Markets and Fundamental Particles

What do they have in common?

When economists devise new theories about the market, and people’s behaviors, the market responds through arbitrage, taking advantage of this new information to make more money, operate more efficiently, etc. Any participant in the market can pick up a copy of an economist’s published research paper and change their behavior accordingly.

The poor economist! The results no longer seem valid! So the cycle begins anew, economists study, agents respond, and back and forth. The early 20th century Austrian school of economics under von Mises knew this, and developed ideas about phenomenology as applied to economics.

But out of that trend toward phenomenology in the early 20th century led to a similar approach to fundamental physics. Especially as applied to quantum theory. Observing something at the quantum level changes it, so it is no longer possible to ascertain the state it was in prior to observation (to the extent that the concept of a pre-observation state is even logically useful). So observation causes the object of observation to respond correspondingly. Like economists and markets.

My analogy may seem a bit rough, but it’s important to remember that how we observe fundamental particles (ie. what theorists would tell an experimentalists to do to attempt to falsify a theory) is largely theory based on the most fundamental levels we can experimentally attain at this time. How we observe very much impacts how the system that is being observed responds. Increasingly complete observations and theories would have to encompass greater and greater subsystems into the system under consideration which leads ad-infinitum to nonsense.

So the point of my analogy is that theoretical physicists should take a cue from economists and very very carefully consider the role of theory in their work. Even if they aren’t philosophers. They should probably ignore everything else though, economics as a subject is dismal in many many ways.

On that note, here’s a good paper discussing the role of theory in economics.