Thursday, April 1, 2010


In general, since WWII, whenever the feeling of uncertainty or fear arises, money flows into US dollars, US bonds, and gold. As uncertainty decreases, money flows out of these assets and into other assets, such as stocks. A look back at the two charts I created yesterday shows how the level of volatility in both the US stock market and the US bond market went up and came down over the last few years. How can we analyze this in terms of entropy and dissipative systems?

In terms of entropy, the entropy of each individual market participant increased as the news and reality of the economic collapse spread. This resulted in a higher individual level of entropy, and consequently, a higher level of entropy for all market participants viewed as a group. For purposes of this analysis, and in terms of open and dissipative systems, each market, and all market participants together as a group, can be considered as three open and dissipative systems all interacting with one another.

Mr. Prigogine suggested that open and dissipative systems import matter, mass, energy, or information into their systems in order to reduce the increased entropy within the system. These systems then process whatever it is that was imported and export entropy into their surroundings. Entropy that is exported is also called negentropy. It is not a big step to state that after individuals imported information and processed it, they exported entropy back into stock and bond prices. This higher level of entropy in the markets was reflected in the higher standard deviation of prices. So how do the markets reduce higher levels of entropy? I would argue that both markets used money to reduce their heightened levels of entropy. Once the money was “churned” and the process played itself out, the markets exported negentropy to some other system. The exporting of entropy by the markets is reflected by the lower calculations of volatility.

Obviously this is a simplified example, but it may help one appreciate the enormous complexity of many open and dissipative systems working out their entropic differences.

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