<nettime> Some light relief

[Ian Dickson <ian@iand.demon.co.uk>]

I wrote this in around 1996 in bar in Prague (as you do ), but I think 
that this group might enjoy it:-)



Quantum Finance, A new methodology for economics

Quantum Finance is a new field that seeks to resolve problems that are 
experienced with the Standard Model, ( i.e. money is real, and takes the 
form of cash and assets ).

Interestingly the whole endeavour arose as a result of a discussion 
between a CERN experimental physicist and his private banker in Geneva. 
This lead to a collaboration between CERN and a select group of Swiss 
bankers, who between them created the discrete GW* Forum, the papers of 
which this summary is based on.

The motives of the CERN researchers was a combination of simple pure 
pursuit of knowledge, and the hope that a successfully predictive theory 
would solve their perennial funding problems. The Bankers were suffering 
from their twin emotions of fear and greed. Fear that they stood to lose 
if Quantum Finance worked, and they were ignorant of it, and greed in 
that they hoped for an edge.

In this overview I shall explore the following concepts and thought 
experiments. ( Many areas are of course incomplete and in need of much 
more research, but I present results and ideas to date in the hope of 
stimulating further discussion ).


1) Quantum Cash and the non existence of "real" money, and monetary 
duality.

2) Estate Agents Uncertainty Principle

3) Schrodingers Bank Account

4) Black Scholes

5) Relativistic effects and Financial Mass, ( inc Hype Drives, current 
technology )

6) The Law of Cash/Energy Conservation, ( and Feynman cashflow diagrams 
).

7) Virtual Economic Particles and the Inflationary Universe

However first of all a History of Classical Financial Mechanics.
Cash was originally believed to have been invented by the Ancient 
Greeks, on the grounds that Aristotle is quoted as saying " all 
investment advisers are sophists ". More recent studies have concluded 
that the Greeks got their ideas from the Ancient Egyptians, who, until 
then, had only been given credit for inventing Pyramid selling.

For years cash was used in ignorance of its true nature and economic 
activity was slow, with take-over technique being limited to your basic 
rape and pillage, and rampant protectionism that was little more than a 
protection racket ( Danegeld ).

This period ended with the development of Banks, who managed to identify 
some fundamental monetary laws , and develop some sophisticated tools 
for financial analysis comparable with the development of Logs in the 
field of mathematics. Indeed armed with profit/loss/cashflows and 
interest the foundations of classical monetary theory were laid down and 
codified ( or exploited ) by Adam Smith ,Venice, and the Lombards, 
eventually leading to the creation of the Gold Standard. Another group, 
for the first time noting the relationship between maths and money, 
invented actuarial studies and then insurance.

This edifice lasted until the 1970's when its growing complexity ( 
analogous to building bigger particle accelerators ) started to make 
clear the holes in the classical theory, though at the time no one 
noticed.

The key areas were the OPEC price hikes and subsequent recycling of 
petrodollars into the third world in the belief that no country could go 
bust. This proved to be an illusion that only be dealt with by applying 
a quantum approach to money. The other feature of this period is the 
appearance of derivatives ( swaps, futures, options ) which seemed to 
obey rules all of their own and had even less relationship to actual 
cash than was normal.

Finally people realised that the worlds assets were a lot less than the 
worlds money supply and that most money did not relate to property, 
gold, goods, services or any other clear source, but to an intangible 
called "confidence", which, it is considered, may be a relative of the 
Higgs Boson.

Once this had been grasped it was clear that only a Quantum and 
Relativistic Theory could explain the reality as probed by modern 
financial markets.


1) Quantum Cash and the non existence of "real" money and duality

Although everyday concepts like Cash, Profit and Loss apply in the 
ordinary world, they break down at the extremes, ( which is why 
apparently healthy institutions like Barings or Orange County can suffer 
such sudden collapse ). In reality the true elements of money can never 
be seen, but only traced by their effects or symbols.

Duality. Coin op machines demonstrate the particle nature of money, but 
any financial institution will tell you that cash flows in waves of 
profit and loss.


2) Estate Agents (Realtors) Uncertainty Principle

You can never know both the ownership of an asset and its value. ( If 
you know who owns it then you do not know its value. You only know its 
value at the time of sale, i.e. when it is between owners).


3) Schrodingers Bank Account

Schrodinger, as well as having a cat, ( either dead or alive ), also had 
a bank account, about which he was equally uncertain. The reason is that 
a Bank is nothing more than a financial probability wave, and he could 
only know that his money was safe when he asked for it back. At this 
point the wave collapses into "solvent", or "insolvent" and he can 
withdraw his money, or not. ( Of course once he held cash he was 
scarcely any happier as the value of cash was a function of the 
countries probability waveform.)

Bill, Schrodingers brother, is believed to have gone bust after 
borrowing money on the basis that the waveform had to collapse as 
"insolvent" eventually, leaving him with no creditor. He was of course 
right in his fundamental understanding, but wrong in his probability 
computations.


4) Black Scholes

Black Scholes are very complex areas of the financial continuum. They 
twist it around themselves and the largest ones form singularities 
surrounded by a Bankruptcy Event Horizon, and anything that falls in 
vanishes for ever.

They used to be hidden from view but in the last couple of decades a 
number of more adventurous financial engineers have been exploring them, 
( sometimes getting too close ). The reason for this interest is simple, 
dropping small amounts of loose change into a Black Schole can release 
vast amounts of profitable energy.

People often ask what happens when something falls into a Black Schole, 
and the answer depends on the relative position of the observer.

To the outside observer all is going well, and then suddenly the object, 
( normally a financially massive institution ), falls in, going ever 
faster until it crosses the BEH and disappears from view.

To the person closest to the BS everything is fine, and stays that way. 
It's the rest of the Universe that goes haywire, and "it's not my 
fault".

Fortunately Black Scholes tend to be either clearly signposted if large, 
and rapidly evaporate if small.


5) Relativistic effects and Financial Mass, ( inc Hype Drives, current 
technology )

Most of the time we inhabit a classical financial universe of profit, 
loss, and cash.

Cashflow = Money times acceleration

but

Cashflow =Money times speed of light squared and also = Money times 
velocity squared / 2

Without going into detail this means that there are two ways to build up 
a financially massive institution or company; the slow organic growth 
and take-over route, or by moving at a relativistic speed and hoping to 
hold onto the extra mass when you slow down.

In attempting to get rich quick it is therefore almost always worth 
trying to attain a relativistic speed in order thereby to increase your 
financial mass relative to the rest of the (classical) universe.

This is commonly done by means of Hype Drives, and although none have 
yet been shown to be reliable, many types have been tried over the 
years.

The earliest Hype Drives had a tendency to crash and burn, ( see the 2nd 
Crusade, South Sea Bubble and Tulip Fever for details ), while the next 
generation ( based on the concept of New Territory) tended to turn on 
their creators and stop producing income, ( see American War of 
Independence ).

In more recent time a typical Hype Drive has involved the incessant 
talking up of vapourware, backed by spin doctoring, until enough hype is 
built up to really go places. The early Biotech floatations were of this 
type, and while promising, they have not managed , on the whole, to 
deliver. Apologists always say that they need just a little more speed 
to create just a little more cash.

After a lull we have seen a whole new approach tried for the first time 
by Netscape, who have used the rocket theory. Simple and effective it 
has pushed them from $100M to $3000M in three days, or 0 to $3000M in 16 
months, depending upon your choice of starting point.

The rocket theory is based on the simple note that since F=ma and 
Ke=mv^2/2 if you throw enough stuff out of the back at high enough 
speed, you go forwards and accelerate. By chucking out over 6,000,000 
copies of their program they built up a highly relativistic speed, and 
time will tell if they can maintain their mass while coming back to 
earth.

UPDATE 2001 - the market of 2000-2001 showed that rocket theory was no 
more effective than any other form of Hype Drive.


6) The Law of Cash/Energy Conservation, ( and Feynman cashflow diagrams 
).

It has been postulated that there is a law of Cash/Energy conservation. 
If true then the Green argument that we are simply borrowing from the 
future will be proven and a huge bill will absorb net profits to date.

In support of their position the greens draw upon Feynman diagrams that 
show time as neutral. ( It is rumoured that Feynman developed these 
diagrams as a way of demonstrating to his bank manager that positive and 
negative credits were interchangeable, as were current spending and 
future lump sums. While his bank manager could not see the importance of 
this Nobel prize winning work, and was indeed needlessly rude at the 
time, these diagrams have become a valuable tool in cash flow analysis).


7) Virtual Economic Particles and the Inflationary Universe

The continued expansion of the economic universe is forever creating 
Virtual Economic Particles, which take the form of quantum collapses 
that exist as thoughts of the "now there's an idea" type, ( See R. 
Penrose, The Emperors New Mind ). A few such particles are energetic 
enough to actually become real businesses.

The other side of this coin is of course Inflation, and the question as 
to whether inflation will continue for ever, be halted in a steady 
state, or collapse. The jury is out simply because at this macro 
economic scale the data is missing, ( the so called "missing cash" 
question). Until much better measurements are made the Inflation outlook 
will always be guesswork, and controlling it even more so.

Arguments that Inflation is the supersymmetry for Entropy are also 
unresolved, but would, if true, disprove Cash/Energy Conservation and 
require Feynman Diagrams to be drawn in three dimensions.

Some people have used the recent UK Property market as a proxy for the 
Universe, ( and then argued for the steady state ), but others tend to 
argue that the system is too small, and that anyway the behaviour can be 
explained by either a massive Black Schole hidden from view by the 
blurring effect of MIG policies, or is the result of a market phase 
change brought on by movement relative to the markets strange attractor.


Summary

As can be seen there remains a lot of work to be done in this area, but 
it may well be that physicists, mathematicians and, ahem, economists 
continue to probe the fundamentals of space and time both physics and 
finance will turn out to be nothing more than interchangeable 
explanations of mathematical reality, and money will indeed be shown to 
be that which makes the world go around.


Postscript - Life is indeed stranger than fiction. Academics have 
demonstrated Gate Theory can be used to model financial markets and that 
Black Scholes is just a special case (ie simple) result.

* Gnomes and Wizards.


-- 
ian dickson                                  www.commkit.com
phone +44 (0) 1452 862637                    fax +44 (0) 1452 862670
PO Box 240, Gloucester, GL3 4YE, England

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