The Hindu Business Line : Theoretical physicists look at markets differently

Not long ago, theoretical physicists from many countries congregated at the Saha Institute of Nuclear Physics, Kolkata, to discuss their latest researches in market fluctuations. Mr Arnab Chatterjee and Prof Bikas K. Chakrabarti of the Institute edited the conference papers and published `Econophysics of Stock and other Markets,' from Springer (www.springer.com) , as part of the `New Economic Windows' series.

Business Line contacted one of the editors, Mr Chatterjee, who is a Senior Research Fellow in the Theoretical Condensed Matter Physics Division of the Saha Institute, to know more about the relationship between physics and markets. Here is his take on a few questions.

What is the relevance of physics for an understanding of economic phenomena?

Frontiers of physics are now unbounded. Theoretical physicists take interest in almost all phenomena that take place around. And application of tools developed in physics over the last few centuries has helped in understanding interesting phenomena across disciplines.

Physicists have loved working in uncharted territories - they have long been working in biology - and no wonder social science has always been an attractive area.

Any prominent examples of such work?

Looking back, the first Nobel Prize in Economics (1969) was bagged by Mr Jan Tinbergen, a physicist, whose ideas of using physics tools to handle economic problems were as early as his Ph.D thesis (`Minimumproblemen in de natuurkunde en de economie' or `Minimisation problems in Physics and Economics'). Later, work of Mr Paul Samuelson (Nobel, 1970) saw the development of the theory of demand-supply equilibrium following Newtonian mechanics, and this was followed by the work of Mr Kenneth Arrow (Nobel, 1972). Mr George Stigler (Nobel, 1982) was the first to perform Monte-Carlo simulations of financial markets, seen long back in studies of different physical systems.

But why are physicists inspired to work in social sciences?

It is probably in the rich foundation and experience of the subject in formulating a variety of complex phenomena in physical systems, and subsequently developed tools of analysis, that physicists have the confidence to handle/attack problems in economics.

Knowledge from physics helps us in looking at a system as complex as the financial market in a completely different way than how traditionally trained economists do. Concepts common in physics, such as self-similarity, universality and phase transition are now used in financial analysis.

Empirical analysis has found a new dimension with tools from theoretical physics, and the experience of modelling complicate systems have proven successful in some cases.

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