Monday, March 29, 2010


In some earlier posts I discussed open and closed systems as they relate to thermodynamic principles. Open systems continuously interact with their external surroundings by constantly exchanging energy, matter, and information beyond their boundaries. Closed systems, however, do not exchange energy, matter, or information with their external environment.

Most systems and organisms found in nature tend to be open systems. Open systems tend to be non-equilibrium systems because of the constant exchange of energy, matter, or information with their external surroundings and/or other systems. In general, the field is called non-equilibrium thermodynamics.

Some concepts borrowed from non-equilibrium thermodynamics seem to explain the market and its dynamics well. The stock market can be thought of as an open system that interacts with other systems and external factors. For example, other systems could be the bond market, or US dollar market, and some external factors are human beings, money, supply, demand, perceptions and expectations. The stock market, in my opinion, also never reaches a state of equilibrium because of its open nature and constant interactions with all these other external factors and other systems.

Open, non-equilibrium systems are also called dissipative systems. Dissipative systems were studied by Ilya Prigogine, a Nobel Prize winner. Mr. Prigogine concluded that dissipative systems, or structures, maintain stable and low entropy states by importing material and energy across their boundaries. These systems will then transform or degrade the energy or matter by performing some process on it. This cycling tends to increase the flow of energy and/or the process may move at a faster rate. This, in turn, may increase complexity and self-organization can also occur. In addition, dissipative systems or structures can export or dissipate entropy into their surroundings. That’s enough for today…more on this in future.

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