Philosophy of Econophysics

Before creating this repository on GitHub, I had already read some articles and texts about econophysics, as well as tried to study economics. Part of that material is summarized on the main page. The truth is that there is no consensus on what econophysics actually is. Intentionally, I focused the discussion on a subset of the field that emphasizes the investigation of the economy rather than finance, and that prioritizes a methodology based on Agent-Based Modeling in the creation of microscopic models. However, this is not the only possible way to approach the field.

I am not particularly interested in the history of the field, but I thought it might be worthwhile to discuss some papers that deal specifically with this topic (“What is econophysics?”). That is how I decided to include a brief discussion of the philosophy of econophysics^[4], which is essentially a summary of the text written by Dean Rickles for the Routledge Encyclopedia of Philosophy.

Physics is often presented as a universal science, providing the ontological^[1] roots of all other sciences that grow from these roots. On this view, any apparent separation between the world of physics and the rest of the world is attributed to the complexity of systems; features of such complex systems (including their own higher-level laws) will be ‘emergent’ properties of the physical systems realizing them.

If we agree that economic systems are complex systems, then a natural task for a physicist is to try to adapt the techniques of statistical physics (the complex systems theory par excellence) to the description and prediction of economic phenomena.

We can, in fact, discern several layers in the definition and understanding of econophysics:

1. Concept-oriented: econophysics involves a kind of statistical mechanics of the economy.

2. Methodology-oriented: econophysics is the proper empirical study of economics, using a data-first approach.

3. Ontology-oriented: econophysics involves viewing economic systems as complex systems with interacting economic agents as parts, such that economic systems more generally follow similar laws as ‘natural’ systems.

4. Heuristics-oriented: econophysics involves finding analogies between financial/socio-economic and physical (natural) systems.

At its core is a postulated mapping between a framework from physics and the behaviors of economic agents. This mapping lies at the heart of the idea that econophysics provides a more realistic approach to economics than orthodox economics, since the structural relationship between the mathematical structure and the physical target system is considered to be closer than in standard axiomatic formulations of economics.

Econophysicists build their theories around the replication of a set of economic facts—properties that are common across many financial objects, markets, and time periods. These so-called stylized facts, derived from the manipulation of empirical data to abstract generalizations that can function as explananda^[2] in theory-building, constitute the phenomena that must be saved (according to econophysics). The standard model of economics is not capable of mapping onto economic reality in the case of these features. Econophysicists claim to be closer to reality in this respect and, in fact, claim to offer explanations for why such events occur in the proportions they do.

These stylized facts mark a methodological battle line between orthodox economists and econophysicists, supplying prescriptive as well as descriptive information used to justify and construct theories and models. Econophysicists view these facts as their raw data, untainted by idealized models. They then build models using them as targets, and in doing so ensure that such models are more empirically sound. The models then built to account for them are constructed using the concepts from statistical physics, motivated by the parallels between the stylized facts and the behaviors of other complex systems well known in the physics of collective systems, as mentioned above.

These then provide an added element of realism — in this case, a kind of microscopic realism in which the phenomenon in question (the stylized fact) can be constructed from the ground up, thus providing understanding of its constitution, in stark contrast to the top-down, principle-based approaches of orthodox economics.

One of the curiosities of econophysics is that the data seem to reveal lawlike behavior even in human-driven systems. It is not that particular events are predictable, but that the frequency distribution of events is. For technical reasons, microscopically very different systems (i.e., made of different parts) can nonetheless display qualitatively identical macroscopic properties for a certain class of properties, including those comprising the stylized facts.

Econophysicists aim to provide structural explanations for stylized facts based on the idea that many economic phenomena originate in the structure of the system from which they arise, rather than from any particular individual action. An example of econophysics thinking can be observed when investigating scaling laws^[3]. In statistical physics, these scaling laws are viewed as emergent properties generated by the interactions of the microscopic subunits. Scaling laws are explained, then, via collective behavior among a large number of mutually interacting components. In this financial case, the components would simply be the market’s ‘agents’ (traders, speculators, hedgers, etc.). These laws are ‘universal laws,’ independent of microscopic details and dependent on just a few macroscopic parameters (e.g., symmetries and spatial dimensions). Econophysicists surmise that since economic systems also consist of large numbers of interacting parts, perhaps scaling theory can be applied to financial markets; perhaps the stylized facts can be represented by the universal laws arising in scaling theory. This analogy is the motivation behind a considerable chunk of work in econophysics; it is also through this analogy, then, that the stylized facts receive their (structural) explanation.

What distinguishes econophysics from other approaches in economics is then the interpretation of the stylized facts. In addition to viewing them as emergent properties of a complex system, econophysics also includes a greater commitment to the stylized facts, treating them not only as a central guide to the nature of economic reality, but also as statistical laws rather than ‘mere’ local regularities. Part and parcel of this view of the stylized facts as genuine laws is that it simply doesn’t matter whether we view the variables of a statistical physics model as spins of atoms or economic agents, since the laws themselves are emergent in precisely the sense that they don’t depend on the microscopic details of the system.

Hence, the subject of econophysics is intimately bound up with many standard topics in the philosophy of science. Some philosophers argue that the models used in econophysics might even demand a rethinking of extant philosophical notions of modeling, since they fail to adequately capture their nature and function in this new context.