The Hindu Business Line : When nuclear physicists talked economics

Two things that can frighten most people are nukes and economics. But, brace up, here is a book in which nuclear physicists talk economics... "Successful or not, we all go to various markets and participate in their activities. Yet, so little is understood about their functionings." Thus begin Arnab Chatterjee and Bikas K. Chakrabarti of Saha Institute of Nuclear Physics, Kolkata, in Econophysics of Stock and Other Markets, from Springer (springer.com).

The book brings together the proceedings of an international workshop held in February, under the auspices of the Centre for Applied Mathematics and Computational Science of the Institute. The first paper is by Taisei Kaizoji of International Christian University, Tokyo. After studying `four stock price indices of the three major stock markets in the world,' the paper concludes that `it remains an unsettled question what causes switching from boom to stagnation.' Kaizoji observes that in the period of booms, the noise traders' herd behaviour strongly influences the stock market and generates power-law tails of the volatility distribution; and that when stagnation sets in, a large number of noise traders leave the market. Lot of noise is evident, at the time of writing. Sensex surged by 111 points in early trade, but witnessed `selling pressure' to plunge below 13,500, even as the BSE wants to patent Sensex in India.

Anirban Chakraborti of the Department of Physics, Banaras Hindu University, ventures to find correlations in stock prices, by applying `the dynamics of asset trees' to `market taxonomy and portfolio analysis.' He says that stocks included in the minimum risk portfolio tend to lie on the outskirts of the asset tree. Such visualisation `retains all the essential information of the market.'

A snatch from Chakraborti's paper titled `Dynamics of market correlations: Taxonomy and portfolio analysis,' co-written with J. P. Onnela and K. Kaski on http://scitation.aip.org, reads thus: "The nodes of the tree are identified with stocks and the distance between them is a unique function of the corresponding element of the correlation matrix. By using the concept of a central vertex, chosen as the most strongly connected node of the tree, an important characteristic is defined by the mean occupation layer. During crashes, due to the strong global correlation in the market, the tree shrinks topologically... "

Stocks in the Indian market are highly correlated, one learns from a paper titled `The Power (Law) of Indian Markets: Analysing NSE and BSE Trading Statistics,' by Sitabhra Sinha and Raj Kumar Pan of the Institute of Mathematical Sciences, Chennai. RMT or random matrix theory finds application in a study on market volatility, by V. Kulkarni and N. Deo of the Department of Physics and Astrophysics, University of Delhi.

"The stock market is only one of many examples for fluctuation scaling," write Zoltán Eisler and Janos Kertész, from Hungary and Finland respectively. `Contrary to a naïve expectation from statistical analysis,' the authors find `a clear sign of non-universality.' Though the dynamics (i.e. trading rules) are the same for all stocks, the resulting exponents vary, they say.

Two scientists from Beijing Normal University, Honggang Li and Yan Gao add two properties to `the family of stylised facts about stock returns.' Forex market is the focus of A. Sarkar and P. Barat of Variable Energy Cyclotron Centre, Kolkata. They find that the average daily exchange rate return of dollar exhibits scaling and follows Levy Stable distribution; for euro, pound and yen, Gaussian distribution holds good.

The eclectic collection includes essays on noise trading, random walk, game theory, triangular arbitrage, fractal overlap, crowd behaviour, wavelets, neural network and regional inequality. The contributors are from exotic institutions — such as Inequality Process Institute (US), Future Business School (Kolkata), Space Applications Centre (Ahmedabad), Beijing University of Aeronautics and Astronautics (China), and Rudolf Peierls Centre for Theoretical Physics (UK).

"Econophysics essentially involves physicists studying economics using ideas from physics," notes J. Barkley Rosser, Jr of the Department of Economics, James Madison University, US, in one of the concluding chapters. He exhorts the practitioners of the new science to seek `a deeper synthesis of the two disciplines.'

Put COIN to work

If the thought of fusing the two disciplines sounds odd, Peter A. Gloor may diffuse such misgivings in Swarm Creativity, from Oxford (www.oup.com). COINs or `collaborative innovation networks' can work in businesses `to enhance quality and competitive advantage,' he says.

Though such networks have been around for hundreds of years, what makes COINs relevant today is that they have reached their tipping point, declares Gloor, borrowing Malcolm Gladwell's thought about critical mass. The book defines COIN as "a cyberteam of self-motivated people with a collective vision, enabled by the Web to collaborate in achieving a common goal by sharing ideas, information, and work."

Gloor describes COIN applications in areas as varied as IT outsourcing and M&A (mergers and acquisitions), sales force optimisation and software, distributed product development and charities online. An interesting example is of how a team from Switzerland — a small landlocked country — won the 2003 America's Cup, sailing's most coveted prize. "Alinghi, the Swiss sailing team, functioned as a close-knit, collaborative community of more than 100 incredibly motivated experts and athletes from 15 countries," describes the author. The team's innovation in fluid dynamics came through `a collaboration with a Swiss university medical researcher who was modelling the flow of blood vessels in the human body.' And Alinghi continues to network with five universities `to generate and test its innovative ideas.'

The author discusses projects in companies such as DaimlerChrysler, UBS, Novartis, Intel, Deloitte, HP and IBM. He also recounts how Leonardo da Vinci was a lifelong learner, `swarming together' with other intellectual giants. "Luca Pacioli, for example, not only invented double entry accounting, but also worked with da Vinci on his engineering exploits." The two `taught each other in a mutually enriching learning and tutoring relationship.' The master artist `had a whole support organisation of painters, sculptors, and other artists on his payroll.'

Origin of gas and oil

It may be heretical to advise economists to learn from other sciences. Be that as it may, read about `a modern heretic' in The Scientist as Rebel, by Freeman Dyson, from New York Review Books (www.nyrb.com), a book that tells the stories of scientists who resisted the restrictions their cultures imposed on them.

Dyson introduces you to one such rebel, Thomas Gold. "About once every five years, he invades a new field of research and proposes an outrageous theory that arouses intense opposition from the professional experts in the field," narrates Dyson. Often Gold was proved right, though decades later. For instance, his 1948 work about hearing, which was dismissed as that of `an ignorant outsider intruding into a field where he had no training and no credentials,' was accepted as true 30 years later.

"Gold's most controversial idea is the non-biological origin of natural gas and oil. He advocates a theory that natural gas and oil come from reservoirs deep in the earth and are relics of the material out of which the earth condensed. The biological molecules found in oil show that the oil is contaminated by living creatures, not that the oil was produced by living creatures," says Dyson.

As with Gold's other theories, the oil theory too was promptly rejected.

Dyson continues the story, in a 2006 postscript to his original essay. Researchers at the Carnegie Institution of Washington Geophysical Laboratory were testing Gold' theory, exposing tiny quantities of materials from the earth's mantle `to high temperature and pressure in a diamond anvil cell.' The experiment demonstrated `abundant production of methane.' The authors of the experiment sent a message to Gold to tell him that his theory had been confirmed. But he had died three days earlier.

Prescient reads for the pre-Christmas week!

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