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.
Showing posts with label DISSIPATIVE. Show all posts
Showing posts with label DISSIPATIVE. Show all posts
Thursday, April 1, 2010
Monday, March 29, 2010
DISSIPATIVE SYSTEMS
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.
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.
Subscribe to:
Posts (Atom)