Workshop Philosophy of Physics and Finance opiro finance partners Landstrasse 40 LI9495 Triesen
Heisenberg s uncertainty principle in financial markets opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
Table of Contents Heuristic phenomena and basic question The connecting pattern: the quantum of action and the catalyst Theory transfer: from quantum mechanics to financial markets Formal transfer: from physical to economic causeeffect quantities Conclusions opiro finance partners Landstrasse 40 LI9495 Triesen 3
Heuristic phenomena and basic question opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
Heuristic phenomena and basic question The fish market effect Sell all fish by the end of the day Fix the price for fish for the day Supply and trading volume is fixed during the day Range of prices attained for fish is large and the prices obtained are completely uncertain The amount of fish sold is completely uncertain Unsold fish goes off Fresh fish implies uncertain prices opiro finance partners Landstrasse 40 LI9495 Triesen 5
Heuristic phenomena and basic question The central bank s dilemma Fix the money supply Fix the interest rate The interest rate at which the economy absorbs the given central banks money supply is uncertain The amount of central bank money absorbed by the economy is uncertain The central bank cannot set both, the price of money and the money supply. Stirring both introduces uncertainty for both quantities. opiro finance partners Landstrasse 40 LI9495 Triesen 6
Heuristic phenomena and basic question The antagonism of momentum and value Value investors If all market participants would buy and sell stocks according to value principles the price would not be able to gain momentum above or beneath fair value Momentum investors If all market participants would buy and sell stocks according to momentum principles than the price would be completely detached from its fundamental value during that period Market reality reflects the thinking and action of market participants opiro finance partners Landstrasse 40 LI9495 Triesen 7
Heuristic phenomena and basic question The duality of regulation and speculation If regulation is completely clear and unambiguous,...then it is also possible to safely circumvent the regulation, which is often accompanied by speculation and may generate more regulation (e.g. clear rules for AAA ratings, innovative solutions to deal with rules speculative leverage of AAACDOs ) The specification of rules can have unintended side effects, which can be demonstrated both conceptually and experimentally with an experiment in an artificial market laboratory. opiro finance partners Landstrasse 40 LI9495 Triesen 8
Heuristic phenomena and basic question The complementarily of position and monumentum Heisenberg s uncertainty principle In quantum mechanics, the Heisenberg uncertainty principle states that certain pairs of physical properties, like position and momentum, cannot both be known to arbitrary precision; that is, the more precisely one property is known, the less precisely the other can be known Basic question Are Heisenberg s uncertainty principle and the fish market effect, the central bank s dilemma, the antagonism of momentum and value, the duality of regulation and speculation not essentially the same? Can the mathematical formalism of quantum mechanics be used to explain economic phenomena? opiro finance partners Landstrasse 40 LI9495 Triesen 9
The connecting pattern: the quantum of action and the catalyst opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
The connecting pattern The common, shared elements Quantum of action «The catalyst» (the cause to action) Fish market effect Central bank s dilemma Momentumvalue Regulation One fish as unit of (trans)action One unit of tradable goods as unit of (trans)action One whole theme cycle as unit of action Securities, tradable etc. as units of trans(action) Price as catalyst for trans(action) Currency as catalyst for trans(action) Participation as catalyst for trans(action) Currency* as catalyst for trans(action) Quantum physics Planck s quantum of action h Will be discussed later * It is not the «rule», as the rule is part of the boundary conditions for trade opiro finance partners Landstrasse 40 LI9495 Triesen 11
The connecting pattern The three catalyst properties as defined in this concept 1 In an environment ENV an action A can take place, also in absence of the catalyst C 2 The presence of the catalyst C accelerates action A in the environment ENV 3 The catalyst C remains unchanged while generating action A The «catalyst» is a concept from biochemistry, which can also be viewed as a general logical concept. opiro finance partners Landstrasse 40 LI9495 Triesen 12
The connecting pattern Examples for typical catalyst in the economy Environment Catalyst Approach & Action Solution Barter economy Money Trade Stock exchange Research coverage of a stock Price realization of hidden value of the stock Auction Price increase Reduction of demand Financial market Participation cycle in the theme Theme cycle of market prices opiro finance partners Landstrasse 40 LI9495 Triesen 13
The connecting pattern The catalyst in quantum physics: a closer look at the photon (1/2) Consider the source of light and an observer in two different situations: Observer is, relative to source of light, at rest (observer 1) Observer has a relative velocity, v>0, towards the source of light (observer 2) observer 1 observer 2 source of light opiro finance partners Landstrasse 40 LI9495 Triesen 14
The connecting pattern The catalyst in quantum physics: a closer look at the photon (2/2) Given: Env = electromagnetic field of the photons of the light source A = h, Planck s quantum of action C = space where relative motion takes place between the observer and the source of light 1 In the absence of C (i.e. no relative motion of the observer and the source of light) Planck s quantum of action A=h is produced by the electromagnetic field with the frequency (energy of the photon equals h* ) Catalyst properties 2 By the Dopplereffect: if the relative space C is introduced (i.e. there is a relative motion of the observer and the source of light) then the observer is measuring a higher frequency ( > ) of the action A=h (with higher energy h* of the photon) 3 The catalyst C (i.e. the relative space which the observer passes through) remains unchanged during this process The space, which the observer passes through relative to the source of light, meets the three catalyst properties. opiro finance partners Landstrasse 40 LI9495 Triesen 15
The connecting pattern Summary The concept of the catalyst originated in biochemistry Its essential mode of operation can be expressed in three properties, which allows us to generalize the catalyst concept to a broader range of applications In several economic situations catalyst properties can be identified In quantum physics the catalyst properties have been verified for the relative space in the electromagnetic field of the photon Is the theory transfer from quantum mechanics to economics possible? opiro finance partners Landstrasse 40 LI9495 Triesen 16
Theory transfer: from quantum mechanics to financial markets opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
Theory transfer Transferring the photon concept to the economy (1/4) Manytz conditions for theory transfer : Theory transfer in a strict sense presupposes and assumes isomorphism between the empirical phenomena to be described and explained (i.e., a 1:1 relationship between the elements, properties, and relationships of interdependence in the two fields). Mayntz 1992* *Mayntz, Renate. 1992, The influence of Natural Science Theories on Contemporary Social Science. [ed.] M. Dierkes and B. Biervert, European Social Science in Transition. Boulder: Westview Press, 1002, pp.2779. opiro finance partners Landstrasse 40 LI9495 Triesen 18
Heuristic phenomena and basis question The use of Mayntz isomorphism Quantum mechanics Incomplete Mayntz transfer Financial markets TQM (Theory) List of items Transfer item per item List of items TFM (Theory) HQM (Hypothesis) List of items Transfer item per item List of items HFM (Hypothesis) EQM (Empiricism) EFM (Empiricism) TQM (Theory) TFM (Theory) After the theory transfer, the new theory for financial markets can be completely understood within financial markets opiro finance partners Landstrasse 40 LI9495 Triesen 19
Theory transfer Transferring the photon concept to the economy (2/4) The auctioneer s photon: Photon = sell offer during an auction Catalyst = price increase mechanism used by the auctioneer Quantum of action = renewal of the sell offer at the increased price while still meeting a demand Emission of a photon putting a sell offer into the auction 1:1 Isomorphism: Absorption of a photon transaction, allocation to the buyer Heisenberg uncertainty: Momentum=fixed quantity to sell=fixed Position=uncertain price=uncertain opiro finance partners Landstrasse 40 LI9495 Triesen 20
Theory transfer Transferring the photon concept to the economy (3/4) The central bank s photon: Photon = unit of money in circulation (currency) Catalyst = unit of money Quantum of action = exchange unit of goods against unit of money Emission of a photon putting a unit of money into circulation 1:1 Isomorphism: Absorption of a photon recollection of money unit by central bank Heisenberg uncertainty: Momentum=fixed transaction volume per unit of currency (e.g. by regulation) Position=uncertain number of hand changeovers until recollection=uncertain opiro finance partners Landstrasse 40 LI9495 Triesen 21
Theory transfer Transferring the photon concept to the economy (4/4) The marketcycle photon: Photon = production of a market cycle per participation cycle Catalyst = market participation cycle Quantum of action = run through a complete market cycle Emission of a photon issuing equity into public equity market (public participation) 1:1 Isomorphism: Absorption of a photon buy back of public equity Heisenberg uncertainty: Momentum=fixed one market cycle per (public) participation cycle=fixed Position=uncertain phase in the participation cycle=uncertain opiro finance partners Landstrasse 40 LI9495 Triesen 22
Formal transfer: from physical to economic causeeffect quantities opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
Formal transfer Definition of quantum of action and of space Step 1 Definition of quantum of action Set the (economic) quantum of action A equal to h. Step 2 Definition of space Space emerges through repeated recycling (selfaccess) of the catalyst C: C C C C C xaxis of space dimension Momentum = action per unit of space. opiro finance partners Landstrasse 40 LI9495 Triesen 24
Formal transfer Definition of time and of velocity v<c Step 3 Definition of time Time emerges tautologically through the pulse of the recycling of catalyst C speed of light is absolute and constant c=1. C C C C C t=time measured through pulse of catalyst s self access Energy = action per unit of time. Step 4 Definition of velocity v<c Due to the Dopplereffect: Different catalysts (for the same action) generate different inertial frames which move with constant relative velocity. opiro finance partners Landstrasse 40 LI9495 Triesen 25
Formal transfer Definition of mass Step 5 Definition of mass We assign to the inertial frames a total energy Etot and a total momentum Mtot. If not all potential of action in the environment Env is transformed to photons by catalysts, i.e. not all of the energy is radiated, then objects emerge which can be considered as emitters of photons and have a rest mass > 0. In order to properly define rest mass and position of rest mass, additional information of the environment Env is required, in particular the concept of inertia has to be deduced from this additional information. opiro finance partners Landstrasse 40 LI9495 Triesen 26
Formal transfer Definition of force Step 6 Definition of force If two objects, with rest mass>0, cannot only emit photons but also absorb photons (of the other object) then an exchange of particles emerges. Through this exchange a force between objects can be defined. Here, the environment Env determines how the distance between the objects varies during the exchange (distances between objects = average length of paths between emission and absorption of photons). opiro finance partners Landstrasse 40 LI9495 Triesen 27
Formal transfer The definition of the wave function Step 7 The definition of the wave function All the properties and observables, such as momentum, energy, mass, position, etc, of quantum mechanical systems can be expressed with a so called wave function of the system, e.g. if p=momentum and E=energy of a photon then the wave function of a photon is expressed as follows: p (x, t) 0 exp( i( x h E h t)) Lemma: if a (causeaction)system follows step 1 to step 6 then it can be expressed with a formally identical wave function as one uses for quantum mechanical systems. opiro finance partners Landstrasse 40 LI9495 Triesen 28
Formal transfer Transfer of the Heisenberg uncertainty principle Step 8 Transfer of the Heisenberg uncertainty principle Every system whose properties can be expressed by a wave function (which is formally identical to a wave function for a quantum mechanical system) must obey the Heisenberg uncertainty principle: p x h 2 The uncertainty of the momentum p, times the uncertainty of the position x, is greater or equal to half the quantum of action, h. opiro finance partners Landstrasse 40 LI9495 Triesen 29
Conclusions opiro finance partners opiro finance partners Landstrasse 40 LI9495 Triesen
Conclusions We have shown how the Heisenberg uncertainty principle can have more general applications in the economy and in financial markets. As one major result we could formally prove that price and supply in economic markets are complementary, i.e. that the Heisenberg uncertainty principle applies to price and supply in economic systems in general. Since the mathematics of the wave function of quantum mechanical systems have a much broader range of applications, this method of theory transfer opens up a large field of new possible scientific research in economics and capital markets theory. opiro finance partners Landstrasse 40 LI9495 Triesen 31
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