Reviewed by
Mauro Lombardi
Department of Economics, University of Firenze
To leave the "newtonian world" of the dominant intellectual paradigm in standard economics means to face relevant theoretical and empirical challenges. Indeed, in forsaking three basic assumptions of this approach (representative agent, state of equilibrium of economy, linearity), we enter the entirely new world of complexity, where heterogeneous agents and the interactions among them matter. It is also a world characterised by non Gaussian processes and phenomena whose dynamics are captured by scaling laws, especially as for financial markets. Thus is not surprising that a new research program has been developed, such as the "econophysics", nothwistanding criticisms raised by some authors (for a critical review see Rosser 2008). Some contributions stemming from this suggestive research line are in this book, these aim at exploring an entirely new universe of possibilities, which are heralded when going beyond the 'pillars of Hercules" of the standard mental framework. The essays develop the approach first of all in the study of financial markets, but they suggest analytical and empirical instruments of great importance also for other fields of research. The analysis of complex phenomena and processes requires theoretical schemes very different from that prevailing during last decades, since key characteristics of real processes to be focussed on are: non-equilibrium dynamics, cognitive limitations of agents, unpredictability, emergence of global properties, hierarchical and decomposable systems. One of the most fundamental ingredients of new attempts aiming at tackling the challenges is the adoption of a multi-disciplinary approach for analysing basic components of economic systems. This can be realised if appropriate concepts are put at the centre of the analysis. This occurs exactly in Part I of the book, under the heading "Evolution of Economic Systems", where the first paper (by Bossomiaer, Harrè and Thompson) treats trust, by allocating it within the horizon defined by group mechanism in evolution (indirect reciprocity and altruistic punishment) and by employing inputs from different disciplines. A second paper (by Ormerod) points out how some key features of complex systems have been considered by completely overlooked contributions by Keynes and Hayek, who moved away from conventional theory in investigating the causes of the business cycle. Indeed they emphasise some connected elements: time horizon of decision processes, cognitive limitations of agents, interactions between agents. The third essay of Part I (by Delli Gatti, Gaffeo, and Gallegati) proposes a model of the long run evolution of an economy in which micro - and macro-behaviours are tightly linked and formalised: heterogeneity of financial positions of agents and their perception of risk; interactions between economic units unrolling within labour and equity markets; firms' size distribution and growth rates. The results of the model are interesting as they highlight how institutional behaviours and psychological factors influence the evolving micro- and macro-properties.
Part II of the book contains two essays by Choustova and Khrennikov, who propose a suggestive theoretical approach to modelling financial evolution with basic assumptions very different from those of the efficient market hypothesis. We are referring to quantum-like models, based on agents subject to "financial waves" of additional (psychological) information, instead of "classical-like" entities acting in contexts characterised by "financial potential" (multi-dimensional decision processes converging to inter-temporal equilibrium).
Part III contains two interesting models. Bruzda develops the so called "wavelet analysis", that is, a particular decomposition of signals in a time sequence. This model is applied to the "cost-of-carry relationship" (peculiar form of arbitrage) for the Warsaw Stock Exchange. The second essay (by Dell'Anno and Schneider) tackles some questions related to quantitative methods in social research, particularly in investigating unobservable variables such as those connected to shadow economy. They discuss the "Structural Equation Modelling" (SEM) and suggest a specific procedure "Multiple Indicators Multiple Causes Model" (MIMIC). The analysis of advantages and drawbacks either of this procedure and of other approaches enriches the picture of a significant statistical debate. The last paper of Part III (by Richmond) raises some basic questions concerning the gravity defying prices of houses in London and Dublin. In Part IV two essays treat topics linked to risk measurement (by Coppola, D'Amato, Di Lorenzo, and Sibillo) and rankings in Multicriteria Decision Making.
In short the book shows promising theoretical and empirical research trajectories, even if some remarks made by Burda, Jurkiewicz, and Nowak (2003) should be considered: "Is Econophysics a Solid Science?" and what conditions have to be satisfied in applying a statistical mechanics approach to economics?
ReferencesROSSER Barkley J Jr. (2008) "Debating the Role of Econophysics." Nonlinear Dynamics, Psychology, and Life Science, 12, July, 311-324
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