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In 1927, Heisenberg putforth
uncertainty principle to the world of quantum physics.
It stated that, more precisely the position is determined, less precisely momentum could be determined. The uncertainty principle was in the context of subatomic particles. Mathematically, the principle states that the product of error (Root Mean Square
in deviation from average) in position and momentum would be greater than or equal to a positive constant.
Contextual paralleling from subatomic particles to financial world (both evidencing wave nature in its existence) seems to be relevant in current colossal collapses. Position parameter referred in Heisenberg’s principle could be the stability factor, indicating
foundation of any financial institution or quantitatively capital factored parameter. The momentum factor which is product of mass & velocity, could correspond to sustainability factor, product of assets (mass) and risk exposures (velocity). The fundamentals
here would be that risk is a reckoning factor for growth.
Wrapping Heisenberg principle over Financial world will stipulate that the deviation in precising stability and sustainability of an FI would always be non-zero positive constant. (Value of constant may depend on risk models to arrive at a constant equivalent
Planck’s constant in Heisenberg's principle). The models we devise to arrive at an minimum error stability factor will unfocus precision in attaining sustainability factor and vice versa. In the current scenario, high error in sustainability factor and
high error in stability factor which obviously didn’t attempt to minimize the Heisenberg product to the minimum levels of the constant.
Logically, quantum physics and more generically laws of physics do find application in the world of money. Probably a data mapper from physics to finance would be handy at this hour to easily assimilate the proven principles in physics for a prudent future
with predictability to avoid catastrophic surprises in finacial world.
If someone uses Volatility as a measure of risk, what would be an appropriate non zero positive constant?
And what if I chose Beta?
Managing Director- Accenture Technology - Banking
26 Jun 2007
This post is from a series of posts in the group:
A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.
Diederick Van Thiel