Self-organized complexity in economics and finance

H. E. Stanley*, L. A N Amaral, S. V. Buldyrev, P. Gopikrishnan, V. Plerou, M. A. Salinger

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

60 Scopus citations

Abstract

This article discusses some of the similarities between work being done by economists and by physicists seeking to contribute to economics. We also mention some of the differences in the approaches taken and seek to justify these different approaches by developing the argument that by approaching the same problem from different points of view, new results might emerge. In particular, we review two newly discovered scaling results that appear to be universal, in the sense that they hold for widely different economies as well as for different time periods: (i) the fluctuation of price changes of any stock market is characterized by a probability density function, which is a simple power law with exponent -4 extending over 102 SDs (a factor of 108 on the y axis); this result is analogous to the Gutenberg-Richter power law describing the histogram of earthquakes of a given strength; and (ii) for a wide range of economic organizations, the histogram shows how size of organization is inversely correlated to fluctuations in size with an exponent ≈0.2. Neither of these two new empirical laws has a firm theoretical foundation. We also discuss results that are reminiscent of phase transitions in spin systems, where the divergent behavior of the response function at the critical point (zero magnetic field) leads to large fluctuations.

Original languageEnglish (US)
Pages (from-to)2561-2565
Number of pages5
JournalProceedings of the National Academy of Sciences of the United States of America
Volume99
Issue numberSUPPL. 1
DOIs
StatePublished - Feb 19 2002

ASJC Scopus subject areas

  • General

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