Behavioral finance FAQ / Glossary (Equilibrium)
This is a separate page of the E section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
00/6i,8i - 07/5i + see feedback,
dynamical systems, emergence,
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
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
This can even strike the most "stable" systems, established for a
They can one day or another surprise you!
The imbalance can be minor or large, depending on the type of
system and the period.
* 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
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
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
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
Those variations of volatility are measured by "heteroskedasticity" (see that
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1) click "messages", 2) enter your query in "search archives".
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