Dear Mr. Soros,
Several leading economists, including several Nobel Prize winners, have recently made their dissatisfaction with their own field clear. In doing this they have confirmed the same criticisms of the Neoclassical Paradigm that econophysics researchers have been making for more than a decade. Early on, they have warned of the pitfalls of mechanical analogies from the 19th century, which current economic theory is built on.
Physicists have pointed out that “Economy needs a revolution” and diagnosed the lack of robustness of the financial system, in some cases before the recent crisis (see attachments). Their criticism concerns the pillars of established economics:
- Markets are not efficient by nature.
- Economics can be driven far from equilibrium (as bubbles and crashes illustrate).
- The system behavior is dominated by interactions between the market participants, and is hard to regulate.
- Network interactions can change the behavior of markets dramatically.
- Science needs to be driven by empirical data, not ideologies and preconceived mathematical formalisms.
Their new approach allows us to understand markets as ecosystems, in which extreme events are the result of systemic instabilities. This is based on the theory of complex dynamical systems, considering randomness and strong interactions as fundamental features.
The financial crisis has not only created huge financial losses. It has damaged the economic system to an extent that several countries are at the verge of bankruptcy, and social systems have become dangerously vulnerable. The problems we have seen may just be the beginning of a larger crisis. The situation may totally get out of control, endangering social peace and cultural achievements.
It may interest you that the European Union is currently building scientific “Flagships” to address the grand challenges of the future. With a budget of 100 million EUR per year, over a period of ten years, they want to foster unprecedented scientific discoveries and radical innovation by transdisciplinary research. The FuturIcT flagship initiative aims at developing a realistic theory of economics and concepts for a sustainable world, involving scientists from a large range of fields. Hundreds of experts in mathematic, physics, economics, sociology, psychology, ecology, computer science, etc. will be working together to combine the best of human knowledge. We would like to invite you to be a galleon figure of this Flagship.
The FuturIcT flagship fits perfectly the goals of your Institute of New Economic Thinking. We hope that you can join us, and that in any case you will add econophysicists to the advisors of your institute. Joining forces could largely accelerate the required paradigm shifts and the development of solutions to the challenges humanity is facing.
See the final version of this
Jean-Philippe Bouchaud, Doyne Farmer, Dirk Helbing, Imre Kondor, Rosario Mantegna, Matteo Marsili and Yi-Cheng Zhang.
See the response from George Soros
Dirk Helbing studied physics and mathematics at the University of Göttingen. He completed his doctoral thesis at Stuttgart University, on modeling social processes by means of game-theoretical approaches, stochastic methods and complex systems theory. In 1996, he received a Heisenberg scholarship following the completion of his habilitation on traffic dynamics and optimization. From 1997 on, he spent two years in total at international research institutions in various countries. In 1998 he became Managing Director of the Institute for Transport & Economics at Dresden University of Technology. In 2000, he was appointed full professor for Traffic Modeling and Econometrics In 2008, Helbing was elected as a member of the German Academy of Sciences Leopoldina. He has edited several special issues on material flows in networks and on cooperative dynamics in socio-economic and traffic systems. He heads the ETH Zurich Competence Center "Coping with Crises in Complex Socio-Economic Systems" and the "Physics of Socio-Economic Systems" Division of the German Physical Society (Deutsche Physikalische Gesellschaft, DPG).
Imre Kondor is professor of physics at Eotvos University, Budapest, honorary professor of finance at Corvinus University, Budapest, and permanent fellow (previously rector) of Collegium Budapest - Institute for Advanced Study. He obtained his degrees in physics from Eotvos University, resp. the Hungarian Academy of Sciences (HAS), and had various teaching and research positions in Hungary, as well as visiting positions at ICTP, Trieste, Italy (1972-73), Goethe University, Frankfurt, Germany (1981), CEN, Saclay, France (1982), and Victoria University, Manchester, UK (1984-86). In 1992 he founded the Bolyai College in Budapest, a school of excellence for science students, where he served as director until 1998. From 1998 to 2002 he was the head of the Market Risk Research Department of Raiffeisen Bank, Budapest. He has published over 70 research papers, 2 books and one e-volume. He is coeditor of Fractals, JSTAT, and from 2005 to 2007 was the review editor of Journal of Banking and Finance. His research experience includes the theory of condensed Bose systems, critical phenomena, complex systems and spin glasses, and, since 1997, the application of statistical physics methods to problems in economics and finance (especially the theory of portfolios, risk management and regulation).
- I. Kondor, A. Szepessy and T. Ujvárosi: Concave risk measures in international capital regulation, in: Risk Measures for the 21th Century, Ch. 4., pp. 51-59, ed. G. Szego, John Wiley & Sons (2004)
- I. Kondor, Sz. Pafka, G. Nagy: Noise sensitivity of portfolio selection under various risk measures, Journal of Banking and Finance, 31, 1545-1573 (2007).
- I. Varga-Haszonits and I. Kondor: The instability of downside risk measures, J. Stat. Mech. P12007 doi: 10.1088/1742-5468/2008/12/P12007 (2008)
Rosario Mantegna was originally trained as a physicist. Just after the completion of his PhD. In 1990 he was a pioneer in the developing of the new interdisciplinary research area of econophysics. Econophysics uses concepts and tools of statistical physics, theoretical physics, statistics, probability theory, theory of stochastic processes, economics, econometrics and finance.
Within econophysics he has investigated different topics. Among them it is worth citing (i) the stylized facts of univariate time dynamics of high frequency price returns, (ii) the hierarchical structure and correlation based networks associated with the multivariate time dynamics of a portfolio of stocks simultaneously traded, (iii) the cross sectional analysis of price returns, (iv) the presence of an Omori law during the periods of time just after a financial crash, (v) the microstructure aspect of the price impact and of the order book dynamics and (vi) the empirical detection of resulting strategies in the trading action of market members of a financial market.