Scale invariance and universality in economic phenomena
Stanley HE, Amaral LAN, Gopikrishnan P, Plerou V, Salinger MAJournal of Physics - Condensed Matter 14, 2121 - 2131 (2002)
Times cited: 2
Abstract
This paper discusses some of the similarities between work being done by economists and by computational physicists seeking to contribute to economics. We also mention some of the differences in the approaches taken and seek to justify these different approaches by developing the argument that by approaching the same problem from different points of view, new results might emerge. In particular, we review two such new results. Specifically, we discuss the two newly discovered scaling results that appear to be ‘universal’, in the sense that they hold for widely different economies as well as for different time periods: (i) the fluctuation of price changes of any stock market is characterized by a probability density function, which is a simple power law with exponent –4 extending over 10(2) standard deviations (a factor of 10(8) on the y-axis); this result is analogous to the Gutenberg-Richter power law describing the histogram of earthquakes of a given strength; (ii) for a wide range of economic organizations, the histogram that shows how size of organization is inversely correlated to fluctuations in size with an exponent approximate to0.2. Neither of these two new empirical laws has a firm theoretical foundation. We also discuss results that are reminiscent of phase transitions in spin systems, where the divergent behaviour of the response function at the critical point (zero magnetic field) leads to large fluctuations. We discuss a curious ‘symmetry breaking’ for values of Sigma above a certain threshold value Sigma©.; here Sigma is defined to be the local first moment of the probability distribution of demand Omega-the difference between the number of shares traded in buyer-initiated and seller-initiated trades. This feature is qualitatively identical to the behaviour of the probability density of the magnetization for fixed values of the inverse temperature.