Behavioral finance FAQ / Glossary (Equilibrium)

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Dates of related message(s) in the
Behavioral-Finance group (*):

Year/month, d: developed / discussed,
i: incidental

(dynamical) Equilibrium


00/6i,8i - 07/5i + see feedback,
dynamical systems,
emergence,
percolation

Keeping one's balance by always moving


Equilibrium and stability are not the same

An equilibrium is a situation in which all the factors balance one
another.

It is often confused with stability, a situation in which not only this balance
is reached but also in which things do not change except in the (rare) cases
of external shocks.

Such a stable equilibrium in which usually nothing new happens is not often
reached, except maybe in cemeteries.

In life, as in all "dynamical systems"  (see the related glossary article),
and more specifically, in economics and finance (*), things are instable
to some degree
.

A dynamical equilibrium or balance is obviously
      not ...static

This can even strike the most "stable" systems, established for a
long time.
They
can one day or another surprise you!

The imbalance can be minor or large, depending on the type of
system and the period.

There are
* temporary
(either irregular or cyclical) adjustment of factors,
* but also heavy disruption or persistent chaotic phases leading
   to a fully different system.

(*) in economics and finance, supply, demand, prices, returns and other

parameters,are always moving, as seen below.

Equilibrium in economics and finance

Push and pull

In the economic and financial world, many variable
factors among them human ones) interplay and many
changes and
surprises are common..

That makes it a typical complex and dynamical
system that cannot reach a perfect and static
equilibrium
.

Does some statistical "pivot" apply,
implying some overall balance?

The aggregate data (production, trade, prices, incomes...)
show thatthe state of the economy moves:

Either alternatively above and below the

statistical mean as a pivot, while staying within
a "normal" distribution range (see "distribution")

This is the case when the feedback (see that word) brings
corrections from one side to the other (reversion /
regression
to the mean or to ...the extremes, negative
feedback
).

Or, on the contrary, farther and farther from the mean,

from the theoretical equilibrium, in a spiral or cobweb,

This happens when the feedback gets inverted (positive
feedback
).

In the same way, in financial markets an equilibrium price is reached
between bids and asks any time
there is a transaction, but it is an unstable
equilibrium
, it usually changes with the next transaction.

Of course there are periods of quasi stability (low volatility, see that
word) and others of high instability / high volatility), such "stases" are
another trait of
dynamical systems.

Those variations of volatility are measured by "heteroskedasticity" (see that
word).

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

Members of the BF Group, please
 vote on the glossary quality at
BF polls

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This page last update: 05/07/15  

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