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Sep/13/2006
The Natural Sciences of Finance

I cannot emphasise how much the understanding of the stock market could be improved if we learned from natural sciences. I will try to explain why we can divide finance into physics, chemistry and biology.

The Physics of Finance
This is a genre which is not meant to predict the future, but to explain universal rules of how the market functions. An obvious rule is for example that money in = money out in a market without change in the number of stocks. A bit more complicated models like the 'Balance Between the Present and the Future' can be derived. Another example on physics is soon to come, where the theoretical change on the entire market from an unexpected move in one stock is explained.

The Chemistry of Finance
This is more into explaining how people's constraint in money, cognitive capacity, and emotions will affect the market. When something happens somewhere in the market, this will influence another part of the market as participants react. 'Stocks as Molecules...' is chemistry. There is no distinctive border between physics and chemistry though.

The Biology of Finance
This part is more related into real speculation. Values & money vs. energy & food aren't just analogies, they are directly transferable. The major difference is that the market evolves with the speed of thought, while the nature has to deal with slow reproduction. You could say that a trader can write his wisdom on a black board with the chalk in his right hand and the sponge in his left. This is also one of the reason I never share how I trade; in the market the tuna won't swim in a steam for long if you fish them, and if you tell them they will escape - or more likely attack you.



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