Economic Fluctuations and Statistical Physics: Quantifying Extremely Rare Events with Applications to the Present Worldwide Crisis

Recent analysis of truly huge quantities of empirical data suggests that classic economic theories not only fail for a few outliers, but that there occur similar outliers of every possible size. In fact, if one analyzes only a small data set (say data points), then outliers appear to occur as ``rare events.'' However, when we analyze orders of magnitude more data (200 million data points!), we find orders of magnitude more outliers---so ignoring them is not a responsible option, and studying their properties becomes a realistic goal. We find that the statistical properties of these ``outliers'' are identical to the statistical properties of everyday fluctuations. We report a recent discovery that the same laws govern the formation and bursting of large bubbles as tiny bubbles, over a factor of 1,000,000,000 in time scale. This work was carried out in collaboration with a number of colleagues, chief among whom are T. Preis, J. J. Schneider, X. Gabaix, V. Plerou, and P. Gopikrishnan.