Physicists, stamp collectors, human mobility forecasters

One of the two reviewers studied in high school to be a physicist. In the end, he became something else, but he never lost his awe of physics. The other reviewer never intended to become a physicist, but he sometimes asks himself why he didn’t become one. Today, they are both sociologists who practice their science on an action theory basis and believe that regularities exist in the world of social actions which can be perceived, understood, explained – and even used for making predictions

Synchronizing to the Environment: Information Theoretic Constraints on Agent Learning

We show that the way in which the Shannon entropy of sequences produced by an information source converges to the source's entropy rate can be used to monitor how an intelligent agent builds and effectively uses a predictive model of its environment. We introduce natural measures of the environment's apparent memory and the amounts of information that must be (i) extracted from observations for an agent to synchronize to the environment and (ii) stored by an agent for optimal prediction. If structural properties are ignored, the missed regularities are converted to apparent randomness. Conversely, using representations that assume too much memory results in false predictability.Comment: 6 pages, 5 figures, Santa Fe Institute Working Paper 01-03-020, http://www.santafe.edu/projects/CompMech/papers/stte.htm

Estimating the Algorithmic Complexity of Stock Markets

Randomness and regularities in Finance are usually treated in probabilistic terms. In this paper, we develop a completely different approach in using a non-probabilistic framework based on the algorithmic information theory initially developed by Kolmogorov (1965). We present some elements of this theory and show why it is particularly relevant to Finance, and potentially to other sub-fields of Economics as well. We develop a generic method to estimate the Kolmogorov complexity of numeric series. This approach is based on an iterative "regularity erasing procedure" implemented to use lossless compression algorithms on financial data. Examples are provided with both simulated and real-world financial time series. The contributions of this article are twofold. The first one is methodological : we show that some structural regularities, invisible with classical statistical tests, can be detected by this algorithmic method. The second one consists in illustrations on the daily Dow-Jones Index suggesting that beyond several well-known regularities, hidden structure may in this index remain to be identified

An empirical behavioral model of liquidity and volatility

We develop a behavioral model for liquidity and volatility based on empirical regularities in trading order flow in the London Stock Exchange. This can be viewed as a very simple agent based model in which all components of the model are validated against real data. Our empirical studies of order flow uncover several interesting regularities in the way trading orders are placed and cancelled. The resulting simple model of order flow is used to simulate price formation under a continuous double auction, and the statistical properties of the resulting simulated sequence of prices are compared to those of real data. The model is constructed using one stock (AZN) and tested on 24 other stocks. For low volatility, small tick size stocks (called Group I) the predictions are very good, but for stocks outside Group I they are not good. For Group I, the model predicts the correct magnitude and functional form of the distribution of the volatility and the bid-ask spread, without adjusting any parameters based on prices. This suggests that at least for Group I stocks, the volatility and heavy tails of prices are related to market microstructure effects, and supports the hypothesis that, at least on short time scales, the large fluctuations of absolute returns are well described by a power law with an exponent that varies from stock to stock

Empirical Regularities in Distributions of Individual Consumption Expenditure

We empirically investigate distributions of individual consumption expenditure f or four commodity categories conditional on fixed income levels. The data stems from the Family Expenditure Survey carried out annually in the United Kingdom. W e use graphical techniques to test for normality and lognormality of these distributions. While mainstream economic theory does not predict any structure for these distributions, we find that in at least three commodity categories individual consumption expenditure conditional on a fixed income level is lognormally distributed.Comment: 9 pages including figures; for Int. J. Mod. Phys. C 13, No.