editorial

Net gains
Physics and physicists have had much to contribute to economic and finance. Now the science of
complex networks sets a way forward to understanding and managing the complex financial networks
of the worlds markets.

When H. Eugene Stanley coined the term televisions 60minutes, JimGrant and dynamics underlying financial markets,
econophysics at a Kolkata conference in founder of Grants Interest Rate Observer, to explain and anticipate the effects that
1995, the field was still in its infancy a twice-monthly journal of financial interactions between many agents are capable
despite having already spawned a slew of markets blamed the mess on mortgage of inducing. An optimistic view is that,
papers by statistical physicists, eager to lend science projects devised by these Nobel- equipped with such knowledge of systemic
their expertise to an intriguing new set of tracked physicists who came to work on behaviour, we might even be able to influence
problems. This trend was born in the wake WallStreet for the very purpose of creating market dynamics using the tools of complex
of a sudden availability of large amounts of complexinstruments1. networksscience.
financial data in the 1980s. But it may have And Grants certainly wasnt a lone voice. One practical way in which this might
had just as much to do with a frustration Some even went as far as to argue2 that the be achieved involves recognizing the
at the inadequacy of traditional theoretical prevalence of Aspergers syndrome in the financial institutions that are too important
approaches to economics, which seemed to physics community was responsible for to system stability to risk allowing their
favour model simplicity over accuracy, or the crisis that physicists working in the failure. The popular notion of a bank being
agreement with empiricaldata. financial sector werent capable of feeling too big to fail is currently being revised by
Perhaps even more attractive for empathy for the lives that stood to be scientists with an intimate knowledge of
physicists, were the inherent mathematical ruined from the inevitable failure of their how networks function. In this Focus issue
similarities between market movements and complexmodels. of NaturePhysics, we have drawn together a
the physical systems with which they were In reality, the collapse was attributable sequence of Commentaries from physicists
already familiar. The fundamental theorem to a combination of factors. Investment working in close quarters with prominent
of arbitrage-free pricing, for example, had houses that had purchased countless economists to elaborate on this, and other
given rise to the BlackScholes equation for mortgages of questionable reliability turned related directions, in the statistical physics of
option pricing a formula easily recognized to their quantitative minds in-house to complex financialnetworks.
as a type of diffusionadvectionequation. divide up and repackage the debts as exotic A report commissioned by the Centre
Early econophysics dealt primarily new products. This process was, however, for the Study of Financial Innovation in the
with these analogies providing insight designed to minimize risk providing safe late 1990s described the financial sector as
into the stochasticity and nonlinearity that investments with above-average returns. The depressingly unenthusiastic about the
characterize market dynamics. Physicists were argument can be made that the subsequent insight emerging from econophysics
able to shed some light on the origin of fat judgment calls of executives and managers research conducted in university
tails that were showing up in the distributions (armed with information they did not departments. The general feeling
of financial data, deviating significantly from understand) were more dangerous than the seemed to be that econophysicists
the Gaussian approximations of the Black instrumentsthemselves. desire to understand the
Scholes formalism. These anomalous statistics Despite the misgivings of the popular underlying dynamics of the
were found to be a natural property of the media, and the relative downturn in the market was fundamentally
universal scaling associated with market employment prospects of the financial at odds with traders
players exploiting microtrends in thedata. sector, the trend for physicists to enter the
The proliferation of econophysicists industry has not abated nor, it must
lining the halls of university departments be said, has momentum for physicists
coincided with a flood of physicists leaving in academia to turn their attention propensity to make money
academia to enter the financial sector. Young to problems associated with market out of itsimperfections.
mathematicians and physicists, equipped dynamics. Indeed, the quantitative The current efforts, however,
with little more than a PhD and a quick wit, finance archive3 was launched in seem to be directed squarely at the
were recruited into an industry that was fast December2008, largely to service a regulators saddled with the task of
learning the value of minds well-versed in wealth of submissions that was being avoiding a repeat of 2008. Perhaps
the language of partial differentialequations. distributed amongst the existingfields. they will be more interested in what the
So when the world at large fell into In recent years, however, the focus physicists have to say than were the market
financial crisis in 2008, physicists were of these efforts has shifted towards players of the late twentiethcentury.
quickly identified by many as one of the the realm of network science. This
key reasons behind the collapse. In an new endeavour addresses a need References
1. http://www.youtube.com/watch?v=2mphjxFYi9g
October2008 interview on US to understand the structure 2. Luyendijk, J. The Joris Luyendijk Banking Blog. The Guardian (8
May, 2012); available at http://go.nature.com/9PZKtC
3. http://arxiv.org/archive/q-fin
4. Lascelles, D. Quant and Mammon, Meeting the Citys
Requirements for Post-graduate Research and Skills in Financial
Engineering (Centre for the Study of Financial Innovation, 1999).

NATURE PHYSICS | VOL 9 | MARCH 2013 | www.nature.com/naturephysics 119

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