Econophysics: Still Controversial After All These Years

Abstract

Econophysics is the biggest branch of complex-systems research, and physicists have flocked into finance. But many economists view econophysicists as dilettantes.Traditional economic theory is fundamentally flawed, econophysicists say. It relies on "representative agent models" in which a hypothetical average Joe interacts with monolithic economic forces. Such models ignore correlations that lead to, say, booms and busts. To prove rigorous theorems, economists assume that market fluctuations follow a bell-shaped "Gaussian distribution," which underestimates the probability of big swings. Econophysicists claim to take a more data-driven approach. They have yet to score a major breakthrough, but they say their contributions are gaining wider acceptance. Still, econophysics does not impress some economists.