Econophysics: Markets And Economies As Complex Systems

Via Wired Magazine comes this paper with a unique take on market behaviour (abstract):

Predicting economic market crises using measures of collective panic
Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam

Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.

The modelling approach used here takes cues from physics as well as behavioural economics, blending the two. I’ll admit I’m a neophyte at both – I’m completely unfamiliar with the approach used in this paper. But the premise, and the results are intriguing, despite the brevity of the paper (17 pages, including references).

Technical Notes:

Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam, "Predicting economic market crises using measures of collective panic", Feb 2011