Statistical physics challenges economics
[Friday February 12] Economists like to think that stock
markets are rational, but recent research has shown that
irrational behaviour has a significant effect on the market.
Thomas Lux of the University of Bonn in Germany and
Michele Marchesi of the University of Cagliari in Italy have
created a computer model of a financial market that splits
traders into two groups, 'fundamentalists' and 'noise
traders'. The former make decisions based on realistic
predictions of the 'real world' value of companies.
Noise traders, on the other hand, act on trends and
patterns in the market. The model, which is based on ideas from
statistical physics, shows that large numbers of 'optimistic' and
'pessimistic' noise traders destabilizes the market.
The model can also explain the extremely high value of
Internet stocks (Nature 397 498).
Once the balance between 'fundamentalists' and noise traders is
breached the market becomes more volatile and creates boom or
bust cycles. For example, Amazon.com is now worth over $30
billion, 30 times its predicted revenue this year, despite never
making a profit. Lux and Marchesi suggests that the increasing
numbers of 'optimistic' noise traders investing in Internet stocks
is making the market unstable. As more and more noise traders
follow this trend, companies such as Amazon find their share
prices pushed far above their true worth.
Guido Germano
Theoretical Physics, University of Bristol, England
tel. +44-117-928 8755, fax +44-117-9255624
http://www.phy.bris.ac.uk/staff/germano_g.html
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