Dynamical Complexity of Market Mechanism

Abstract

Recent there is a new trend among physicists—the so-called econophysics as an interdisciplinary field of investigations. Chief among the current Topics is devise appropriate models to understand financial markets. The traditional theory of finance is based on the newtonian mechanical paradigm, where a representative agent facing the well defined benchmark, that the pendulum-like equilibrium around a preset center prevails. The modern financial market participants show that this view is way out-dated, that the market is collective phenomena resulting from countless inhomogeneous agents with different strategies and perceptions. This poses a serious challenge and opportunity for statistical physics community: In recent years we have been accustomed to modeling systems with many degrees of freedom, out of equilibrium, that many advanced tools have come of age. It is in this spirit we have introduced five years ago in Fribourg the so-called Minority Game. The hope is that the striped down model of financial market represented by MG game acts like an Ising-like model: simple enough to work with, both analytically and numerically, and yet the outcome can be complex and rich enough to account for diverse phenomena encountered in real financial markets. Below I recall the basic idea of modeling financial markets.