Economics and physical sciences … herd behaviour part 2

I have got to thinking about how ultimately applicable physical sciences are to the backwards stochastic (statistics of randomness) approach put forwards by economics. Armed with a few neodymium rare earth magnets, some iron filings and two of my daughters lunch boxes (sorry honey, thank you) I was pontificating the application of polarity and magnetic attraction to the field of Economics and the role of agents. This at-home ad-hoc experiment introduces 6.1 Billion people (the iron filings) to 2 agents – the home video is linked below. The 2 agents are first polar opposites, and then like polar (same polarity). The outcome is then the distribution (grouping) of the people (filings) in the presence of just 2 agents. Hopefully it is simple enough to imagine what would happen with just one agent (one magnet).

Excuse the format, each is a 1 minute home video captured via an Android phone. Simplistically, the filings are intended to represent the motion/grouping of people in respronse to applied influences.

1. Filings introduced to a field of 2 polar opposite magnets
Video1: 2 magnets, polar opposites 1 min 12.9MB (allow time to load)
– resulting distribution between 2 magnets (agents), then shaken (volatility)

2. Filings introduced to a field of 2 polar same magnets (same polarity), resulting distrituion
Video2: 2 magnets, same polarity 1 min 15.6MB (allow time to load)
– resulting distribution between 2 magnets (agents), then shaken (volatility)

A few observations to both that have obvious applications to herd behaviour and economic theory –
a) a distribution of location/distance occurs in both scenarios in response to the forces/influence of each agent
b) minor grouping/clustering before asssociation (movement) to one or the other magnet creates crowding at one or the other
c) friction plays a very large role on rate of movement, and the final distribution (e.g. glass vs plastic vs paper)
d) introducing volatility forces closer attachment (to magnet); creates group segregation => reduces broader distribution
e) if aluminium filings where introduced (non-ferrous), these filings (people) would be unaffected by either polarity. i.e. Some filings (like people) would remain unaffected by the application of 2,3, … 1000 magnets.
f) the more violent the shaking, it forces all filings (people) to cling to the nearest magnet (agent), eventually reducing the distribution down to the number of magnets (agents).
g) the magnets can represent religions, opinions, beliefs, political/sexual/social preferences etc. Volatility (my shaking) can represent shocks whether natural or man made interference.
h) the magnets can represent competitions, choice, and field are the forces of the resultant global environment.
i) friction/stiction would make the distribution less responsive to applied volatility (shaking)
j) even though strongly attached to a particular agent, there is a sub-distribution of position within each agency (magnet)
k) regardless of polarity/bias, each agent (magnet) attracted it’s own group dependent on it’s strength/influence

I then thought of the ‘Field of Dreams’ and the modern day economic metaphor “If you build it, they will come” … maybe. Like the filings, they (people/muppets) must first be ‘attracted’ to the idea/commodity/agent. Are they then sufficiently removed/detached from existing agency/consumption influence to freely migrate/move to the newly introduced agency? What influences/forces currently bind them or otherwise restrict them? Are they able to be influenced in the first place? All of these considerations have some tangible similarities to physical reality in electromagnetism and ferro/nonferro magnetic interractions.

3. Introducing a 3rd agent, moving it, then removing it
Video3: 2 magnets same polarity + introduce a third magnet 1 min 15.6MB
– excuse me for not being more scientific, it is Sunday and we were playing at the time
– the new agent (magnet) altered the distribution within and around of the existing 2 magnets, it added a 3rd influence
– even though all agents were identical, the 3rd magnet (agent) did not attract 1/3 of all the filings (people/muppets)
– the distribution was not 1/3 to each agency (magnet), but the 3rd agent could draw some muppets away from the existing 2 creating a bigger local 3rd group only by positioning itself properly.
– when removed, the muppets attached to the 3rd agent were redistributed back to the remaining 2 depending on proximity and where the 3rd agent departed from

[post-edit] Removing a magnet is the equivalent of a major bankruptcy or insolvency. Once everything has been shaken up (shocked) and forced into tighter groups, then only by reducing the number of agencies (via liquidation) forces the redistribution of those muppets attached to the liquidated agent. Too Big Too Fail also works in this instance. Combining 2 agencies clearly combines the 2 groups into 1 larger group. All in all, the distribution is affected by volatility into tighter groups. I for one can see the events of 2008/2009 in this very simple experiment via the combination of some banks and the failure of others. If I had a larger area and 10 sets of hands I could simulate a larger experiment of motion, interaction, regrouping while adding and liquidating agents of various size, position and alignment.

So James Clerk Maxwell and his theory of electromagnetism (among other physical sciences) have very relevant applications to economics as far as I am concerned. An agency has physical influence similar to the laws of attraction and repulsion. Introducing volatility would increase stochastic distribution only in the presence of very weak existing attraction, affecting only those not influenced or not subject to attachment. Those who are already strongly attached will remain more so in the presence of volatility (ala the magnets).

Hence I concluded from this very simple Sunday playtime, that giving things a good shake up reduces choice and reduces economic distribution thus creating monopolies. Which is funny since ‘monopolies’ is related to ‘monopole’, which is a singular bias/influence/force. Agents, like magnets, are attractors. More agents and their resultant interactions do not create more even distribution. Volatility reduces distribution, not increasing it, and creates tighter grouping. That is volatility forces closer association. But of course there are more than 2 or 3 inflluences (agencies) within our current global society.

Food for thought … but there is an utter lack of application of proven and well established physical science that is clearly missing from the field of economics. Stochastics and statistics is the cheats way of (not) explaining that which you don’t understand by associating ‘randomness’ to orderly influences. QED: Economics. Imagine for a second if Sir Isaac Newton had associated a stochastic function to gravity? NASA would not have been be able to land 3 rovers on a planet over 100 million kilometres away with any degree of certainty. Instead, it would be ‘probable’ that ‘in all likelihood’ that the $500Billion budget allocated will result in ‘at least some’ rovers landing on the correct planet, but only after launching 100 of them. That a particular rover will land in an exact place and time is the outcome of a probability distribution. Sadly, the latter approach allows people to claim status as being a Nobel recipient and afforded some kind authority on the mechanics of economagic.

Imagine yourself one of the filings within a field of multiple attractors. Are you ferrous, and influenced by the strongest local magnet? Are you non-ferrous and totally unaffected by the presence of all and any agent? What associations/agencies do you most closely associate/group with or are attracted to? Is this a strong or weak attraction?

As directed, I had to stop to clean the lunch boxes and return them to their rightful owner.


About atradersrant

Self-employed private trader of equities, commodities and FX for income and investment; Follow me at your own risk! I provide analysis of major market & economic trends .. with too much commentary on fraud and corruption that is rife in the open market.
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