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Why youth hostel showers are like the stock market
February 12, 2008New economics research stresses importance of variety
Diversity keeps you warm. At least that is true while you're having a shower in youth hostels. If you like, this sums up the research project just published by scientists from the Universities of Fribourg and Bonn. Their result is not as trivial as it sounds. Ultimately it shows that heterogeneity provides stability, whether this is in a shower, in power grids or even on the stock market.
At least that is what the Bonn economist Christina Matzke and her colleague Damien Challet, a physicist at the University of Fribourg, say. They modelled the temperature profile of showers in a youth hostel on the computer. 'All in all, heterogeneous taps offer advantages - they prevent the average shower temperature of all guests from suddenly dropping or rising,' Christina Matzke explains. 'From the perspective of the individual they also have disadvantages, as it's more difficult for each person to set the right temperature.'
The problem sounds comical, but in principle it can be applied to all situations where people compete for a scarce resource, whether this is hot water, electricity or equities. One thing is always true, the more individualistic the behaviour of those involved in the market is, the more stable the whole system becomes. Put simply, the only reason why our electricity grid does not break down is that not all the inhabitants of Germany switch on the tumble drier at the same time. And if all shareholders made strictly rational decisions on their investments, there would probably be a lot more turbulence on the stock market.
The result is also significant from a theoretical point of view. 'We show what different results economic models can produce, depending on whether they are based on homogeneous or heterogeneous behaviour,' Christina Matzke emphasises. Accordingly, it is important to account for differences in individual behaviour when making forecasts. Although it sounds obvious, economists long ignored this insight. For decades their models were dominated by 'homo economicus', an imaginary standardised market investor who always made rational decisions rather than deciding according to individual criteria.
University of Bonn
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UA scientists discover quantum fingerprints of chaos
Chaotic behavior is the rule, not the exception, in the world we experience through our senses, the world governed by the laws of classical physics.
Older Americans: How they are faring in the recession
Older Americans have weathered the financial crisis relatively well, although many now expect to work longer than they did just a year ago.
Wishful betting can contaminate financial markets, study shows
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Engineers ride 'rogue' laser waves to build better light sources
A freak wave at sea is a terrifying sight. Seven stories tall, wildly unpredictable, and incredibly destructive, such waves have been known to emerge from calm waters and swallow ships whole.
Dartmouth researchers develop computational tool to untangle complex data
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Predicting boom and bust ecologies
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Stress affects older adults more than young adults
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Scientists adapt economics theory to trace brain's information flow
Scientists have used a technique originally developed for economic study to become the first to overcome a significant challenge in brain research: determining the flow of information from one part of the brain to another.
Financial risk-taking behavior is associated with higher testosterone levels
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