8 ms·
The physics of financial networks
- dredmorbius 5y agoHard paywall.
- dredmorbius 5y agoArxiv / preprints available: https://news.ycombinator.com/item?id=27460258 https://news.ycombinator.com/item?id=27460258
- dang 5y agoChanged now. Thanks!
- streamofdigits 5y agopreprint version [available here](https://arxiv.org/abs/2103.05623 https://arxiv.org/abs/2103.05623)
- dang 5y agoOk, we've changed to arxiv.org from https://www.nature.com/articles/s42254-021-00322-5 https://www.nature.com/articles/s42254-021-00322-5, which is hardwalled. Thanks!
- chirau 5y agoThe full paper is here https://arxiv.org/pdf/2103.05623.pdf https://arxiv.org/pdf/2103.05623.pdf
- dang 5y agoOk, we've changed to arxiv.org from https://www.nature.com/articles/s42254-021-00322-5 https://www.nature.com/articles/s42254-021-00322-5, which is hardwalled. Thanks!
- mistrial9 5y agofrom the top of the paper: "As the total value of the global financial market has vastly outgrown the value of the real economy, financial institutions on this planet have created a web of interactions whose size and topology calls for a quantitative analysis by means of Complex Networks." refer to Capital in the Twenty-First Century : "The book's central thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability." regarding models, in a conclusion of Nature paper: "Differently from other networks, here nodes have some ability to anticipate the future, including the future structure of the network and try to take advantage of it. Although in reality such ability is much more limited than what models in mainstream economics postulate, it represents a circularity in the model that is difficult to treat with analytical or statistical tools. " so, participants use models and apply them to change behavior, making the system harder to model (!)
- ludamad 5y ago"so, participants use models and apply them to change behavior, making the system harder to model (!)" I am ignorant here, but isn't this property true of iterated prisoner dilemma situations? Is game theory not an adequate model here?
- vladTheInhaler 5y agoI mean there are a lot of questions that can be posed, but are computationally intractable to answer. Think of the traveling salesman problem. Or worse - the halting problem.
- HWR_14 5y agoThat property is true of game theory problems, of which iterated prisoners dilemmas are a subset. And yes, game theory is the appropriate field to deal with those issues, however that does not necessarily mean that any solutions exist or are trivial for a specific problem. Compare to a lot of engineering models being reduced to "just calculus"
- 5y ago
- alimw 5y agoThese guys' models can have multiple solutions. To me, that would indicate a problem with the model. But they are happy enough just to select the most optimistic solution.
- teorema 5y agoI have to read the paper thoroughly but I've come to the opinion that multiple solutions aren't in of themselves a problem if they are incorporated into inferences. A lot of Bayesian inference can be thought of as involving solution spaces, for instance, where you're assigning a probability to each solution. Not disagreeing with you, just wondering out loud if it could be revisited with other methods.
- epistasis 5y agoI don't do financial modeling, but in all other areas of modeling it's definitely the case that there are many different "solutions" by which I'm guessing you mean local optima. Having multiple solutions is somewhat equivalent to having different states of matter in physics. And economies definitely have very different modes, or states, that we call recessions or booms. Being able to have these sorts of local optima would seem to be necessary foe any model of an economy. But I may not be understanding you, because we are using the same words in different ways...
- carlob 5y agoI took a class of econophysics in grad school and one of the models with studied was a very simple generational model to explain inflation. It was originally discarded because it had an unrealistic solution with very high inflation, however it turned out to be a very good model for how hyperinflation can arise with a relatively small change in parameters. This was made particularly poignant given that the professor was Argentinian.
- alimw 5y agoThis turns out to be a review paper by the same authors which only mentions the model I wanted to criticise. It's unlikely that one of the original papers will ever turn up on HN though! I was surprised to see this. As I recall they began by adopting a structural model for debt valuation that assumes no dependence on any external assets other than the debtor's. Then they reintroduce full n-dimensional dependence through a different mechanism they made up to try and force the 1-dimensional solutions into a state of consistency. It's a bit of a mess. Actually you're right. The presence of multiple solutions is not in itself enough to make me hate the model. The analogy relating different economic regimes to different phases of matter is potentially a good one.
- mooneater 5y agoWas hoping to find out who the next LTCM or Bear Stearns is.
- anthony_r 5y ago> "As the total value of the global financial market outgrew the value of the real economy" - the first sentence What the hell is this supposed to mean? What is "value" here, can financial markets conjure more houses, crops or datacenter capacity? Or does it mean that "market prices of securities" have outpaced the "market prices of" .. "the real thing"? Like, seriously, what?
- dangerlibrary 5y agoYes. The market prices of securities, and (critically) the returns on those securities, are now higher than the book value and returns of the cash invested in companies whose shares back those securities.
- anthony_r 5y agoThe market value of stocks and corporate bonds is pretty much always larger than the book value of the underlying companies. If this is not the case you've found yourself in a 1931-type of a bargain. The delta between the book value and the securities pricing is the estimated future profits. Now how exactly did you arrive at the conclusion that the future profits estimation is too high?
- bordercases 5y agoHow did you arrive at the conclusion that your estimates were correct in the first place? That argument cuts both ways.
- deleted 5y ago[deleted]
- dangerlibrary 5y agoI didn't come to that conclusion, and you are ignoring the part of my comment pointing out that the critical switch is that the _returns_ on securities now exceed _returns_ on actual businesses. But, since we're now talking about overvalued securities: https://www.npr.org/2021/05/05/993754418/planet-money-the-100-million-deli https://www.npr.org/2021/05/05/993754418/planet-money-the-10...
- bernardv 5y agoNot again. Econophysics tried hard 15/20 years ago but really made no substantial contribution to our understanding of markets.
- paulpauper 5y agoEric weinstein has tried to apply physics concepts to economics , such as gauge theory. I dunno if he succeeded. I remember it generated at the time a lot of hype
- 0xBABAD00C 5y agoSeems like a strange sentiment, evaluating a modeling approach based on historical analogies vs its own merits. If we're playing the historical analogies game, people were saying "not again" about Neural Networks up until mid/late 2000s.