Chicago?

[steve]

Another case of physicists (one of them a U Oregon professor) invading another field. This time, art identification :-)

http://www.nytimes.com/2006/12/02/books/02frac.html

"Last winter the Pollock-Krasner Foundation, which represents the artist’s estate, commissioned Richard P. Taylor, an associate professor of physics at the University of Oregon, to examine some of the disputed paintings. He used a technique he pioneered, which he said identified consistent patterns known as fractals — regularities that recur on finer and finer magnification, like those in snowflakes — in several authentic Pollocks.

Using the same computer analysis on transparencies of 6 of the 24 paintings discovered by Mr. Matter, Dr. Taylor found “significant differences” between their patterns and those of the known Pollocks he had examined.

Dr. Taylor, who said he was not paid for his research, though the foundation reimbursed the university for its equipment and time, emphasized at the time that his work was only one among many pieces of evidence that should be used to make conclusions about the paintings. But he said his finding put the onus on Mr. Matter to provide a plausible explanation of why the patterns didn’t match up."

[T.R. Elliott]

Consider the following: mathematicians and physicists have a long tradition of arrogance and animosity. Both sides have complained about the others’ encroachment into their territory. Mathematicians have long maligned the physicists’ willingness to draw upon a mathematical set of tools that often proved (a) useful in practice and (b) mathematically indefensible or inconsistent. Physicists have brought great insight and progress to mathematics by barreling ahead, infinities be damned. Contrarily, physics has benefited by the encroachment of mathematicians.

The reason, of course, is that the boundary between the two is fuzzy.

I have more than a couple memories of mathematicians maligning the bumbling physicists while physicists similarly maligned the persnickety mathematicians, always concerned about crossing Ts and dotting Is.

My point: even a brief look at the history of intellectual history, in particular the creative growth of intellectual knowledge, shows not a little arrogance as part and parcel of the program, littering the path.

Also consider that mathematics itself, when looked at from a foundational perspective, is as troubled as physics is to the mathematics, or economics is to the physicists. See Morris Klines “Mathematics: The Loss of Certainty” for a fantastic tour of this issue.

My opinion: people should get over the reaction to arrogance and get on with the program. I think there is a program that needs to be addressed, and arrogance—considered unnecessary baggage or not—will always be carried along. And the meeting of different fields is often the source of new understanding and knowledge.

It may be arrogant to say as such, but the over-obsession with turf wars, the circling of the economic wagons, though something that should be considered, should not detract from the more important issue: what is each side saying, who is correct, when are they correct, what are the implications, etc.

One final note: my approach to economics, as someone with a background in physics, has been motivated in part by my interest in energy, which has lead me to consider economics as it is practiced and its alternatives or relations, in particular ecological economics. And my experience with the bulk of economic thinking, when approaching the topic of society and energy, has been negative. What I mean by that: when a serious problem, such as society and energy, is considered, many in the economics community try as hard as possible to swipe the concerns away using what I consider to be largely indefensible arguments. This particularly comes from those with a libertarian persuasion—James Hamilton at Econbrowser as an exception, one with a libertarian bent who is taking energy seriously. But in general, I have not been happy with the meme that has originated in economics, a meme that correctly says markets will solve all problems but, unfortunately, does not go further to tell us that markets often solve problems in ways we might find unappealing—e.g. if one considers survival of the fittest and social Darwinism to be a type of market. In other words, the average intelligent guy on the street seems unconcerned about what could be critically important issues in energy, because they are certain that markets will solve the problem. And what they really mean is that markets will solve the problem in a way that allows me to maintain my standard of living.

Perhaps I’m ignorant. But I would call this faith unsubstantiated by arguments based on a long view of history, an understanding of energy, and a realization that most economic arguments with respect to this issue are inferential and, with respect to larger scale issues like energy, almost anecdotal.

[anne]

Ah, art and physics, Oregon and Case Western:

http://www.nytimes.com/2006/12/02/books/02frac.html?ex=1322715600&en=088aba5919b319b2&ei=5090&partner=rssuserland&emc=rss

December 2, 2006

The Case of Pollock's Fractals Focuses on Physics
By RANDY KENNEDY

In an article published this week in the prestigious science journal Nature, two physicists contend that a method intended to identify complex geometric patterns in the seemingly chaotic drip paintings of Jackson Pollock is flawed and may be useless in the increasingly convoluted world of authenticating Pollock's work.

The article, written by a physics professor and a physics doctoral student at Case Western Reserve University in Cleveland, provides a new twist in the mystery surrounding a group of small drip paintings discovered several years ago in a storage locker in Wainscott, N.Y. They were found by Alex Matter, whose father, Herbert, and mother, Mercedes, were artists and friends of Pollock's. Mr. Matter believes the paintings are authentic Pollocks, and if he is proved right, they will not only be worth millions of dollars but will also add an important new chapter to Pollock's work.

But the paintings have incited a lively and sometimes bitter debate among Pollock scholars. And as a result, greater attention has been focused on the role science is now playing alongside connoisseurship in the business of art authentication.

Last winter the Pollock-Krasner Foundation, which represents the artist's estate, commissioned Richard P. Taylor, an associate professor of physics at the University of Oregon, to examine some of the disputed paintings. He used a technique he pioneered, which he said identified consistent patterns known as fractals — regularities that recur on finer and finer magnification, like those in snowflakes — in several authentic Pollocks.

Using the same computer analysis on transparencies of 6 of the 24 paintings discovered by Mr. Matter, Dr. Taylor found "significant differences" between their patterns and those of the known Pollocks he had examined.

Dr. Taylor, who said he was not paid for his research, though the foundation reimbursed the university for its equipment and time, emphasized at the time that his work was only one among many pieces of evidence that should be used to make conclusions about the paintings. But he said his finding put the onus on Mr. Matter to provide a plausible explanation of why the patterns didn't match up.

In 2004, before the examination of the disputed paintings, a physics doctoral student at Case Western, Katherine Jones-Smith, became interested in Dr. Taylor's published reports about Pollock and fractals and made the research the subject of a presentation. But while preparing it, she said, she found that simple, childlike drawings she made using Adobe Photoshop exhibited the same fractal characteristics that Dr. Taylor said were exhibited in Pollock masterpieces.

"I entirely expected them not to be fractal," Ms. Jones-Smith said of her drawings, one of which is composed of hastily scrawled stars. "So I was really startled when they turned out to be." ...

[steve]

Amusingly, when I head Richard Taylor's colloquium on his fractal analysis of Pollock (a few years ago), the first question I asked was about the dynamic range over which the fractal behavior was observed!

BTW, that Keynes excerpt on Planck is fantastic.

[STS]

Jeffrey Miller:

Thanks for the pointers to Bouchaud's work. I've been beginning to read his papers myself lately and find them useful. You probably know Doyne Farmer's work applying mean field theory to a model of the double auction?
(eg. http://www.santafe.edu/~baes/jdf/papers/doubleauctionfinal.pdf)
Farmer was among the first to start down this path of applying physics to financial economics and running money using the resulting ideas. It has never been quite clear to me whether the ideas are more effective in building a good sales pitch for investors or in actually trading profitably ;)

I'd like to second T.R. Elliott's "get over the personality stuff" remarks. I also observe the tendency in academic economics to tinker with the well behaved parts of any problem space while ignoring the enormous need to add to what DeLong recently dubbed the "Marshallian toolkit".

Econophysicists, whatever their long-term significance, are at least trying to bring some new modeling tools to bear. Economists would do well to pay more attention to the tools and less to the tone.

[piglet]

"when a serious problem, such as society and energy, is considered, many in the economics community try as hard as possible to swipe the concerns away using what I consider to be largely indefensible arguments."

So true.

[Robert]

Mark Thoma says, "If the econophysicists have something better to offer, great. I'm listening."

Off his home page, Barkley Rosser has a review of McCauley's book, Dynamices and Markets: Econophysics and Finance. Barkley Rosser is listening. Mark Thoma - sorry - not so much.

[calmo]

Barkley, -sorry- so impressionable, has a ways to go before catching up to Mark whose standards are higher.
Or such is my first cheerleading reaction to your post Robert. (You figure I should bust out and explicate just why I think those standards are higher?)
But you do distract me with the idea that one can listen too much. [Far Side's dog language researchers' skit comes to mind: What the dog's barks really meant: "Hey hey hey"] Recall the Dark Matter that deliberately invoked allusions to physics to draw attention to what now is seen as an accounting irregularity in foreign investment earnings.
How long do we give the Econophysicists to solve the problems of Economics?
The accountants will tell us.

[Jeffrey Miller]

STS,
Yes, I'm familiar with Farmer's academic work and with the Prediction Company, which he founded along with some other physicists in Santa Fe about 15 years ago. Farmer sold his share of the company some years back for very nice profit.
The rest of the company was sold to UBS last year of the year before. They were (are) very profitable...

[Robert]

Calmo seems to criticize Mark Thoma for saying that he is willing to listen to econophysicists. I do not agree. I do not see why one should not look at McCauley's novel "empirically-based theory of market dynamics, volatility, and option pricing." Perhaps McCauley is correct that this model "prices options correctly and also makes clear the instability of financial models." (I've elsewhere said that Ito calculus is a stretch for me.)

Anyway, I put up a couple of amusing quotes about physics and economics.

[calmo]

No Robert, calmo doesn't criticize Mark here for saying that he is willing to listen to econophysicists and thereby squandering an opportunity and his precious time --unlike Barkley who is going to go on and no doubt win a double Nobel in Economics and Physics.
calmo is not saying that, no.
He, calmo, is merely suggesting that this nearly universal reverence for physicists has its place, practice and limits --beyond which one needs to employ atleast some spec of circumspection, caution, possibly even skepticism -in order not to look like Charlie Brown as Lucy takes the ball away yet once more.
It appears to me that Mark may be more circumspect than Barkley. [This circumspection is somewhat infectious, no?]
Ito calculus may be child's play for the String theorists who are recognized (possibly even gainfully employed along with many other mathematicians by HFs for all I know) by some physicists as real physicists, but totally incomprehensible to other traditional physicists (as per a fairly recent thread here). Their place in the practice (physics, mathematics, or economics) I think is decided by the usefulness of their results --an in-house kind of accounting, ironically an application of economics, yes?

[Martyn Strong]

Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable.

By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent).

A system like this will make the financial markets work as smoothly as the local fruit market.