Financial payoff functions and potentials

Abstract

This paper attempts to argue that when considering a financial payoff function as a potential, one can begin to model how ‘private’ information is. Private information is probably best understood by juxtaposing it against the concept of ‘public’ information, i.e. information which is widely available via various freely accessible media platforms. The very simple model presented here allows us to make a case to compare public with private information. In economics and academic finance, a comparison of both such notions of information can prove to be a useful exercise especially in models where a more formal approach to information is needed. The argument made in this paper is based on using Fisher information and its relationship with a probability density function which itself is related to a wave function. The comparison between the level of available public information (proxied by total energy) and the payoff function (proxied by the potential function) is an important driver in determining the decay of the wave function.