Chemistry Related
By Lisa Merkl
Predicting financial markets is more of a gamble than traditional economists will admit, and making sense of such numbers is more like trying to decipher noise blasting from a loudspeaker, says a UH econophysicist, who leads one of the world’s most preeminent groups of its kind.

Joseph McCauley, a physics professor with a dual appointment as a senior fellow in the economics department at the National University of Ireland, Galway, leads the UH group. The team’s main discovery, backed up by empirically based modeling of market dynamics, is that financial markets are unstable. Associate Professor Kevin Bassler, Professor Gemunu Gunaratne, and Professor George Reiter — all of the physics department — round out the UH econophysics group that applies their newly discovered models and methods to solve problems in economics.

McCauley was the only invited physicist to speak at an economic workshop — “Financial fragility and technological progress with heterogeneous agents and social interactions” — this past December in Trento, Italy. He weighed in with his perspective on the subjects of macroeconomics (the overall aspects and workings of a national economy) and microfoundations (in which the macroeconomic model is built up from the actions of individual agents).

McCauley and his colleagues contend that a market is made up of “noise” in the strictest mathematical sense of a random and persistent disturbance that obscures clarity. Using techniques developed in physics such as entropy — the study of randomness or disorder — challenges the common belief in economics that market statistics have structure and tend toward equilibrium.

© University of Houston 2007