In the so called ‘causal’ interpretation of quantum mechanics, an electron is considered as a particle and such particle is influenced not only by a classical but also by a so called quantum potential. This idea was developed by Professor Bohm in an important paper. In this paper we use some of the basics of this interpretation in a financial option pricing environment. The causal interpretation allows for trajectories. Path breaking work by Professors Bohm and Hiley and Khrennikov and Choustova have made that the causal interpretation is a step closer to potential applications in social science. In this paper we consider the wave function as a wave of information. We consider the gradient of the phase of this wave function and show how the option price could be influenced by this gradient.
In the so called ‘causal’ interpretation of quantum mechanics, an electron is considered as a particle and such particle is influenced not only by a classical but also by a so called quantum potential. This idea was developed by Professor Bohm in an important paper. In this paper we use some of the basics of this interpretation in a financial option pricing environment. The causal interpretation allows for trajectories. Path breaking work by Professors Bohm and Hiley and Khrennikov and Choustova have made that the causal interpretation is a step closer to potential applications in social science. In this paper we consider the wave function as a wave of information. We consider the gradient of the phase of this wave function and show how the option price could be influenced by this gradient.
The pilot wave function and its uses outside of quantum mechanics Let us recall our discussion on Bohmian mechanics in Chapter 6. The idea of using Bohmian mechanics outside of quantum mechanics is not new anymore. Khrennikov [1] provides for an overview on how this model can contribute in precise terms to areas such as economics and finance.1 Historically, the work by Bohm and Hiley [2] and also Hiley and Pylkkanen [3] brought forward the idea that the pilot wave function could be seen as a wave function containing information. In Khrennikov [4], Choustova [5], and Haven [6], the idea of using pilot wave theory to finance was investigated. Khrennikov [1] (p. 160) remarks that “the force induced by the pilot wave field does not depend on the amplitude of the wave.” He cites the argument made by Bohm and Hiley [2] that because of this property the pilot wave is an information wave. The various interpretations (with applications) of the wave function will be covered in detail in Chapter 13. Here are some of the key features which can be of use in an financial/economics setting. When the wave function is not factorized, then a change in the price of a stock i will affect the prices of stocks, j , with j ≠ i . See Khrennikov [1] (p. 161). The Bohmian theory, as we remarked already in Chapters 1 and 6, is non-local.
The causal quantum mechanics (i.e. Bohmian or de Broglie-Bohm or Bohm-de Broglie quantum mechanics) has made possible to calculate the trajectories of electrons in a typical double-slit experiment [C. Philippidis et al., Il Nuovo Cimento, 52 B, 15-28 (1979)]. The trajectories do not correspond to an uniform movement but to an accelerated one. The acceleration is caused by the quantum potential. From the quantum theoretical point of view, there is a probability for the electron to emit photons, with a certain emission power, during its movement from the slits to the screen. We find a quantum general formula for the emission power of photons, valid independently of the interpretation. Then, according to the Copenhagen interpretation, this formula gives a strictly zero value for the emission power because the electron moves as a free particle after it leaves the slit and before reach the screen. Then, there is no emission of photons. In the case of the causal interpretation, the emission power results, for a concrete real experiment, in a very tiny but not a zero value, driven by the square of the quantum potential gradient. We give an idea of the type of spectrum that could be measured. A brief idea of a possible experimental arrangement in order to detect this effect, is given.
Short introduction to Bohmian mechanics Sheldon Goldstein in a Foundations of Physics paper [1] indicates (p. 341): “Since macroscopic objects are normally regarded as built out of microscopic constituents …there can be no problem of macroscopic reality per se in Bohmian mechanics.” Goldstein in the same paper remarks (p. 342) that this | ψ | 2 has “a status very much the same as that of a thermodynamic equilibrium.” Basil Hiley the closest collaborator of David Bohm, says the following (Hiley [2] (p. 2)): “What Bohm (1952a; 1952b) did was to show how to retain a description of all the usual properties of a classical world and yet remain completely within the quantum formalism.” The Bohm (1952) [3] [4] references in that quote refer to the original work of Bohm in which he sets out the basics of the Bohmian mechanics. As we will see later in the next section of this chapter, the appearance of an “additional term” in the Hamilton-Jacobi equation, is the hallmark of Bohmian mechanics and it is very often termed the “quantum potential.” Hiley [2] (p. 2) remarks that since the Bohmian momentum is a well-defined function of position and time, an ensemble of trajectories can be found when the quantum potential is non-zero. A unique, classical path is found when the quantum potential is zero. From the outset, we hope the reader can savor the beauty of this simple but very powerful result. Bohmian mechanics indeed shows this very gentle transition from quantum mechanics to classical mechanics via the value of the quantum potential.
In this talk we intend to provide for an overview of the uses we can make in financial economics of several quantum physical concepts. We introduce and briefly discuss the so called information wave function. We discuss how the information wave function can be of use in financial option pricing. We then briefly allude on how the information wave function can be used in arbitrage. We briefly discuss how the information wave concept can be connected to measures of information. We round off the paper on recent work we are doing with Andrei Khrennikov on i) testing probability interference in psychology (Khrennikov and Haven 2006 (I)) and ii) finding uses of ‘financial ’ nonlocality and entanglement (Khrennikov and Haven 2006 (II)). In summary this talk addresses interference (probability interference), financial entanglement and looks at using the wave function in a variety of ways within an economics/finance – political science – social interaction environment.
We apply methods of quantum mechanics for mathematical modeling of price dynamics at the financial market. We propose to describe behavioral financial factors (e.g., expectations of traders) by using the pilot wave (Bohmian) model of quantum mechanics. Trajectories of prices are determined by two financial potentials: classical-like V ( q ) ("hard" market conditions, e.g., natural resources) and quantum-like U ( q ) (behavioral market conditions). On the one hand, our Bohmian model is a quantum-like model for the financial market, cf. with works of W. Segal, I. E. Segal, E. Haven, E. W. Piotrowski, J. Sladkowski. On the other hand, (since Bohmian mechanics provides the possibility to describe individual price trajectories) it belongs to the domain of extended research on deterministic dynamics for financial assets (C.W.J. Granger, W.A. Barnett, A. J. Benhabib, W.A. Brock, C. Sayers, J. Y. Campbell, A. W. Lo, A. C. MacKinlay, A. Serletis, S. Kuchta, M. Frank, R. Gencay, T. Stengos, M. J. Hinich, D. Patterson, D. A. Hsieh, D. T. Caplan, J.A. Scheinkman, B. LeBaron and many others).