QEF01 – Introduction to Quantum Economics and Finance

These are the notes to the first of a series of presentations on quantum economics and finance. For the video version see here.

Quantum economics and finance uses quantum mathematics to model phenomena including cognition financial transactions and the dynamics of money and credit. In these talks we’ll be talking about topics including: why quantum in the first place; quantum probability and logic; basics of quantum computing; quantum cognition ; quantum walk; quantum game theory; quantum supply and demand; threshold effects; option pricing; and the money bomb. 

So why quantum in the first place?  The quantum revolution in physics was born when physicists found that at the subatomic level energy was always exchanged in terms of discrete parcels which they called quanta, from the Latin for “how much”. In economics the equivalent is financial transactions, like when you buy an ice cream in Italy and you say “quanto costa” which makes the quantum connection a little clearer. So money behaves in some ways like an object but not a classical one. It shows signature properties of quantum systems such as discreteness, indeterminacy, entanglement, duality, interference and so on.

Perhaps the most obvious such property is the way that money jumps. In physics Erwin Schrodinger said “If we have to go on with these damned quantum jumps then I’m sorry that I ever got involved” but with financial transactions of course the same thing happens all the time. For example when you tap your card at a store, the money doesn’t flow out continuously, it just jumps.

In physics the position of a particle is fundamentally indeterminate and is in a sense constructed by the measurement procedure. It’s the same thing in markets. If you put your house up for sale you will have a fuzzy idea of the price but the actual monetary value is only determined at the moment of the sale.

And this is money’s job: it’s a way to collapse value down to number. Theorists often talk about money but one thing that isn’t often emphasized is the most basic feature which is is its connection with numbers. If you look at a US dollar bill for example you see it has a numerical 1 and a word “one” in each corner, so it’s got quite a few ones, and then it’s got “one dollar” down at the bottom, and a big “one” in the middle, and there’s a lot more ones on the other side, so they’re really emphasizing the connection with one, and that is money’s most basic property – that it combines the properties of a real owned thing with a virtual number.

These dual real/virtual properties are reflected in the two main historical theories of money which are bullionism – money is gold and nothing else as JP Morgan said – and chartalism, which is the idea that credit alone is money as Alfred Mitchell-Innes said the next year. But then Bitcoin comes along and on the one hand it seems to be completely virtual, but on the other hand it’s also real as you’ll notice if you happen to lose the hard drive in which your bitcoins are located.

The duality of money is therefore similar to the duality of light. Wave-particle complementarity has been reflected in theories of light that go back millennia – Aristotle thought light was a wave, and Newton thought it was particles, and this bounced back and forth until finally the quantum theory came along and showed that it has properties of both at the same time. It’s the same with money.

In economics we’re used to treating preferences as something like fixed and known objects, adjusted for some cognitive biases, but often our preferences are made up in response to questions which act like a kind of a measurement event. So thoughts and ideas behave in some ways like objects but they’re not classical objects. In physics, Bohr’s theory of wave particle complementarity was actually inspired by the observation from psychologists that we can hold opposite ideas in the mind at the same time in superposition, and in fact it’s these interference terms which play a very important role in quantum cognition as we’ll see.

In physics, particles can mysteriously become entangled so they act as a single system. In the financial system there is a much more direct form of entanglement where financial assets and virtual liabilities have these quantum characteristics of entanglement.

In economics there’s this idea of rational economic man, who is like a kind of robot. The picture which is emerging from quantum social science is a quantum economic person who’s entangled, indeterminate, dynamic, paradoxical and alive. As the philosopher Slavoy Zizek said, a fact rarely noticed is that quantum physics appears to defy our common sense view of material reality, but it seems to apply somewhat better to human reality where the human spirit encounters itself outside itself.

Further reading:

Orrell D and Chlupatý R (2016) The Evolution of Money. New York: Columbia University Press.

Orrell D (2016) A quantum theory of money and value. Economic Thought 5(2): 19-36.

Orrell D (2020) The value of value: A quantum approach to economics, security and international relations. Security Dialogue 51(5): 482–498.

Next: QEF02 – Quantum Probability and Logic

Playlist: Quantum Economics and Finance