Unveiling the quantum secrets of investment success?
As the world becomes increasingly complex and interconnected, traditional models of decision-making are proving inadequate in certain contexts. One emerging field of research that may hold promise for investors is quantum cognition.
Applying the principles of quantum mechanics to cognitive processes, such as decision-making and reasoning may initially sound far-fetched. While quantum mechanics is often associated with subatomic particles and the behaviour of the physical world at a sub-microscopic level, researchers in the field of quantum cognition are interested in exploring how quantum principles might be applied to understanding human thought processes and by natural extension, investment decisions.
One key aspect of quantum cognition is the concept of superposition. In quantum mechanics, this refers to the idea that particles can exist in multiple states at once. Similarly, in quantum cognition, superposition can be thought of as the idea that individuals can hold multiple conflicting beliefs or opinions simultaneously. This can be particularly relevant in the context of investing, where investors may have to consider multiple variables and potential outcomes when making investment decisions.
Another key aspect is entanglement which refers to the phenomenon in which two particles become linked in such a way that the state of one particle affects the state of the other, regardless of the distance between them. Similarly, in quantum cognition, entanglement can be thought of as the idea that individuals' beliefs and opinions may be interconnected in complex ways. The parallel in investing, is found in a range of factors, including emotions, biases, social networks, and broader economic and political trends.
The development of more advanced data analytics tools is also an area of considerable interest, as data sets become increasingly complex and difficult to analyse, traditional statistical methods may prove inadequate. By applying quantum principles to data analysis, researchers may be able to develop more advanced algorithms that can identify patterns and relationships that might otherwise be overlooked. An excellent resource to consider is: "Quantum Investing: Quantum Theory and Its Application in Finance, Economics, and Banking" by Mikael Börjesson, 2019.
Here are three real-world examples of quantum cognition in action:
Quantum algorithms for portfolio optimisation: Researchers at the University of Oxford have developed a quantum algorithm for portfolio optimisation that can handle complex, high-dimensional data sets. By incorporating principles from quantum mechanics, the algorithm can identify more efficient and profitable portfolios than traditional methods. Researchers at Goldman Sachs and Cambridge Quantum Computing recently demonstrated how quantum algorithms can be used to optimise portfolio construction by considering both risk and liquidity constraints.
Quantum-inspired machine learning for fraud detection: Financial institutions are increasingly using machine learning algorithms to detect fraud and other financial crimes. Researchers at CERN have developed a quantum-inspired machine learning algorithm that can detect fraudulent transactions with greater accuracy than ever before.
Quantum finance for risk management: The field of quantum finance explores how principles from quantum mechanics can be applied to risk management and other financial applications. Research teams at IBM and JP Morgan recently demonstrated how quantum computing could be used to price a simple derivative known as an Asian option. They showed that their quantum algorithm could provide a more accurate price estimate for the derivative than a classical one.
Quantum cognition challenges us to rethink the traditional notions of investment decision-making and embrace a more nuanced and fluid approach. As Jerome Busemeyer, American cognitive psychologist and pioneer in quantum cognition research, comments: "Cognition is not just classical, but quantum as well. Quantum cognition offers us a new perspective on how we make decisions. By applying insights from quantum mechanics to human cognition, we may be able to develop more sophisticated models of decision-making that can help us navigate the complexities of the modern world."
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