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Physics and Financial Economics: New Transfers and New Relations

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Howe
Hosted By: History of Economics Society & American Finance Association
  • Chair: Christophe Schinckus, RMIT University Vietnam

Where Does Econophysics fit in the Complexity Revolution?

David C. Colander
,
Middlebury College

Abstract

A revolution is occurring in economics that is changing its scope and method. I call it the complexity revolution. The question I explore in this paper is: Where does econophysics fit in that revolution? I argue that the changing methods generally associated with the term econophysics are occurring because of advances in analytic and computational technology, and are not uniquely attributable to integrating physics and economics. Thus, using the term “econophysics” is likely to mislead people as to the nature of the complexity revolution. That complexity revolution involves an exploration of envisioning the economy as a complex evolving system driven by often unintended consequences of actions by purposeful agents. It is a vision that is more related to biology than to physics, and, at this stage of its development, is better thought of as an engineering revolution than a scientific revolution.

Agent-based Modeling’s Open Methodology Approach: Simulation, Reflexivity, and Abduction

John B. Davis
,
Marquette University and University of Amsterdam

Abstract

This paper argues that agent-based modeling’s innovations in method developed in terms of simulation techniques also involve an innovation in economic methodology. It shows how Epstein’s generative science conception departs from conventional methodological reasoning, and employs what is termed an open rather than closed approach to economic methodology associated with the roles that reflexivity, counterfactual reasoning, and abduction play in ABM. Central to this is the idea that improvements in how we know something, a matter of method, determine whether we know something, a matter of methodology. The paper links this alternative view of economics and economic methodology to a social science model of economics and contrasts this with standard economics’ natural science model of economics. The paper closes with comments on what this implies regarding the concept of emergence and the view that generative social science is intuitionistic.

The History of Economic Theory and the Pre-History of Econophysics: Boltzmann versus the Marginalists

Geoffrey Poitras
,
Simon Fraser University

Abstract

Given the acknowledged influence of classical physics on the development of neoclassical economic theory, the emergence of the ‘new’ subject of econophysics in the mid-1990's poses a methodological and historical quandary. This paper explores this quandary by contrasting developments in the history of economics with the prehistory of econophysics. In particular, what role did physics play in the contributions by the marginalists to the subsequent development of neoclassical economics? And, what is the relationship to the ergodicity hypothesis introduced by L. Boltzmann that is essential to the history of statistical mechanics and the pre-history of econophysics? This paper addresses these questions by contrasting the methods and philosophy adopted from classical physics by Edgeworth and other marginalists with those of the ergodicity hypothesis introduced into late 19th century statistical mechanics by Boltzmann. An interpretation of ergodicity is provided that establishes a motivation for the emergence of econophysics during the 1990's. The relevance of ergodicity to the stochastic models of modern economics is also identified.

When Financial Economics influences Physics: The Role of Econophysics

Franck Jovanovic
,
TELUQ University
Rosario N. Mantegna
,
Palermo University
Christophe Schinckus
,
RMIT University Vietnam

Abstract

This paper aims at discussing the unexpected influence of Financial economics on Physics. The rise of Econophysics, a fundamentally new approach in finance, suggests that the influence between the two disciplines becomes less unilateral than in the past. Methodological debates emerging in Econophysics led physicists to acknowledge that dealing with financial complex systems contributed to a better modelling of their field. The approach of econophysicists suggests that physicists might try to conceptualize physical phenomena by integrating elements they faced with in Financial economics, and more generally in Economics. Surprisingly, many of econophysicists’ argumentations have some methodological similarities with practices used in Financial economics. This paper analyzes the influence of Financial economics and Economics on Physics by discussing three examples: out of equilibrium processes, signal detection and information. It investigates and illustrates what are the methodological changes generated by Econophysics that explain this new influence, and what is the role of finance. This paper sheds new light on the traditional distinction between “hard sciences” (like Physics) and “soft sciences” (like Economics) and the specific situation of Financial economics in this movement.
Discussant(s)
Alan Kirman
,
University of Aix-Marseille III and EHESS
Marcel Boumans
,
Utrecht University
Emmanuel Haven
,
University of Leicester
Xavier Gabaix
,
Harvard University
JEL Classifications
  • B4 - Economic Methodology
  • G0 - General