The Hindu Business Line : Social physics

ON SEPTEMBER 2 the S&P CNX Nifty failed to close above the crucial resistance level of 2426. A stock or an index typically rises sharply if it breaks above the resistance level. Resistance and breakouts happen because of the interaction between buyers and sellers. You know that physics studies interaction among particles in a substance. That is why economists have been applying the laws of physics to understand social behaviour.

Consider the traffic flow. You move freely when the traffic is light. You, however, adjust your speed when the traffic is heavy. Finally, there is bound to be a stationary jam if the traffic is dense. These three states of traffic flows correspond to the gaseous, liquid and solid states in physics. How?

Particles move freely when they are in a gaseous state, as they have more space. In liquid state, the particles form a certain discipline, falling in line just as we do when the traffic is heavy. The stationary jam is akin to the solid state where particles do not have room to move. But what causes traffic jams? We know that most liquids become denser when they are cooled. Till a liquid reaches its freezing point, there is a slow and gradual change in its behaviour. The moment it reaches the freezing point, a small change in temperature causes a disproportionate change in its density. Physicists call this phase transition.

This phenomenon can explain traffic jams. A break down of one car can sometimes cause a traffic jam. Similarly, a small change in buying volumes above the resistance level could push the price up, causing the breakouts. Phase transition is the central idea of Thomas Schelling's 1978 book "Micromotives and Macrobehaviour" and Malcolm Gladwell recent book "The Tipping Point".

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