8.6 econophysics MH 2/6/06 10:41 AM Page 686 NEWS FEATURE NATURE|Vol 441|8 June 2006 CULTURE CRASH Some economists had hoped that physicists might shake up the rigid theories typical of mainstream economics. But so far, they’re unimpressed by physicists’ handling of the markets. Philip Ball reports. CHINAFOTOPRESS/GETTY or the past two decades, some physi- their statistics. At face value it is a damning It is tempting to interpret this as a mere acad- cists have been trying to apply their indictment, and raises the question of whether emic turf war. But Ormerod and colleagues are ideas and tools to an area that seems a econophysics will ever make a genuine contri- among the few people in economics who have Flong way from traditional physics. They bution to economic theory, or whether it is taken econophysics seriously. Most economists are exploring the notion that there might be a doomed to remain a fringe interest. don’t know the discipline exists — and if they kind of physics of the economy — an ‘econo- did, they would probably heap derision on it. physics’, as it has been dubbed1. Last year, some Claim to blame The idea that physics might have something of these econophysicists even went as far as to Some econophysicists admit that there are useful to contribute to economics arises suggest that economics might be “the next problems. “Econophysics is a field with very because both fields are concerned with systems physical science”2. uneven quality,” says Doyne Farmer, a physi- of many interacting components that obey spe- But now this unlikely marriage is showing cist at the Santa Fe Institute in New Mexico, cific rules. Statistical physics describes the signs of turning sour. Even those economists who made pioneering contributions to the behaviour of bulk matter based on the forces who at first welcomed econophysics are start- study of chaos before moving into economics. acting between atoms and molecules. Econom- ing to wonder whether it is ever going to deliver Yi-Cheng Zhang of the University of Fribourg ics studies the interactions between economic on its initial promise. Early successes in model- in Switzerland is even more ready with ling financial markets have not led to insights a mea culpa. “My economist friends are elsewhere, some complain. Matters came to a right. The literature is often littered with head at the Econophysics Colloquium, held at garbage. We can find gauge-field theor- the Australian National University in Canberra ies of finance, quantum options and last November. A group of economists attend- so on. In short, anything goes.” ing the meeting were so dismayed with what But others reject the accusations. In “Econophysics they saw many physicists doing that they response to the Canberra critique, Joe penned a forthcoming paper entitled ‘Worry- McCauley, a physicist at the University is a field with ing trends in econophysics’3. of Houston, Texas, who now works very uneven In their critique, economist Paul Ormerod mostly on economic problems, says, quality.” — of the London-based consultancy Volterra and “Would one write an essay called his co-authors accuse econophysicists of a ‘Worrying trends in physics’ simply Doyne Farmer litany of sins: applying inappropriate assump- because a few minor researchers put out tions to economic systems, failing to do their bad papers? Bad papers, even wrong homework properly, getting fixated on a small papers, appear in every issue of every corner of the subject, and being sloppy with scientific journal.” 686 © 2006 Nature Publishing Group 8.6 econophysics MH 2/6/06 10:41 AM Page 687 NATURE|Vol 441|8 June 2006 NEWS FEATURE Econophysicists have focused on the financial market because it offers a lot of good-quality data. was revisited in the early 1960s, when mathe- matician Benoit Mandelbrot showed that fluc- tuations in cotton prices have a statistical distribution that differs from that expected of a typical gaussian process — where each event happens randomly and independently of all others. There were more large fluctuations than a gaussian distribution predicts4. This has sig- nificant implications for economic theories that assume market ‘noise’ to be gaussian — but more importantly, it suggests that big fluctua- tions, perhaps even market crashes, are not rare anomalies but intrinsic to normal market behaviour. Mandelbrot’s 1963 paper on price fluctuations is now regarded as one of the key precursors to modern econophysics. Out of equilibrium But it wasn’t until the early 1980s, when an unusual mix of researchers got together at the Sante Fe Institute, that economists showed much interest in scientific ideas related to complex systems. They were helped by advances in computing. “Once we got desktop computers, we could model systems of many ‘agents’ — market traders, say, or businesses. mist at the University of Western Sydney in agents and allow them rules of behaviour and Arguably, deriving microeconomic princi- Australia. Keen had hoped in particular that see how they evolved,” says economist Brian ples from the behaviour of individual agents econophysics might break his fellow econo- Arthur, who worked at Santa Fe alongside should pose similar problems to deriving mists’ misconceived obsession with equilib- physicists and evolutionary biologists to thermodynamic laws from interatomic forces. rium. “Equilibrium thinking still has them in develop non-traditional approaches to eco- M. OESER/AFP/GETTY M. OESER/AFP/GETTY The rules dictating how interactions play its unshakeable thrall,” he says. nomics5. Such computer simulations of the out between economic agents are admittedly A glance at almost any plot of commodity economy led to models of ‘interacting agents’6 more complex than the forces between atoms, prices over time belies the idea of market equi- that were influenced as much by work on cog- but in conventional economics the rules have librium: the values fluctuate wildly. But in nition and evolutionary biology as by physics. always been grossly simplified to make the neoclassical theory, these fluctuations are In these models, researchers could give the models workable. regarded as background ‘noise’ caused by interacting agents any decision-making strat- For example, the core theory of mainstream unpredictable ‘shocks’ from outside the eco- egy they desired, and therefore study markets economics, the neoclassical model, argues that nomic system, to which the market constantly with different underlying behaviours. “What agents always act with perfect rationality to and quickly adjusts. An attempt to explain we found was quite surprising,” recalls Arthur. maximize their ‘utility’ (for example, profit), such fluctuations using statistical physics was “Under some restrictive conditions, you get based on complete information about the state made as early as 1900 by Louis Bachelier; he market equilibrium, but under other condi- of the market as a whole. In this picture, an eco- proposed an explanation that introduced tions you get much more complicated out- nomic market quickly reaches an equilibrium the theory of random walks, which was later comes.” It seemed there was no good reason to state, in which commodities find the price that developed independently by Einstein to believe that microeconomics always operates perfectly balances supply and demand. explain brownian motion. at equilibrium. “The economy is out of kilter Bachelier’s theory was deemed too strange to most of the time,” says Arthur. That, he says, Model world be taken seriously by economists. But the issue accounts for one of the virtues of econophysics. Economists recognize that real human agents “The core of economic theory is still built do not always act in such a coldly rational way, around equilibrium models, but most models and that they generally have to manage with in econophysics are non-equilibrium ones.” incomplete information. But although Nobel But those economists who have adopted prizes in economics were awarded in 2001 and new approaches such as agent-based model- 2002 for work that recognizes these limitations, ling have become increasingly frus- neoclassical theories — and particularly the “Physicists trated with the intransigence of main idea of equilibrium — remain central to main- suffer from -stream economics. Some have even stream economics. resorted to starting their own publica- Ormerod and his colleagues, and other a belief that tion, the Journal of Economic Interac- physics-friendly economists, had hoped that there must be tion and Coordination, the first issue of econophysics would help them create a universal rules.” which appeared online in May. Zhang new economics that is free from some of the says that three of the four authors of the dogmatic assumptions characterizing the — Paul Ormerod Canberra critique are victims of the mainstream discipline today. “Economics intellectual exclusion imposed by desperately needs econophysics,” claims mainstream economists. “That’s why they had Ormerod’s co-author Steve Keen, an econo- such high hopes when physicists offered what 687 © 2006 Nature Publishing Group 8.6 econophysics MH 2/6/06 10:41 AM Page 688 NEWS FEATURE NATURE|Vol 441|8 June 2006 IS ECONOPHYSICS REALLY NEW? Although the idea of economists the circulation of the planets. frequently alluded to scientific the foundations of statistical borrowing concepts from Pierre-Simon Laplace and ideas and analogies. physics. The early microecono- physics might seem unlikely, it the Belgian astronomer Microeconomic theory, mists Francis Edgeworth and has been a feature of economic Adolphe Quetelet which strives to under- Alfred Mashall drew on some of theory ever since its inception. helped to establish the stand economic phe- the ideas of these physicists, in Adam Smith (pictured) wrote idea that there are nomena by building particular the notion that the his Wealth of Nations, which laid natural laws, akin to them up from the economy achieves an equilib- the foundations of economic Newton’s laws of behaviour of individ- rium state like that described IMAGE/ALAMY CLASSIC thought in 1776, in an intellec- motion, that govern ual ‘agents’ in the for gases by Maxwell and tual climate that was infused human social systems economy, was estab- Boltzmann.