When Physics Became Undisciplined: An Essay on Econophysics Dr. Christophe Claude Schinckus August 2018 Department of History and Philosophy of Science Girton College, University of Cambridge This dissertation is submitted for the degree of Doctor of Philosophy in History and Philosophy of Science When Physics Became Undisciplined An Essay on Econophysics Dr. Christophe Schinckus Abstract In the 1990s, physicists started looking beyond their disciplinary boundaries by using their methods to study various problems usually thrown up by financial economics. This dissertation deals with this extension of physics outside its disciplinary borders. It seeks to determine what sort of discipline econophysics is in relation to physics and to economics, how its emergence was made possible, and what sort of knowledge it produces. Using a variety of evidence including bibliometric analysis Chapter 1 explores the field’s disciplinary identity as a branch of physics even though its intellectual heart is better seen as the re-emergence of a 1960s research programme initiated in economics. Chapter 2 is historical: it identifies the key role played by the Santa Fe Institute and its pioneering complexity research in the shaping of methodological horizons of econophysics. These are in turn investigated in Chapter 3, which argues that there are in fact three methodological strands: statistical econophysics, bottom-up agent-based econophysics, and top-down agent-based econophysics. Viewed from a Lakatosian perspective they all share a conceptual hard-core but articulate the protective belt in distinctly different ways. The last and final chapter is devoted to the way econophysicists produce and justify their knowledge. It shows that econophysics operates by proposing empirically adequate analogies between physical and other systems in exactly the ways emphasised by Pierre Duhem. The contrast between such use of analogy in econophysics and modeling practices implemented by financial economics explains why econophysics remains so controversial to economists. Preface This dissertation is the result of my own work and includes nothing which is the outcome of work done in collaboration except as declared in the Preface and specified in the text. Section II in the Chapter 1 is broadly based on a paper I published in the Journal of the History of Economic Thought: - Gingras, Yves, and Christophe Schinckus. 2012. "Institutionalization of Econophysics in the shadow of physics." Journal of the History of Economic Thought 34 (1):109 - 130 Section III in the Chapter 1 is adapted from Chapter 2 of the book by Jovanovic and Schinckus (2017). - Jovanovic, Franck, and Christophe Schinckus. 2017. Econophysics and Financial Economics: An Emerging Dialogue, New York: Oxford University Press. It is not substantially the same as any that I have submitted, or, is being concurrently submitted for a degree or diploma or other qualification at the University of Cambridge or any other University or similar institution except as declared in the Preface and specified in the text. I further state that no substantial part of my dissertation has already been submitted, or, is being concurrently submitted for any such degree, diploma or other qualification at the University of Cambridge or any other University or similar institution except as declared in the Preface and specified in the text Acknowledgment I would like to express my special appreciation and thanks to my advisor Dr Anna Alexandrova who was a tremendous mentor for me. I really thank her for always encouraging my research and for being so patient with me. This dissertation could not have been done without her. Table of Contents General introduction .................................................................................................... 6 Chapter 1: When physicists became undisciplined: The case of econophysics ...... 11 I. Introduction ........................................................................................................................ 11 II. Disciplinary perspectives on econophysics .......................................................................... 15 II.1. The Position of Econophysics in the Disciplinary Space ......................................................... 15 II.2. The Institutionalization of Econophysics ............................................................................... 28 III. Econophysics and the origins of financial economics ........................................................... 32 III.1. The origins of the Gaussian approach in financial economics .............................................. 33 III.2. The first attempt to generalize the Gaussian framework ..................................................... 37 III.3. The rejection of stable Lévy processes in financial economics ............................................. 40 IV. For a constructivist history of econophysics ....................................................................... 45 IV.1. Foundational elements of econophysics .............................................................................. 45 IV.2 Similarities between the emergence of econophysics and financial economics .................. 47 V. Discussion .......................................................................................................................... 53 VI. Conclusion ........................................................................................................................ 60 Chapter 2: Where did econophysics come from? ...................................................... 63 I. Introduction ........................................................................................................................ 63 II. The Santa Fe Institute ......................................................................................................... 67 II.1. From cellular automata to computers and agent-based modelling ...................................... 71 II.2. From power laws to dynamic complexity .............................................................................. 75 II.3. Scaling properties at the Santa Fe Institute ........................................................................... 80 III.4. Two computational sides of the same complex coin ............................................................ 82 III. The complexity era in economics ....................................................................................... 84 IV. Chaos theory associated with economic complexity ........................................................... 89 V. Statistical patterns in economics ......................................................................................... 91 V.1. Patterns and origins of econophysics .................................................................................... 91 V.2. The development of the SFI, a feeling of déjà vu? ................................................................ 95 V.3. Statistics in economics? Nothing new!: The case of statistical economics ........................... 98 VI. Webs in economics or agent-based modelling .................................................................... 99 VII. Conclusion ..................................................................................................................... 101 Chapter 3: The methodological diversification of econophysics ........................... 104 I. Introduction ...................................................................................................................... 104 II. Preamble: Econophysics and the notion of emergence .............................................. 107 III. Methodological diversification of econophysics: Overview ............................................... 111 IV. Statistical econophysics ................................................................................................... 113 IV.1. An asymptotic machinery ................................................................................................... 113 IV.2. Phenomenological invariance and renormalization group theory ..................................... 116 IV.3. Phenomenological invariance as an emergent property .................................................... 128 V. Agent-based econophysics................................................................................................ 133 V.1. Bottom-up agent-based econophysics ................................................................................ 134 4 V.2. Top-down agent-based econophysics: An in-between approach ....................................... 146 VI. From diversity to unity: A Lakatosian coherence .............................................................. 150 VI.1. The concept of “hard core” ................................................................................................ 151 VI.2. The hard core of econophysics ........................................................................................... 154 VI.3. Beyond the hard core, the diversity! .................................................................................. 159 VI.4. Asymptotic reasoning as a source of diversification .......................................................... 161 VI.5. The role of the positive heuristic in the evolution of econophysics ................................... 163 VII. Conclusion ..................................................................................................................... 168 Chapter 4: Modelling