Econophysics: Can physicists contribute to the science of economics?

• Published in: Physica A 1999-07, Vol.269 (1), p.156-169
• Main Authors: Stanley, H.E, Amaral, L.A.N, Canning, D, Gopikrishnan, P, Lee, Y, Liu, Y
• Format: Article
• Language: English
• ISSN: 0378-4371; 1873-2119
• DOI: 10.1016/S0378-4371(99)00185-5

Econophysics is a new word, used to describe work being done by physicists in which financial and economic systems are treated as complex systems. Everyone is affected by economic fluctuations, and quantifying fluctuations is a topic that many physicists have contributed to in recent years. Moreover, everyone – rich and poor – would be powerfully affected by a breakdown of the world-wide financial system. Further, it is possible that methods and concepts developed in the study of strongly fluctuation systems might yield new results in economics. Finally, economic systems are complex interacting systems for which a tremendous amount of quantitative data exists, much of it never analyzed. Here we discuss selected recent examples where statistical physicists studying fluctuations have uncovered two new empirical “laws”. The first empirical law concerns the histogram giving the relative occurrence probability that a stock experiences a given price change; this histogram decreases as the given price change increases, with an apparent power law tail that describes fluctuations differing by as much as 8 orders of magnitude in this relative occurrence probability. The second empirical law concerns a histogram of size changes of business firms, which has a width that decreases as a power law of the firm size for firms that range over roughly 8 orders of magnitude. In addition to such scaling laws, there appears also the analog of “universality” – e.g., the analogous histogram of country size appears to obey the same scaling law, with the same exponent, as the histogram of firm size.