This two-minute video excerpt sums up why the Efficient Market Hypothesis may not be the best model for understanding the markets. Watch and learn why.

Learn more about this year’s Social Mood Conference>>

Dr. Baddeley will discuss her  latest research on financial herding at the 3rd Annual Social Mood  Conference.

This week I spoke with Michelle Baddeley about  her research and coming presentation, “Herding, Animal Spirits and Financial  Instability” for the April 13 Social Mood Conference. She describes the path that led to her study of social learning and herding in  financial markets.

Jill M. Noble: Please tell us how you got into behavioral finance and neuroeconomics.

Michelle  Baddeley: When I was an undergraduate I had an inspirational lecturer who introduced me to Keynes in a macroeconomics course. So I decided on Cambridge (for postgraduate work) because that’s where Keynes was: I was very interested in his thoughts on financial speculation. In his many writings in the context of financial speculation, he talks about the way people follow each other. He doesn’t use the word herding, specifically, but he talks about a social learning process where people follow what others are doing and then decide what to do [individually].

I started off with an applied macro perspective, but it’s empirically difficult to capture these things using a macro approach. In 2005 I went to the American Economic Association Meeting and attended a session on neuroeconomics. It made me think that the way to understand herding is with a more micro approach — and that neuroscientific techniques could illuminate the herding process quite nicely.  When I came back from that conference, I contacted various neuroscientists in Cambridge and discovered that they were very interested in working with economists on this sort of research.

JMN: Being at Cambridge, did you find that the scientists investigating brain function and conducting fMRI studies  were already aware of Keynes’ social learning idea?

MB: Not so much. Generally they were  interested in economic decision-making in the broader sense. They were familiar  with standard concepts of utility, game theory and things like  that.

JMN: What did you personally expect to  find when you began to look at the neurobiological side of finance?

MB: I had  some preconceived notions. Coming from the Keynesian perspective, the focus is very much on financial and economic decisions not being rational. I brought with me a view that things are either strictly rational in a well-defined sense or not rational at all. But as I started working with the behavioral scientists I moved away from that sharp distinction. If you’ve read some of Daniel Kahneman’s literature you’re familiar with the idea that things aren’t so binary: it’s more of a systems approach. This stark division between rational and irrational is not particularly helpful because no decision is simply one thing of the other: it’s an interaction that has different systems thinking. None of these systems are necessarily better or worse than any other: it’s just a more complex way of understanding how people think.

I think that neuroscientists and psychologists are better [than economists] at thinking about thought in a more nuanced way.

JMN: It’s wonderful to finally have the tools to measure and quantify these decision-making processes. You’re absolutely right to point out that things aren’t as black and white as was previously thought.

MB: That’s right, and a lot of neuroscientist’s work identifies some areas of the brain  that are more highly evolved, and they’re activated with particular decisions.  But then there are more primitive systems in the brain that are also activated.  So there’s an interaction between these two things which neuroscientists, with their brain imaging experiments, are able to pick up.

JMN: We’re especially interested to hear about your findings in regards to the primitive parts of the brain in contexts of uncertainty — the idea of herding as a knee-jerk response.

MB: Yes, with the fMRI studies that we did… in 2006 I first heard of socionomics when I talked with Wayne Parker at a conference in Paris. Wayne had published a couple of papers with Bob Prechter, and he listened to a presentation I was giving and then introduced himself. The experiments that I did with the Cambridge neuroscientists were uncovering an interaction: Keynes talks about an interaction between cognitive and instinctive. The results were quite  preliminary, but the primitive reward structures in the brain respond to a whole lot of things, but the same areas that might be activated in addictive behavior and receiving any sort of reward [monetary or otherwise] these areas of the brain are activated. They are relatively primitive structures; the limbic system.

JMN: Will you speak to this at the Social Mood Conference?

MB: The study I will talk about at the conference looks at the interaction between what could  loosely be described as greed and fear: a certain area of the brain called the amygdala evolved with emotional processing. It’s an ancient structure that  processes a lot of aspects of emotional decision-making.

What we found in our experiments is that when individuals saw social signals (a group of  people making a decision), those individuals then decide whether they’re going to go along with that decision (to conform) or do the opposite (to be  contrarian). There was this interaction between the areas of the brain that were picking up what could be interpreted as a fear response and the areas of the brain that could be implicated in a greed response…wanting the reward, yet being afraid to go against what the group is doing. It’s a small sample and the results are quite preliminary, but it was very interesting to pick up.

JMN: Yet this type of research is still very new, in terms of the availability of large sample sizes or numerous research studies…

MB: Yes, I think there is some resistance  among standard economists to neuroeconomics generally. They are different  methodological styles. The standard approach uses econometric analysis usually  based on very large sample sizes, whereas brain imaging studies, necessarily,  are on very small samples because it’s an expensive technique.

Neuroscience techniques aren’t “conventional” at all. It’s becoming more established, but it’s taking a while… If you want to do an econometric study — assuming that you can just use public data published by a government organization and software that you probably already have — then the cost is very low. But to do a brain imaging study it’s tens of thousands of pounds.

JMN: This is exactly why we’re excited  to have you join our list of speakers, all of whom are going against the status quo in some way or another. The forefront of research is often not very popular amongst the old guard.

MB: Yes! And that’s what makes it fascinating — you’re not just reinventing things around the edges. To be confirming more or less what everyone else is saying isn’t very exciting, is it? This is different, and more exciting.

April 13 in Atlanta, GA: You have the rare opportunity to hear Michelle Baddeley in person, plus an outstanding international lineup of professionals at the forefront of social mood research. From physicists to financial experts, computer scientists to behavioral psychologists and more, the Social  Mood Conference is an event you don’t want to miss.

Reserve  your seat at the cutting edge of socionomic research  today>>

Alan Hall and John O’Donnell discuss socionomics: What it is, how we can observe it in the world around us, and what social mood actually does.

On April 13, Alan Hall will speak at the 2013 Social Mood Conference. Learn more here >>

Interview with Rishab Aiyer Ghosh on making social media the true engine of Internet searches

What will the next wave of the digital revolution look like? The short answer begins with the phrase, “open source software.” From Wikipedia to the Human Genome Project, open collaboration is transforming the way innovation happens.

Rishab Aiyer Ghosh has been at the center of the open source movement for nearly two decades. His career began in 1995 as Founding International and Managing Editor “First Monday,” the most widely read peer-reviewed journal of the Internet. From there, Ghosh went on to develop the Free/Libre Open Source Software initiative (FLOSS).

Today, with grants from the US National Science Foundation and European Commission, he heads the Collaborative Creativity Group at the United Nations University Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-Merit). Ghosh is currently a board member of the Open Source Initiative.

His latest project is Topsy Labs, which is using big data to produce “the only full-scale public index of the social web.” You can watch this interview with Myriah Johnson of Upside News, as Ghosh explains the how and why behind integrating social media into effective search engine results.

Open source software and social media alike depend on mass participation — and where large groups are involved, socionomics can shed a uniquely revealing light.

Rishab Aiyer Ghosh will speak at our 3rd Annual Social Mood Conference April 13 in Atlanta.

Don’t miss this rare opportunity to hear from other professionals at the cutting edge of social mood research. From physicists to financial experts, computer scientists to behavioral psychologists and more, the Social Mood Conference is an event you can’t afford to miss. Reserve your seat at the forefront of socionomic research today >>

Are you an entrepreneur, investor, trader, finance professional, researcher, professor, social scientist, behavioral economist or an expert in a related field?

If so, there are dozens of reasons to attend The 2013 Social Mood  Conference. Here’s our “best of” list of those reasons, titled “13 Reasons to Attend the Social Mood Conference.” Click here to read the PDF brochure

Reason 1: YOU.

The first and foremost reason to attend The 2013 Social Mood Conference is you.

That’s right! You play a crucial role in our exciting event. “What do I have to offer?” you may wonder. The answer is: A LOT! Learn  more

Reason 2: Mingle with the best and brightest in social mood research.

From Robert Prechter, the founder of social mood research, to finance professionals, such as Kevin Armstrong, a former investment manager of more than $8 billion in assets, and Murray Gunn, the head of technical analysis for HSBC Bank, to enterprising researcher Jon Clifton, the man responsible for Gallup’s groundbreaking World Poll, you’ll rub shoulders with some of the most accomplished personalities in finance, big data and social science – today’s torchbearers of social mood research. Learn more

Reason 3: Understand the world.

Like our heliocentric solar system, evidence for socionomics – the reality  that social mood drives social action (not the other way around) – has always been in place. Yet only now is it being explored and understood.

Have we figured it all out? Not even close. But like other breakthrough fields that have come before it, socionomics today is a train that is just leaving the station. Hence your extraordinary opportunity to get on board. Learn more

Reason 4: It’s your Golden Ticket to discovering the “next big things” – for an incredibly reasonable price.

Ask yourself this: What would I have paid to get in on the ground floor of lucrative trends – in big data, mobile technology, Internet search, personal  computers – if I had the chance to turn back time to five, 10, 20 years ago?  $1,000, $10,000, more?

The 2013 Social Mood Conference is your Golden Ticket to identify the “next  big things.” When you attend this event, you will be equipped to pinpoint the  developing trends – still in their infancy today – that will shape the future. Learn more

Reason 5: Don’t be left behind.

Social mood research is rapidly expanding its reach into governments, businesses and technologies around the globe.

Some of the biggest and fastest-growing organizations worldwide have  discovered that social mood research is an invaluable tool that informs nearly every major decision they make. Learn  more

Reason 6: Identify what people want – before they know they want it.

Understanding why people do what they do is only half the benefit of socionomics. Social mood research also helps you make precise forecasts about what people want – before they themselves know it. Learn more

Reason 7: Learn how the Emmy-winning founder of Minyanville.com uses “Social Mood as a Leading Indicator to the Stock Market.”

As a group, the 14 speakers at The 2013 Social Mood Conference offer a  one-of-a-kind meeting of the minds. Yet many of the individuals alone provide  enough reason to attend.

One such speaker is Todd Harrison, founder and CEO of MinyanvilleMedia, Inc., who will discuss how he uses “Social Mood as a Leading Indicator to the  Stock Market.”

Recognize the name? Harrison, a Wall Street veteran and a consummate  student of the markets, was featured in the 20th anniversary documentary of Oliver Stone’s hit film, Wall Street, and he’s a go-to expert  for the major financial news outlets and periodicals. Learn more

Reason 8: Hear from the world-renowned poll researchers at Gallup.

A window into the minds of six billion people, Gallup’s World Poll tracks  what many thought was immeasurable, including key states of mind around the  world, such as fear, hope and attachment to one’s community.

Jon Clifton and Joe Daly will detail the World Poll’s most significant  findings, and what all leaders in any organization, industry or government need  to know about what people are thinking right now. Learn more

For the next five  reasons, plus three bonus reasons, download the free PDF brochure, “13 Reasons  to Attend the 2013 Social Mood Conference.”

By Jill Noble | February 21, 2013

Murray Gunn will speak at the 3rd Annual Social Mood Conference

Head of Technical Analysis at London-based HSBC Bank, Murray Gunn publishes macro level, technical analysis-based research for clients who include fund managers, central banks and corporate treasuries as well as internal trading and sales operations. He and his team analyze currencies, interest rates, equities, metals and commodities and other markets.

Reserve your seat now to see him at the 3rd Annual Social Mood Conference April 13 at the Georgia Tech Conference Center in Atlanta, GA.
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JMN: You’ve certainly caught our attention with your Elliott wave analysis and your mentions of social mood and socionomics in your work. Please tell us how you first got interested in the socionomic hypothesis.

MG: I first became interested in socionomics by reading Robert Prechter’s Popular Culture section in Elliott Wave International’s Global Market Perspective, which I started reading way back in the early 1990s. I was a fund manager at the time. I was trained as an economist, yet realized early in my career that markets don’t often follow an economics textbook. So I became interested in crowd psychology and herding behavior.

Prechter’s writing made a lot of sense to me and to the team of fund managers I was working with at that time. We were involved with the global bond market even though the sorts of relationships that we discussed… were seen by the mainstream as being interesting but not really serious.

Back then, the idea that “mood drives markets” was anathema to the majority of investment professionals. I think they were conditioned to accept the Efficient Market Hypothesis and the Capital Asset Pricing Model as sacrosanct. In general, most people in the investment world “get” that herding and social mood drive markets, but in my experience they think these factors drive markets only some of the time, and don’t see the constant linkage the way socionomists do.

JMN: What changes have you noticed in other people’s opinions of social mood in the markets?

MG: There’s a link between the performance of the stock market and interest in technical analysis in general, and cycle analysis in particular. Of course, the work that the Socionomics Institute has been doing has been very well regarded over the last few years. When we see the markets turn down, that’s when I notice a higher interest in cycles and socionomics and herding behavior.

JMN: How have you been able to utilize the predictive value of social mood in your work?

MG: Over the years, I’ve found that to understand social mood extremes has helped me identify and profit from market turning points, when used in conjunction with the Elliott Wave Principle and other technical analysis. At the 2000 and 2007 tops in developed stock markets, of course, there were plenty of socionomic clues.

I’d say the AOL/Time-Warner merger was one of the best, at the 2000 top. For me, it crystallized an extreme herding point of belief in new technology. In the run-up to the 2007 extreme, in 2006 in the UK, [lenders introduced] a mortgage loan that was dubbed “the mortgage that never dies.” The borrowers needn’t repay the loan and could simply pass it down to their children when they died. I remember thinking that such a manic belief in house prices and credit was just so extreme. Even compared with all else that was happening then, that was one of the all-time best examples of what extremes in social mood can produce.

JMN: That sounds like quite the socionomic red flag: a “mortgage that never dies” — that’s practically absurd!

MG: Yes, and in currencies at the run-up to the 2008 top, the Euro vs. the Dollar (that top is still in place today) was characterized by a famous supermodel wanting to be paid exclusively in Euros, and a major hip-hop artist calling Euros the new “bling.” In combination with the Elliott Wave cycles at the time, it certainly led to a profitable opportunity.

Of course, when I use socionomics in the investment sphere, I don’t rely on 1 or 2 pieces of evidence: it’s not a trading system. Like detectives, we’ve got to constantly weigh the evidence and combine it with Elliott wave analysis in order to come to conclusions. The extremes in mood can be a hugely beneficial sentiment gauge for people involved in financial markets.

JMN: I like your point: that socionomics is a very important part of the big picture. Could you tell us about what you’ll present at the conference?

MG: I’m interested in the concept of relativity and how it relates to socionomics. Human beings tend to think in relative terms, and this should affect how we exhibit our herding behavior. In particular: Does the relative performance of stocks or sectors or indices give us relevant barometers to work from? Can they help us in identifying trends or turning points in the markets?

I’m also interested in periods (such as now) when there’s such a divergence between the social mood barometers of some stock markets when you look at them priced in the fiat currencies (dollars, pound sterling, etc) compared to those same barometers of social mood priced in another currency such as metal. One is up since ’09, and the other is down. What should we take as the real barometer of social mood? I’m really looking forward to engaging with the other delegates about these issues.

JMN: We’re really looking forward to hearing your insights about mood and the markets. Thank you.

MG: Thanks, Jill. I’m very much looking forward to coming over.

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To learn more about how Gunn and others apply socionomic analysis to the world of investing and trading, register now for the Social Mood Conference, this April 13 in Atlanta, GA>>

Preview what you can expect to hear from the scientist who founded Artemis Capital Asset Management

An exceptional gathering of movers and shakers in finance and behavioral research will share their latest work this April 14 in Atlanta, at the Georgia Tech Conference Center. From physics to psychology and hedge funds to herding, these thinkers will cover the vast yet interconnected disciplines in social mood research.

Dr. Tobias Preis is one such esteemed speaker. A physicist and complex systems scientist by training, Preis and his research team are at the cutting edge of financial systems modeling. Preis will share some of his latest work, from his role as Associate Professor of Behavioral Science and Finance at Warwick Business School in the United Kingdom.

His presentation at the Social Mood Conference, “Quantifying Economic Behavior Using Big Data,” will touch on many ideas he shares in the following video:

To learn how big data provides insight into financial market crises — and how patterns of interaction on the internet provide insight into different  perceptions of economic wellbeing around the globe — you won’t want to miss Dr. Preis’ talk.

Register now to attend the 3rd Annual Social Mood Conference on April 14 in Atlanta, GA — and gain the opportunity to meet and mingle with others who follow the exciting new science of socionomics.

Reserve your seat today >>

February 8, 2013

Q&A with author of “Forecast: What Extreme Weather Can Teach us About Economics”

A physicist by training, author Mark Buchanan’s acclaimed books and articles explain how “physics can help us understand our world better.”

This April 13 in Atlanta, Mr. Buchanan will present his ideas about nonlinear dynamics and complex systems as they relate to finance and socionomics at the 3rd annual Social Mood Conference. Reserve your seat today >>

Jill M. Noble: As a physicist and author, you’ve been thinking about natural, scientific patterns for 15-20 years. Would you explain how models that physicists use to understand the weather can be adapted to make complex financial systems understandable?

MB: It’s the natural way to think about markets, and there have been a few economists who thought about it this way (a hundred years ago). But they didn’t have the mathematical tools to begin building specific theories you can compare to data; to test if this way of thinking can make sense of how markets work.

JMN: So now that we have the tools…

MB: … Physicists have started build very detailed models of markets which you compare to the statistics of stock markets, bond markets, all type of financial markets across different regions. What you find is that the statistical patterns that come out of these theories fit the real world very well. Certainly they go far beyond any kind of equilibrium theory in actually accounting for real-world data.

The latest book I’ve written [explores] this analogy to the weather. When you write a book about modeling an economic system using ideas from physics, it sounds really complicated. But everyone understands the weather — we all have a good intuition for how changeable, and weird, and hard-to-predict weather is, just naturally.

JMN: That’s a useful analogy.

MB: …It’s the big collective pattern of all of our interactions that leads to ["market weather"]. The argument I’ve made in the book is that economics in some ways stands where weather science was about 50 years ago… We can now begin to do that in economics as well, and build up theories that start to categorize all the different kinds of forces that lead to bubbles and crashes, that lead to banking crises that lead to the imbalances which then cause disruptive events and often a lot of trouble for people in the real world.

JMN: I like where you’re going with the parallel between extreme weather and economics — because financial systems are neither simple nor random, like the weather.

MB: Exactly.

JMN: We want to believe that our human choices are based on rational thought, but it seems like that may not be the case. Could you speak to the concept of herding or why so many of our financial decisions are irrational?

MB: Right. In socionomics, the focus is about mood, and collective moods — and I think that’s absolutely correct… the market has a mood. Collectively, societies can have moods and get charged psychologically with certain kinds of energy and force. Historians and social scientists have talked about “social forces,” but it’s always been very vague — and for good reason: because it’s hard to pin down what those moods are; where those moods reside.

JMN: It’s been hard to measure.

MB: Yes, very hard to measure. But that doesn’t mean they’re not real. We used to think of people as rational beings. At least in our own individual lives, it’s easy to have the illusion that you’re making your decisions consciously and deciding what to do and when, all in your conscious brain. But a huge amount of research in the past century — particularly in the past few decades — has shown that an overwhelming amount of our behavior is not controlled by rational thought, whatsoever.

A lot of the time our rational thoughts are really just rationalizations after the fact: you make some decision (they even do brain imaging studies where you see the part of the brain involved in making the conscious decision activates a few hundred milliseconds after the part of the brain that carried out the muscle action involved in the decision)…

The brain seems to be more of a rationalization device than it is a rational device — at least, the conscious part of the brain. We know that we evolved from apes… and most of the history of our lineage was animals who were acting on instincts… they didn’t even have the conscious part of the brains; the outermost layer we have, that distinguishes us.

The rest of the brain that they were using is still perfectly active within us as well. A lot of the things we do are instinctual; a lot of our communications are non-verbal. The conscious part of our brain is this tiny little film on top of the much deeper substratum of our brain that is instinctual and archaic. It’s also hugely useful and powerful.

The realization that that part of the brain is so important and that we are not the rational beings we thought we were means that we have to change the way we think about human behavior and it means, if you start to model human behavior, that you are no longer modeling just rational, conscious thought. It’s showing how people interact with each other, how people get contextual cues from their environment (whether it’s in the news they’re reading of things they hear from their friends verbally or emotions they pick up from other’s facial gestures or tone of voice or whatever they hear.

There are so many ways we interact. I think all these mechanisms build up collective patterns of human emotion and mood that become predominant in markets or in one part of the country or another. Still, they’re very hard for us to perceive, but you can see fairly well how they do this and be very influential in driving collective social outcomes.

Maybe it was easy in the past, when you would hear people talking about socionomics and mood it was easy for economists and others to say “Oh, that’s vague, wishy-washy nonsense.” But that’s not easy to say anymore, because we know fully well that there are all these interactions going on and that there have to be collective patterns of mood, and psychological priming, and lots of effects that drive people on the molecular level that drive people to do certain actions rather than others.

I think all this work in psychology has really started to put in place a much more specific grounding by which we can start to actually understand collective social forces of which mood is one descriptor, and really start to build up a much more specific theory of how collective patterns move through societies [driven] by forces that often have to do very little with rational thought.

JMN: I think it’s a really exciting time where people are finally beginning to see that we’ve been rationalizing activities that we couldn’t understand until more recently – now we can see these big patterns and larger systems.

MB: Right. There’s something about the human brain: we like to flatter ourselves. We like to think we’re rational and “in control.”

JMN: It feels “safe” to think that you make your own choices and you’re not at the whims of your friends or what state you live in, what country you’re in; all kinds of larger networks. Especially Western minds.

MB: Yes, we have that tradition going down several centuries that places thought at the individual level.

JMN: Well, at the upcoming Social Mood Conference, we’ll have a gathering of non-linear minds at least. We can’t wait to hear your presentation.

MB: I’m looking forward to it.

To read Part 1 of this interview (an in-depth discussion of ideas from Buchanan’s upcoming book, Forecast) follow this link >> To see him at the 2013 Social Mood Conference, REGISTER NOW>>

January 31, 2013

Author and Physicist Mark Buchanan makes the case for economies as natural, patterned systems.

Mark Buchanan is a former editor at Nature and New Scientist, and currently writes monthly columns for Bloomberg View and Nature Physics. He received the LaGrange Prize for writing on issues in complexity science in 2009. Buchanan brings physics-inspired thinking to the understanding of financial systems.

Mr. Buchanan will speak about his work at the 3rd Annual Social Mood Conference April 13 in Atlanta. Reserve your seat today >>

JMN: Your latest book compares the physics of meteorology to the trajectory of modeling financial markets. Forecast will publish this spring, but how long ago did these ideas begin to crystallize?

MB: I started writing about a year ago. But I suppose I started reading about all the material and doing the research maybe 15 years ago.

Physicists began to model financial markets in a new way about 15-20 years ago.  The old traditional economic models look at an economy as a system in equilibrium, or a kind of balance. Each individual in the market has certain aims, and they try to act in a way to reach those aims. Of course, not everyone’s aims can be met at the same time, but… all the forces come together and find a balance point where everyone is satisfied as well as they can be.

[But markets] aren’t like that. If you look in the real world, they’re hardly peaceful systems that you would describe as tranquil and at rest.

JMN: Hardly.

MB: Rather, they’re churning around every day, crazy things are happening, they’re very unpredictable, there’s kind of wild chaos in the markets. So how can you understand that? Equilibrium theory has the simplest conceptual way of understanding that. They say, “[The market] would be in perfect, calm rest if it weren’t being perpetually knocked about from the outside.” There are always new inventions, new companies being started, new managers being hired, and new products come to market. All of this creates information and knowledge that shakes up the market every day…

JMN: Okay, so why is this standard, traditional/fundamental explanation wrong? It does offer a narrative…

MB: That’s a very simple way of thinking. It’s more or less akin to the way physicists think about very simple systems — like the water in a bathtub… It’s smooth on the surface, but if you smack it with your hand it stirs a bunch of waves. There’ll be chaotic motion on the surface for a short period of time and then it will gradually relax into a smooth, stable [resting point]…

JMN: But that’s assuming it’s a simple system, right?

MB: Right: it’s really simple…. The physics of the water in the bathtub is really old physics: it’s a centuries-old understanding. I’d say in the past century, physics has moved on… to thinking about systems that inherently will not come to a state of rest or balance, and have their own internal dynamics…

One of the most obvious [examples] is the weather. If you look at the weather, of course, sometimes we have nice blue skies and sunny days and calm atmospheres. But other days, out of those blue skies — for normal, ordinary reasons– you get storms that brew big weather systems…

Three centuries ago, people tried to understand the weather as an equilibrium system: just a bunch of air being heated near the equator. That warm air rises into the upper atmosphere and travels up toward the poles, and then descends again. [People] tried to think of a system that has a really nice, stable flow of air… really simple (kind of like water in a bath) just sitting there in a very stable pattern. But that doesn’t explain almost anything about the weather.

JMN: Right. It doesn’t explain the more dynamic weather systems…

[And] these continual, churning storms and systems make the weather and the atmosphere very interesting. That was only understood, amazingly enough, starting around the 1950s. It took some of the early computers [for us] to start to understand where weather systems come from.

The basic story is that there are “positive feedbacks” — what we can call “instabilities” by which, if you have a system with no interesting pattern. So everything looks the same, and blue sky is everywhere — if you perturb that a little bit, the disturbance has a tendency to create forces which make it grow, so you get more of a delineation…more of a deviation creates forces again which act again to create positive feedback. You get a driving force that disrupts the nice, stable equilibrium pattern and creates these churning storms and weather systems…

The system has natural forces within it which are continually churning up new patterns that haven’t existed before, creating change. You don’t need anything coming from the outside to “smack the system around.” You don’t need those shocks from the outside in order to have perpetual change and perpetual chaos in the system.

And this is basically true not only in the atmosphere, but also in nearly everything we know in the biological and physical world. It’s true in the human body, in the oceans, even in the way the sun interacts with the earth (solar wind). It’s just true everywhere.

It would be a shock, really, if somehow the economy was the one system in the world that didn’t conform to the same kinds of patterns. In fact, it does not conform to the equilibrium picture. It also falls into this class of disequilibrium systems which have their own internal dynamics.

JMN: And this is where your physics background meets financial theory…

MB: [Instead of] building models of parcels of air being heated and rising and falling in the atmosphere, you build models of individuals or firms acting (within some economy) where they make decisions every day to undertake certain projects, or to buy and sell in a stock market, and they’re looking to the past and forming theories about how they might act best in their own interest. They then take some actions. …

To learn about what Mark Buchanan has found at the intersection between physics and finance, watch this space for Part 2 of the interview…To see him at the 2013 Social Mood Conference, REGISTER NOW>>