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A quantum model of supply and demand

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  • Orrell, David

Abstract

One of the most iconic and influential graphics in economics is the figure showing supply and demand as two lines sloping in opposite directions, with the point at which they intersect representing the equilibrium price which perfectly balances supply and demand. The figure, which dates back to the nineteenth century, can be seen as a graphical representation of Adam Smith’s invisible hand, which is said to guide prices to their optimal level, and features in nearly every introductory textbook. However this figure suffers from a number of basic drawbacks. One is that it does not express a dynamical view of market forces, so it is not clear how prices converge on an equilibrium. Another is that it views supply and demand as deterministic, when in fact they are intrinsically uncertain in nature. This paper addresses these issues by using a quantum framework to model supply and demand as, not a cross, but a probabilistic wave, with an associated entropic force. The approach is used to derive from first principles a technique for modeling asset price changes using a quantum harmonic oscillator, that has been previously used and empirically tested in quantum finance. The method is demonstrated for a simple system, and applications in other areas of economics are discussed.

Suggested Citation

  • Orrell, David, 2020. "A quantum model of supply and demand," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 539(C).
    • Handle: RePEc:eee:phsmap:v:539:y:2020:i:c:s0378437119316607
    DOI: 10.1016/j.physa.2019.122928
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    References listed on IDEAS

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    1. Meng, Xiangyi & Zhang, Jian-Wei & Xu, Jingjing & Guo, Hong, 2015. "Quantum spatial-periodic harmonic model for daily price-limited stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 154-160.
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    8. Piotrowski, Edward W. & Schroeder, Małgorzata & Zambrzycka, Anna, 2006. "Quantum extension of European option pricing based on the Ornstein–Uhlenbeck process," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(1), pages 176-182.
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    Citations

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    Cited by:

    1. Sarkissian, Jack, 2020. "Quantum coupled-wave theory of price formation in financial markets: Price measurement, dynamics and ergodicity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 554(C).
    2. Haoran Zheng & Jing Bai, 2024. "Quantum Leap: A Price Leap Mechanism in Financial Markets," Mathematics, MDPI, vol. 12(2), pages 1-27, January.
    3. Stijn De Backer & Luis E. C. Rocha & Jan Ryckebusch & Koen Schoors, 2024. "On the potential of quantum walks for modeling financial return distributions," Papers 2403.19502, arXiv.org, revised Dec 2024.
    4. Jinge Bao & Patrick Rebentrost, 2022. "Fundamental theorem for quantum asset pricing," Papers 2212.13815, arXiv.org, revised Apr 2023.

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    More about this item

    Keywords

    Quantum economics; Quantum finance; Quantum cognition; Entropic forces; Harmonic oscillator; Quantum agent-based model;
    All these keywords.

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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