Jun

21

Living at Micro Scale by fellow Reedie David Dusenbery details the history of physical sciences concerned with the study of small living things. The physics of microscopic life is markedly different than at our size due to the physics of fluids and molecules. Over 80% of life is small, and over 80% of the five billion year history of life on earth has been micro organisms. He discusses the development of optics to allow study of micro organisms, the development of physical science and math in fluids, Brownian movement, gases. Many of the advances in the physical sciences were by names important in statistics like Bernoulli, Laplace, Fourier in no small part due to the algorithms developed and used in statistical computations. Many ideas can easily be used in market studies and many of the quantitative information presented in graphical form are familiar.

An interesting example is the remarkable discovery by Hungarian mathematician George Polya in his study of random walks that the probabilities of returning to the start is 1 for one or two dimensions, but in three dimensions the probability is only .34. In testing this in market it is easy to see the high likelihood of daily change being 0 as a time series is limited to 1 or 2 dimensions. The average daily change over the last 15 years is in fact -.05, or close to 0, and a quick histogram will confirm the distribution. This is similar to the the appearance of trends as an artifact of randomness as a function of time series, correlation and volatility.

Another interesting idea is the use of dimensionless constants to facilitate computations and study and classification. The Reynolds number is the ratio of inertia to viscosity. This seems like a useful criterion in market movements.

The book is fascinating, well written and accessible to non specialized scientists. I highly recommend it despite a sometime soporific effect due to its technicality. It is a completely different approach to microbiology than any other and very refreshing as a result.

Jim Sogi elaborates:

Dusenberry's thesis is that physics of the environment and the established quantification in physics can be used to explain and predict many micro biological phenomenon. He uses ideas such as diffusion, Brownian motion, information theory, hydro dynamics, laws of motion, thermodynamics to analyze micro organisms. In the chapter on diffusion, organisms interact with their environment chemically, absorbing food and information , and to send out chemicals. For example fungi send out enzymes that dissolve surrounding tissues and provide nutrients to for them to absorb.

A similar analysis might work in markets. Take the diffusion of market moving factors such as FOMC which we saw two days ago move the markets some 4% quite dramatically. How does this diffuse? Today the effect on the market is pretty much gone and it seems stuck at 912. Distance in the market would be measured by time and by points, so 2 days and 40 points counted.

Ideas such as inertia and Brownian motion have been used before.


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