Risk Latte - Laws of Thermodynamics and the Financial Markets

Laws of Thermodynamics and the Financial Markets

Rahul Bhattacharya
April 1, 2008


In the end, we'll all be consumed by the laws of thermodynamics. It's all physics.

All systems are guided by the laws of thermodynamics. Whether we are talking about physical systems like stars and galaxies, social systems, like human society and tribal communities or financial systems, like stock markets, they are all governed by the first, second and the third laws of thermodynamics.

Those of us who have recently been brutalized by the financial markets - either they have lost a ton of money or their jobs - will do well to remember what a famous British scientist and author has said about the laws of thermodynamics. C.P. Snow had a unique way of remembering the three laws of thermodynamics:

You cannot win (that is, you cannot get something for nothing, because matter and energy are conserved). Translated into financial lingo it means there's no free lunch!

You cannot breakeven (you cannot return to the same energy state, because there is always an increase in disorder; entropy always increases). Translated into financial lingo it means that no matter your pedigree and CV or where you came from, once you have worked on the Street or the City you will not be the same person again. Just like your virginity, the loss of your sanity, equanimity and brain cells are irreversible processes.

You cannot get out of the game (because absolute zero is unattainable). Translated into financial lingo it means that since your greed and stupidity are so humongous, and your belief in Federal Reserve Bank is so strong, you'll keep on goofing up and either make money for yourself or lose money for others ad infinitum.

There you go guys. The sum total of all financial theory and the story of our lives in a nutshell.


References: Hyperspace by Michio Kaku (Anchor Books)
http://www.physlink.com/Education/AskExperts/ae280.cfm

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