Physics of Risk

Some systems analyzed by Physics of Risk are very complex and are impossible to understand by using traditional for physicist – reductionist – approach. Such systems are not reductive, because of importance of interactions between different parts of systems and the parts themselves. There is one example which should be known to everybody – human body. By cutting human heart out or by tinkering with human brain we won’t be able to clearly understand how human organism works! In order to do so we must study all internal organs and their interrelations.

Though human body is at the same time perfect and slightly inapt example of complex system. It is so, because that each internal organ has it’s own differing function and thus differing structure. Individuals within financial markets in this sense are different. At least from the bird’s eye view they appear to be identical as they all perform similar function while participating in global exchange of money and goods. It is thought that essential properties of time series from financial markets could be explained by studying complex interactions of somewhat similar and somewhat different individuals within financial markets.

Aforementioned possibility is explored through the so-called agent based models. These models replace individuals from actual systems, not necessarily limited to financial markets, with abstract objects, so-called agents, which base their behavior on simple rules. In this section we will show that, despite simplifications in behavior of individuals, complex behavior of model system can be obtained using agent based modeling.

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