| How Showering Explains the Stock Market
What can prevent future economic recessions? The answer may be in your shower stall …
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Most scientists today work on rarefied or esoteric projects, things pretty remote from everyday life. Damien Challet found inspiration in his bathroom. Though trained as a physicist, “I found it more fun to work with people than electrons,” he admits, and a few years ago, while living in his native Switzerland, Challet grew fascinated with the daily battle in his building for a hot shower.
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“I was living in a flat that only had six [temperature] settings on each tap,” he remembers. “It was very difficult to get the right setting,” and his water temperature would buck wildly each day. But instead of shrugging his shoulders and counting this as an unavoidable detriment of urban living, Challet, now a senior researcher at the Institute for Scientific Interchange, in Turin, Italy, decided to look into the unstable dynamics of modern plumbing.
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To do so, he enlisted Christina Matzke, his advisee when he taught at Oxford University. Matzke had tackled showering systems for her master’s degree thesis in mathematical economics there, and with his new perspective on bad showers, Challet helped her rework it. The result was a curious scholarly paper that peeps behind the shower curtains in an unnamed, fictitious building where up to forty sorry neighbors try to bathe simultaneously, with predictable results—all forty are annoyed.
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Though both sympathetic to the plights of their showering Sims, Challet and Matzke argue from their god-like perspective that this morning fight for hot water is a “fascinating game.” (Real-life apartment dwellers might be more inclined to concede the paper’s other claims that getting hot water is “challenging” and that the impish plumbing in some buildings is “possibly unlearnable.”) Most curious of all, Challet says spying on people’s bathtub behavior can shed light on how they behave during more important “games,” like trading on a stock exchange.
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Matzke, who is German, explains that the paper looks at two scenarios. In one, showerers can turn their hot and cold water to only a limited number of settings, like Challet’s tap in Switzerland. (These kinds of faucets are more common in Europe than in the United States.) This “homogeneous” case forces bathers to act almost identically, because they lack enough options to fine-tune their water flow.
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That’s usually not a problem if a few people are showering, and they can settle into equilibrium. Unfortunately, Matzke notes, “If one person changes her shower setting, she influences the temperature of all the other bathers.” And if people cannot adjust their taps precisely in response, Matzke’s mathematical models show that the water temperature will spike or sink. A shower-by-shower cascade of frenetic “tuning and retuning” follows, and predicting the final temperature of anyone’s water is impossible.
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Alas, the opposite case can lead to bad showers, too. With “heterogeneous” faucets, people can adjust their hot water taps smoothly, to whatever temperature they like. This is good in some ways, says Matzke: “With heterogeneous bathers you can suppress oscillations. It’s collectively better,” because the average temperature is closer to ideal. But as with any average, some people will be above, some below. And that “could be very risky,” she warns. “You have bathers who have large deviations from the temperature they want.” Now a third-year Ph.D. student in Germany, Matzke lives in a dormitory with dubious plumbing and presumably speaks from experience.
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The paper sounds a little like something from Freakonomics, though the authors don’t consider themselves part of that school. Still, they think economics and physics have a lot to say about social situations. “Disorder in physics corresponds to different personalities in human beings, different ways of analyzing the world,” says Challet. He’s especially enamored of the Darwinistic “minority game”—any situation, he says, with “a number of people playing, and those that happen to be in the minority win. It’s meant to mimic real life.”
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Which brings us back to stocks. As with showers, people spend inordinate amounts of time and effort tuning and retuning tax and interest rates and the money supply to keep the various global stock exchanges from running too hot (a bubble) or cold (a recession). They don’t always succeed: As with Challet’s shower in Switzerland, there’s been a lot of ups and down recently. And while Challet and Matzke say their shower model obviously cannot predict a stock market—markets are too complicated for that—they said it closely models the markets’ gross behavior and gives clues about what situations can lead to danger. To wit, Challet thinks the same behavior that dooms showerers contributed to recent subprime mortgage meltdown.
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During the housing-market heyday, he says, “many people were interested in building the same portfolios. Then they tried to sell them at the same time.” That apish behavior parallels the “homogenous” case above. Like the limited tap settings, investment banks had virtually identical computer programs controlling their decisions about what to buy and when. So when the market got cold, they only had so many options for how to adjust. This left the banks and their insurers vulnerable to an icy gush of reality when more and more people turned on the faucets and the market sank. About the only person who made out well was hedge fund manager and Queens native John Paulson, who bet big against the housing market and made $15-billion for his fund, and $3-billion for himself, in 2007—probably the single biggest annual salary in history. More of Paulson’s “heterogeneity” would have stabilized the market and perhaps prevented a crash.
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Still, heterogeneity isn’t a perfect solution: As with heterogeneous shower taps, a wider mix of investment strategies would keep the market from veering wildly up or down. But not everyone can share in the spoils. Remember that the heterogeneous situation is only better on the average. And while you can suppress oscillations, Matzke noted, you also divide people into winners and losers, those above and below the average. Overall, according to Challet and Matzke’s models, inequality may be the tax we’ll have to pay in the future for stability.
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For their own future work, Challet and Matzke will continue looking at consumer behavior and especially financial markets, which supply them with loads of data about all the irrational, silly, and Machiavellian decisions people make. (Challet regularly gives a lecture with [now wistful] title of, “So you are about to make money in the financial markets. Should you tell your friends how?” No, he says. Tell them nothing.)
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Still, there’s one subject neither plans to return to. “Not showering,” says Challet. “I’m done with showers.” He pauses, then hastens to add, “Research-wise.”
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©SamKean
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