Neuro-econo-physics: Analogies Between Human Brain and Financial Markets

Barmase, Swapnil (2014) Neuro-econo-physics: Analogies Between Human Brain and Financial Markets. Masters thesis, Indian Institute of Science Education and Research Kolkata.

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Abstract

Stock market is often compared to the human brain, with companies playing the role of neurons. This analogy has been drawn from the studies of uctuations and the nature of synchronization in these two seemingly distinct dynamical systems. Here, we carry out a quantitative analysis of the stock market behavior, from a neurological perspective in a mathematical framework, which enables us to precisely establish this correspondence. Through correlation studies, we demonstrate identical synchronization in stock market and brain dynamics arising from both noisy high-frequency uctuation and structured `memory modes', manifesting at two well separated scales. Isolating collective and sectorial dynamics from the random uctuations, using Random Matrix approach, we take recourse to `Wavelet transform' for disentangling the non-stationary variations at multiple scales. The synchronization between the activities of neurons belonging to same sensory organ and companies belonging to same business sector is found to occur in high frequency range. The correlations in the activities of distant parts of brain and companies belonging to distinct business sector manifest in low oscillation frequency domain akin to the memory modes in non-linear systems. Taking into account the financial crisis of 2008 and failure of economic theories, to envisage even the possibility of such extreme events, novel insight towards forecasting emerge from this study. As the long range synchronization in the human brain can predict the forthcoming stimuli by top-down mechanism,i adaptively matching `memory' driven expectations against signals from environment, dynamics of financial markets may probably be predicted from the collective social behavior.

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