APL Colloquium

January 10, 2003

Colloquium Topic: Statistical Mechanics of Money, Income, and Wealth

We draw an analogy between the exponential Boltzmann-Gibbs distribution of energy in physics and the equilibrium probability distribution of money in a closed economic system. Analogously to energy, money is locally conserved in interactions between agents, thus the thermal Boltzmann-Gibbs distribution function is expected for money. Using tax and census data, we demonstrate that the distribution of individual income for more than 95% of earners is exponential, and for the top few percent it follows a power law. We calculate the so-called Gini coefficient, which characterizes inequality of the distribution, and find a very good agreement with the data. The exponential income distribution is characterized by a dimensional scaling parameter analogous to temperature. This effective temperature varies by +/-25% between different states of the US, and is about twice higher in the US than in the UK. A thermal machine could use the difference of temperatures to extract a monetary profit. We will show that the probability distribution of price changes in the stock market is very well described by a multiplicative Brownian motion with a fluctuating diffusion coefficient. The quantitative agreement often extends for 10 orders of magnitude. For more information on the papers that will be presented, you can visit this website: http://www2.physics.umd.edu/~yakovenk/econophysics.html

Colloquium Speaker: Victor Yakovenko

Dr. Victor Yakovenko was educated in Moscow Physical-Technical Institute. In 1987, he received a Ph.D. from the Landau Institute of Theoretical Physics. In 1991, he was a postdoc at Rutgers University, and in 1993 obtained a faculty position at the University of Maryland and is currently Associate Professor. Dr. Yakovenko's research interest is in the area of condensed matter theory, particularly the theory of unconventional superconductors, such as organic and high-Tc. In addition, he also works in the new field, often called econophysics that applies statistical physics methods to economic and financial problems.