Power Laws

Power laws might also be active at even larger scales. In almost every nation, a small fraction of individuals has a large fraction of the wealth, and the distribution follows a simple power law. No one is sure exactly why this should be, but Bouchaud, together with Marc Mézard of the University of Paris South, has produced a model in which 1,000 individuals attempt to make money by trading among themselves or by investing. The researchers found that the percentage return of investments — with the wealthy on average gaining or losing larger amounts than the less wealthy — inevitably leads to the power-law pattern.

via The physics of the trading floor : Article : Nature.

I’ve recently become interested in power laws. Power law shows up everywhere in nature and people are increasingly finding power laws that correctly predict human behavior. This is fascinating. While economists haven’t generally embraced power law analysis, it seems to me that power laws could describe the results of many people making decisions, i.e. the efficacy of decision making is distributed naturally through some power law. If a few people consistently made really good decisions, but most people made a much higher percentage of poor decisions, what kind of society would we have? I suspect that we’d have one pretty much like the one we do have!

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