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We have great knowledge of self-organization at the levels of physical, chemical, biological and social phenomena. Research, complexity analysis is an intellectual challenge and very useful. The paper presents a theoretical insight into the scientific complexity in specific areas of financial trading through the third law of thermodynamics / entropy and the relation between quantum and Shannon theory of information. Theoretical analysis gives implications for entropy through the information[...]

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We have great knowledge of self-organization at the levels of physical, chemical, biological and social phenomena. Research, complexity analysis is an intellectual challenge and very useful. The paper presents a theoretical insight into the scientific complexity in specific areas of financial trading through the third law of thermodynamics / entropy and the relation between quantum and Shannon theory of information. Theoretical analysis gives implications for entropy through the information[...]

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Research Article

through Quantum and Shanon's Theory of Information

Ana Njegovanović

Kamaufova Street Number 3, 10000 Zagreb, CROATIA

Email: ana.njegovanovic@gmail.com

We have great knowledge of self-organization at the levels of physical, chemical, biological and

social phenomena. Research, complexity analysis is an intellectual challenge and very useful.

The paper presents a theoretical insight into the scientific complexity in specific areas of financial

trading through the third law of thermodynamics / entropy and the relation between quantum and

Shannon theory of information. Theoretical analysis gives implications for entropy through the

information of pillars of reality. Financial Trading (different financial models of the stock market,

some based on competition between informed investors and "noise trader" -noisy coding theory,

game theory, and extreme theory) are followed by analysis and synthesis of the interrelationship

of the third law of thermodynamics / entropy and their meaning following Ludwig Boltzmann

formulas for physical entropy (S = k log W-relation between the microscopic and macroscopic

world view) and the evolution of biology and biological complexity (John Kelly's formula for

maximizing profits by Fredrik Burton and Richard Dawkins), which is the same as the profit of a

successful gambler / investor (grows the same way). Physics and information create interplay;

Real-world information is different in comparison to what seems to us at first glance, the world is

in quantum mechanics ultimately (quantum theory information is over-set Shannon's information

by somehow falling into Shannon's information). Information is synonymous with knowledge. The

network of human behavior is based on theoretical principles of information technology (such as

biology and physics). We wonder what is the entropy of the stock? The role of intelligence / human

brain and entropy?

Keywords: The third law of thermodynamics / entropy, market volatility, quantum information theory, Shannon's theory of

information.

INTRODUCTION

The paper presents a theoretical insight into the scientific understood it as a statistical concept. In the mid-twentieth

complexity in specific areas of financial trading through the century, entropy was used in engineering, mathematics

third law of thermodynamics / entropy and the relation through Shannon's work in communication engineering

between quantum and Shannon theory of information. and Kolmogorov in the theory of probability and the theory

Financial Trading is followed by the analysis and synthesis of dynamic systems. Conditional entropy or mutual

of the interdependence of the third law of thermodynamics information is adapted to statistical and nonlinear

/ entropy and their significance following Ludwig correlations. The use of continuous processes with

Boltzmann's formula for physical entropy and the evolution random walk and Brown's motion nucleus are financial

of biology and biological complexity (John Kelly's formula modeling and are based on an increase in price / yield on

for maximizing profits by Fredrik Burton and Richard the Gauss curve. However, empirical works point to the

Dawkins), which is the same as profit successful gambler acceptance of Benoit Mandelbrot's approach rather than

/ investor (grows the same way). the Gaussian process where yields can not be managed.

Entropy was introduced in thermodynamics in 1865 from It should be noted that "Shannon's term entropy is taken

Clasius. Within statistical physics (Boltzmann, Gibbs) he from the field of thermodynamics, and there is a solid

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

Njegovanović A. 116

analogy between entropy known in thermodynamics and and is used in the interpretation of processes in the field of

entropy in information (this does not mean that the research of natural, social and human sciences.

understanding of the basis of information theory is a

necessary knowledge of thermodynamics)." As it is In the The definition of the third law of thermodynamics / entropy

mathematical, general definition there are numerous ways and market volatility (the range and price movements, the

of understanding and interpreting entropy. However, market volatility, the index and certain securities)

Shanon's theorem gives the upper bound in the connection measured by "standard deviation" (deviations from

capacity, bits per second (bps) as the available bandwidth average assets) but due to some standard deviation

and signal ratio and noise (noise) link. We can state C = deficiencies, an alternative measure to address the

B * log2 (1 + S /N). Where C reaches the channel capacity, problem of volatility in the market? Some of the assets are

B is the bandwidth of the line, S is the average signal more volatile than the other, ie the shares are more volatile

strength, N is the average noise strength and is expressed than the stock exchange index that contains many different

in decibels (dB) per given form of 10 * log10 (S / N). While, stocks. Investors with less risk can choose volatile

Shannon formally determined the amount of information in securities due to uncertainty of return. Volatility suggests

the message as a function of the likelihood of the that investors can evaluate a securities bet (as far as

occurrence of any possible message. Given the space securities are volatile in relation to the broader market)

message M = {m1, m2, .., mn} and the probability p (mi) using the Capital Asset Pricing Model (CAPM), which

for the occurrence of each message, the informative calculates the expected return on assets based on its

content of the message in M is: Σᵢͫ-p (mᵢ) log2 (p (mᵢ)). stake and expected market return. Changes in return

volatility can affect decision makers who are not prone to

Financial markets are dynamic systems that are constantly risk, but also spending patterns, decisions on corporate

developing and continually generating large amounts of capital investment and macroeconomic variables. We are

data. Trading in stocks, bonds, or currencies creates a asking you how to solve volatility? If standard deviation has

transaction network among brokers resulting from the some drawbacks? What is then an alternative measure?

architecture of the financial market. The attention of Entropy as an alternative measure to standard deviation?

physicists to financial markets enables them to investigate However, why entropy? Entropy can encompass

the dynamics of the market by the techniques of statistical uncertainty and mess in the time series without imposing

mechanics. Stock markets, futures, currencies, goods are any restrictions on the theoretical distribution of probability

analyzed and analyzed in research of universal properties. which is its main advantage. Entropy is a measure of a

By defining the third law of thermodynamics / entropy (from disorder or a coincidence of a particular system. Because

the aspect of physics) we try to find an analogy with the it depends on the initial and final state of the system, the

financial system through the information theory. absolute value of entropy can not be determined. We have

to consider the difference between the initial and the final

"One version of the third law of thermodynamics states that state in order to determine the entropy change. What

an infinite number of steps would be needed to achieve measure entropy should be used because there are

absolute zero, which means you will never get there. If you several entropy? Shannon's entropy or Tallis's entropy.

could reach absolute zero, it would be a violation of The difference is that Renyi and Tsallis are suitable for

another law, because if you had a refrigerator at the anomalous systems, while Shannon is for optimal balance

absolute zero, you could build a 100 percent effective systems.

machine. "(Siabal Mitra, professor of physics at Missouri

State University). According to David McKee, a professor Trading on the stock exchange is a complex interlinking of

of physics at the South Missouri State University, "there is coexistence between rationality and irrationality. The

a field of exploration of ultra-low temperatures, and every principles of biology are complex, complicated, and require

time you turn, the new is a record low. Nanocel (nK = 10- a great infrastructure to develop new knowledge.

9 K) temperatures are easy to achieve, now all (pK =, 10- However, our understanding of finance in permanent

12 K) The YKI Group of Low Temperature Laboratories at global changes, new technologies, techniques, seeks a

Aalto University in Finland They cooled a piece of rhodium new, innovative way of thinking. The principles of biology

metal up to 100 pK or 100 trillion of Celsius degrees above are useful for understanding the internal functioning of the

the absolute zero which surpassed the previous record of financial industry. Financial markets are the adjustment

280 pK set in 1993. " that enables us to stimulate economic growth and

development and risk management. Adjustment in the

"Since the absolute zero temperature is physically sense of finance implies high innovation and

unattainable, the third law can be repeated to apply to the competitiveness, whereby evolution will help explain the

real world as: the entropy of the perfect crystal approaches dynamics of financial markets.

the zero as its temperature approaches the absolute zero.

From the experimental data we can extrapolate that the Application of biology information where genetics have

entropy of the perfect crystal reaches zero in absolute been developed using the language of preservation and

zero, but we can never empirically prove it. " We can transfer of information. Information has a clear and well-

conclude that entropy is the most intriguing term in science defined meaning. Biological information is known for its

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

World J. Econ. Fin. 117

persistence, but the core is in the principles of universality. and Hartley and is the core in formulating the theory of

Perhaps we can use it as a framework for successful stock information. By Shannon (official definition) entropy is the

trading? Complexity is on average increasing, the key average amount of information, choice and insecurity

component of this growth is the natural selection process encoded in samples drawn from the signal or message.

that clearly defined Charles Darwin. Natural selection is a The generalization of Shannon's entropies of any series

process that connects us to our environment because the with a defined probability distribution is known in financials,

properties that survive are the best adapted to that namely applications include financial prediction

environment. In accordance with Darwin's definition of (Molgedey, Ebeling, 2000), market efficiency (Jang, Kwak,

natural selection, (in the financial world it is not quite Kaizoji, 2008, Mensi, 2012, Zhang, courses (Petron,

analogous to Darwin's natural selection processes) Serva, 2003). The basis of Shannon's works is based on

evolutionary financing leads to the study of stock trading quantifying insecurity and disruption in various problems

behavior. In this regard, the market can be seen as a where classical methods are insufficient (Fourier

mechanism of choice in making financial decisions, transformation). However, the lack of temporal

conscious adaptation and accidental mutation. Namely, relationships implies some knowledge of the system, and

information is fueled by evolutionary forces within the there is also a weak description of the non-linear chaotic

financial markets. regime. This led to permutation entropy (application in bio-

medicine) as a technique to overcome the problem (Brandt

and Pompe, 2002).

THEORETICAL BACKGROUND

It is also necessary to emphasize Boltzman-Gibss's

Understanding the notion of entropy necessarily requires

statistics as the basis of modern physics, which represents

its historical context from Clausius, Boltzmann, Gibbs and

the relation between statistical mechanics and classical

Planck. According to J.Bernard Brissauda, "entropy

thermodynamics by expanding to Clausius's concept of

measures freedom and allows a coherent interpretation of

insecurity for the microscopic state of the system (Boon,

entropy formulas and experimental facts". According to

Tsallis, 2005). The applicability of Boltzman-Gibss's

Brissaud entropy we have various aspects: 1. entropy is

statistics is limited and universal and applies to extensive

the loss of information about the physical system observed

regimes. Contrary to Boltzman-Gibsu's Tsallis entropy, it

by the outsider but within the system; it represents

must be extensive as prescribed by the law of

countable information. 2. Measure the degree of freedom.

thermodynamics, leading to a non-additive entropy known

Brissaud believed that entropy was assimilated with

as Tsallis's entropy. Tsallis's entropy, despite some

disorder (temperance is a better measure of disorder).

shortcomings, is accepted in the concept of non-

Entropy in finance can be observed through the entropy of

extensibility in the study of financial systems. It is important

information and probability entropy (portfolio selection and

to emphasize here the research of Rak et al., In non-

asset pricing). G. C. Philippatos and C. J. Wilson have

extensively statistical features price fluctuations in the

suggested approaching medium entropy despite some

Polish market (Rak et al., 2007); Matsuba and Takahashi

shortcomings in experimental research yet being

on the Nikkeia Market Index (Vosvrda, 2009); Vigor has

recognized in the area of portfolio selection. Namely, "the

quantified the efficiency of capital with Tasallis entropy

middle entropy portfolios are consistent with Markowitz's

(Matsuba, Takahashi, 2003); Namaki and associates

full covariates and Sharpe's single index.

compared emerging markets with mature markets in times

Applying entropy to pricing options like the Entropic Price of financial crisis (Namaki et al., 2013); while Senapati

Theory (EPT) introduced her by applying the pricing of proposed the theoretical framework based on Tsallis

stock options and pricing the bonds. Determining the entropy to explain the behavior of trace stock throughout

option price leads to the principle of maximum entropy the day (Senapati, Karmesh, 2016). In 1960, Alfred Rényi

(MEP), and the Buchen and Kelly surveys have shown that proposed a mathematical generalization of Shannan's

"maximum distribution of entropy could correspond to the entropy with the motivation to introduce theoretical

known probability of precision density function." Their evidence for a centralized limited theorem but never

research also influenced Neri and Schneider who concluded. However, Rényi's entropy lacks connection

developed a test for maximum distribution of entropy. with thermodynamics, such as Shannon's entropy, leading

When correlating between different currency pairs to non-integration into statistical mechanics. Stacionarity is

(Krishnan, Nelken, 2001), obtaining the neutral density of a prerequisite in statistical methods, meaning that the

future risky shares or other risky assets (Rompolis, mean, variance and auto-correlation structure remain

Retrieving, 2010) can be derived the presumed probability invariable in time translations, which is important for

density and distribution from the price option (Guo, 2001). modeling and predicting the financial system. But the

Stuart and Hawkins used MEPs to determine the price of batches are usually unpredictable or not stationary where

derivative securities, swaps (Stuzer, 1996, Hawkins, the statistical properties change over time. Time-

1997). dependent entropy information theory is introduced to

achieve time evolution of entropy. Applications include

Shannon's (1948) entropy is a "mathematically quantified different disciplines such as biomedicine and finance

degree of lost information" based on the work of Nyquist (Alvarez-Ramirez, Rodrigues, 2012).

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

Njegovanović A. 118

Multiscale entropy was introduced in 2002 for assessing investment? Research conducted at the University of Bonn

the complexity of finite signals in the range of time scales. with an innovative approach to socioeconomic,

Multiscale entropy also records the short-term and long- psychological and neuroscience data has found anterior

term correlations of the "structural wealth" of the signal. As insular cortical regions more active among people who do

a prevalent measure of complexity, the algorithm of not trade stocks, while at the University of Bonn (CENs-

multipurpose entropy is applicable in biomedicine (Costa Center for Economics and Neuroscience) professional

et al., 2005), geophysics (Guzman-Vargas et al., 2008), retailers interior insular was lower.

hydrology (Li, Z., Zhang, 2007) (Wang et al., 2013) and

finance (Wang et al., 2012; Liu et al., 2010; Xia et al., 2014; Professor Andre Lo (MIT) points to the need for paradigm

Niu and Wang, 2015; Sharma et al. 2010, Xia; Shang, shift in the financial economy with the aim of analyzing

2012) Standard multipath entropy relies on coarse- financial markets from the perspective of the evolutionary

graining algorithms that modulate signal fluctuations in perspective. The reason for this approach is "evolutionary

different scales. mismatch" evolution may help explain risk aversion and

tendency to "match probability" in financial terms that

FINANCIAL EVOLUTION ultimately can lead to non-optimal investment. Financial

behavior does not explain why people make suboptimal

The finance theory continues to develop beyond the decisions, we can look for a response in the field of

traditional academic areas of rational expectations and neurofinancing that adds biology that is a mix of economics

efficient markets with innovations coming from and psychology. The brain does not like risk / insecurity.

psychology, neuroscience, biology, and physics. Why do people give up investing in risky forms of

Analyzing financial markets from a biological perspective, investment? Research conducted at the University of Bonn

within the evolutionary framework in which financial with an innovative approach to socioeconomic,

markets, instruments, institutions, investors communicate psychological and neuroscience data has found anterior

dynamically, developing under the "financial selection" insular cortical regions more active among people who do

law. In the financial world financial intermediaries are not trade stocks, while at the University of Bonn (CENs-

adapted, but perhaps not in an optimal way. The Center for Economics and Neuroscience) professional

evolutionary models of financial markets are new frontiers retailers interior insular was lower. Namely, many factors

whose research is still under way. Nuclear finance is a influence investment decision-making, whether the

necessity of compromise between risk and expected investment is lucrative or not. The decision made follows

return. The change in the price of securities that is positive the company's development: price movements, quarterly

is the attracting prize for investors and the corresponding review and stock price movements. It is difficult to review

risks. However, aversion to risk, ie non-risk, implies the existence of a large number of information coming from

avoiding investment due to unforeseen returns. investors. The brain was not set up to fully understand

complex issues such as the financial market and extract

The fruitful collaboration of Doyne Farmer (University of rational decisions. Our brain has not changed, in a sense,

Oxford) with Andrew Lo (MIT Sloan School of we still use the same "hardware" as our ancestors did

Management, finance professor) and John Geanakoplos before the millennium. A study conducted by Cambridge

brought understanding of the financial market through University under the supervision of neuroscientist John

Andrew Lo's hypothesis of market adaptability trying to Coates, Wall Street has carefully examined stress

align the Famas hypothesis with the humanities behavior hormone cortisol. Monitoring the work of a broker at the

by using evolutionary biology and economic equilibrium London Stock Exchange over a longer period of time, the

John Farrow's Method of Understanding Market Behavior stress hormone appeared 68% more often among brokers

is based on modeling mediator-simulation of investor than usual (double blind-checking results). The conclusion

participation in the financial market. Complex approach of the study suggests that cortisol causes mediators to fall

means building a library of information needed to simulate into shock-induced paralysis. This makes them less

the interaction of participants in the financial market. tolerant than usual and causes them to miss decisive

opportunities, especially in times of crisis. In turn, it

Professor Andre Lo (MIT) points to the need for paradigm reduces market falls longer than needed. Without this

shift in the financial economy with the aim of analyzing shock-induced paralysis, researchers are convinced that

financial markets from the perspective of the evolutionary risk aware investors will soon be able to identify favorable

perspective. The reason for this approach is "evolutionary opportunities and the crisis will be overcome. Research

mismatch" evolution may help explain risk aversion and shows that both professional investors are driven by their

tendency to "match probability" in financial terms that emotions. Two key brain players in financial matters are

ultimately can lead to non-optimal investment. Financial the reward system and the center of anxiety. The reward

behavior does not explain why people make suboptimal system is responsible for motivating a person. It reminds

decisions, we can look for a response in the field of of the experiences that felt good and should be repeated.

neurofinancing that adds biology that is a mix of economics On the other hand, the center of anxiety is responsible for

and psychology. The brain does not like risk / insecurity. risk awareness. Potential threats, including abstract capital

Why do people give up investing in risky forms of loss, are discussed here before each decision. Human

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

World J. Econ. Fin. 119

intelligence involves understanding and thinking about an Perez-Garc'ı added clarifications. The classical channel

endlessly changing external environment. The brain is capacity assisted by an unlimited quantum feedback is

capable of high variability in neural configurations or equal to the classical ability of assisted overlap (Bowen,

states, it will understand and anticipate variable external 2004). There is also a knowledge of the strong conversion

events. Entropy measures the variety of possible and characterization of the second order of capacity

configurations within the system, and recently the concept assisted by overlap. Understanding the interchange

of brain entropy is defined as the number of neural states channels of information plays an important role in the

that a particular brain can access. The relationship quantum Shannan theory and proves several important

between high entropy of the brain and high intelligence properties (Adami, Cerf, 1997). The operational

indicates the role of entropy in the functioning of the brain. significance of the channel information Benett et al.,

Thus, access to variable neuronal states predicts complex Shows as a tool of classical capacity merging. Giovannetti

behavioral behavior, and indicates that entropy is derived and Fazio (2005) found several capacities of the damped

from the neuroimaging signal by carrying information on channel, with Wolf and Perez-Garc'ı added clarifications.

intellectual capacity. Entropy is a word that is generally The classical channel capacity assisted by an unlimited

associated with physics especially with other entropy law. quantum feedback is equal to the classical ability of

Entropy brain hypothesis is a model of brain function that assisted overlap (Bowen, 2004). There is also a

establishes the link between total entropy in the brain and knowledge of the strong conversion and characterization

long-term psychological conditions, particularly of the second order of capacity assisted by overlap.

pathological conditions such as schizophrenia and Quantum Reverse Shannon's Theory quantifies the speed

obsessive-compulsive disorder. Small fluctuations in brain of classical communication needed to simulate a quantum

entropy are natural, but according to the Carhart-Harris channel in the presence of unlimited interlinking between

model, many conscious states can be classified as "low sender and recipient (Bennett, 2014). It is necessary to

entropy" or "high entropy". Neuroscientists have isolated point out the work of Gupta and Wilde (2015) who provided

the two main networks in the brain: a Task Positive direct evidence of strong conversation using R'enyi

Network (TPN) associated with activity and action, and the entropy. The same strong conversations are held in the

Default Mode Network (DMN), associated with idle and presence of a quantum back channel amplifying Bowen's

maintaining a coherent ego, or feeling "self" while active in results (2004). Second-order results for classical

active tasks. As Ilya Prigogine says, "the entropy is the communication assisted by overlapping revealed the

price of the structure. "Entropy is more than" mess "or" characterization for some channels using the previous

chaos ". Metaphors that cover some aspects of entropy Matthew and Wehner (Datta et al., 2014). The relationship

(such as slag structure and rigidity) have negative, between information and entropy is deeply subtle.

normative connotations that subtract what entropy Shannon's derivation of the mathematical theorem uses

generally means in math and physics: increasing the simple axioms that the information has to satisfy

capabilities. (Shannon, Weaver, 1949), Shannon introduced his theory

of information as a mathematical communication theory

(Shannon, 1948, Shannon and Weaver, 1949) introducing

QUANTUM THEORY AND SHANON'S THEORY OF the general model of the communication system.

INFORMATION

The quantum capacity theorem is one of the most

The contemporary definition of information contains important theorems in quantum Shannon theory. This is a

information in an event and a proportional logarithm of its basic quantum theorem that shows the fundamental

inverse probability of occurrence: I = log 1 / p. This quantum of information, the coherent information reaching

definition shows the existence of an event, the second the quantum information rate across the quantum channel.

possibility is to calculate the probability of an event / Coherent information does not have a strong analogy in

activity event. Translated into the economic dictionary one classical Shannan theory by dividing the quantum and

event could be a drop in stock prices (whatever the event classical theory of information.

we were able to apply it to the theory of information).

Shannon's definition of information is proportional to the If we look at the information as a binding force between

logarithm of the inverse probability of an event (a well- different aspects of the quantum system, this means that

known and highly plastic story of two users of the quantum systems can share more than 100% of the

communication channel Alise and Bob). information, so each theory of information should be able

to deal with it to fully describe reality; Otherwise, some

Understanding the interchange channels of information parts of reality will be unavailable to our understanding.

plays an important role in the quantum Shannan theory The quantum information theory is over-set Shannon's

and proves several important properties (Adami, Cerf, information by reducing the Shannon's information in some

1997). The operational significance of the channel cases. Quantum information tells us about reality, in

information Benett et al., shows as a tool of classical addition to what we have learned through Shannon, that

capacity merging. Giovannetti and Fazio (2005) found is, that it has a lot of untapped potential.

several capacities of the damped channel, with Wolf and

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

Njegovanović A. 120

How mathematical form of information is also entroped. However, we need to elaborate the qubit, which can be

We ask whether the information is the same quantity that any quantum system with two orthogonal states.

appears in mechanics statistics. This is a simple example

of getting Boltzmann's distribution of information

maximization. QUANTUM COMPUTERS AND STOCK TRADING

Can information theory help maximize profits on the stock The quantum computer is defined as a binary code, a data

market? Maximizing profits in financial speculation is the storage method, such as strings (1) and zero (0), the basis

same problem as maximizing the communication channel of all conventional computers. Quantified computers use

capacity. We know that Shanon solved this latter problem, qubite (qubite based on quantum-mechanical principles

so this is the solution to other problems. Namely, the that describe the partial and widespread behavior of matter

solution consisted in maximizing channel capacity so that and energy on an extremely small scale), a unit of

the length of the message follows Shannon's rule of information that can be "1", "0" or both "1" and "0".

"reverse probability logs". In that sense, the amount of

money after investing is the length of the message we get How many computers can be fast in processing

what the stock exchange mixers call the "optimum information? Is Exponential Growth Limit? If we use 100

logarithm portfolio". In practice, the portfolio of the optimal electrons today to encode one bit of information, then we

algorithm implies investing in one option can lead to a loss can ask how many electrons will be used to encode one

in the initial stage and lack of funding for the next bit of information? Understanding the boundaries

investment, similar to the one in communication, some introduces us to simply defining a computer. Today we use

roles include large amounts of money, while some have to a computer based on Bull's logic laws (Bull markets are

be very small. The value of a company's shares increases defined so that the market is aggressively developing over

but also falls in some period, ie there is a natural fluctuation a period of time. As the market starts to grow, stock market

in the market. If the company is financially and strategically is increasingly greedy)

healthy then the overall growth trend is long-term. By using

publicly available information we can roughly estimate that Classical information processing can be a good

some companies will grow next year by X%. The Shannon approximation of the situation we have on the macroscopic

formula gives us guidelines if the investment shows a level, and sometimes the level of detail that offers a higher

success rate of only 50% that means that on average there level is sufficient for daily purposes. Exploring the

is no gain with the potential for losing the invested capital. properties of computer science from physics, computer

We are asking whether financial market analyzes and science, and information theory to math and philosophy on

monetary speculation can we use thermodynamics to a quantum basis offers all the complexity of whose

describe market behavior and to deduce the general research is rapidly growing. If we start with computing as

trends of the financial world? Thermodynamics points to a process that maximizes mutual information between

the energy exhaustion of resources and causing inputs and outputs - in case the question arises, the speed

consequences for Earth's planet as they disappear. We of computer operations can be considered as the rate of

notice such an impact on the economy (the price of establishing mutual information, ie the growth rate of

gasoline is linked to the price of oil that depends on oil correlation between outputs and inputs. The Qubits offer a

reserves and its availability), any political instability in the higher level of mutual information than is possible with the

Middle East leads to higher gas prices. Behavior in the bits, it is directly translated into the quantum acceleration

financial market reflects the behavior of physical systems we see in Shore (Shor's algorithm, named by

in thermodynamics. The Finance Act states "There is no mathematician Peter Shore, is a quantum algorithm that

risk-free financial gain on an efficient market. "The third works on a quantum computer for total factorization,

law of thermal dynamics has its analogy in stock trading, formulated in 1994 ) and Grover's (quantum algorithm that

the law defends us to reach absolute zero; in terms of finds a unique entry into the function of a black box that

trading, it means being cooler, especially from the risk of produces a particular output value by evaluating the

investing. We can conclude that Shannon's formula for function, was created by Lov Grover, 1996) algorithm. .

maximum channel capacity, Bolcmon's formula for Quantum computers are in front of us. Quantum effects are

physical entropy, and Keliyeva formula for profit experimentally observed in macroscopic objects such as

maximization is the same formula. parts of solid bodies and organic molecules in living

systems, pointing out that quantum computers impose a

Communication signal is transmitted by a quantum higher order of data processing by solving problems that

system. Simple classical information is expressed in bits; conventional computers are not capable of solving the

and is transmitted by a physical system with two different "higher order" of data processing.

states, one state is logically 0, the other is logically 1.

Consequently, the classical information expressed in the Quantum Computing can help marketers, analysts and

bits can be applied in the quantum communication Ι 1 Ι. their companies overcome the challenges of financial

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

World J. Econ. Fin. 121

research. Finance is not like empirical science because it a global minimum. Optimum trading paths have already

has no chance of repeating experiments or testing the been developed to reduce trading costs and control

theory under controlled conditions (most of the claims algorithms by executing a balance between fast (market

about research results in the financial economy are risk minimization) and slow trading (minimum impact on

probably incorrect, argues Professor Campbell Harvey, the market).

President of the American Financial Association; outside

"simple toy models", Lopez de Prado). INSTEAD CONCLUSION

As modern physics can not progress without objects such The paper gives a theoretical insight into the complexity of

as the Great Hadron Collider (LHC), beneficial financing the financial world in comparing physics (third law of

that takes into account the real coincidentalness and thermodynamics) and entropy with quantum and Shanon's

complexity of the market requires machines that are theory of information. Comparison gives a wider

consistent with the task pointed out by Lopez de Prado. understanding and interdependence of the dynamic

Many financial problems require numerous calculations activities of the financial system.

that go far beyond the capabilities of the fastest

supercomputers (Lopez de Prado). Dynamic optimization Concepts and applications of entropies are relevant in the

of the portfolio to calculate the optimal path for core field of finance, although the term entropy itself is related

investment "A better portfolio means less rebalance and to thermodynamics. Benefits are in risk measurement and

cost (Lopez de Prado). "Some complex derivatives depend distribution descriptor. Entropy as a risk measure in

on the path," (Lopez de Prado). The first rule of quantum portfolio selection, or variance with entropy as a substitute

mechanics is: "If you think you understand quantum for medium variance models or models for adding entropy

mechanics then you do not understand quantum to the original portfolio and optimizing new models. The

mechanics." principles of entropy in determining property prices allow

the likelihood of extraction of property from incomplete or

The work of Ovidius Sorin Racorean "Decoding Stock limited information. Successfully resolving canonical

Market Behavior with the Topological Quantum Computor problem assessment options. The principle of maximum

/ 2014" (uses modern mathematical concepts, braids, entropy is used in setting up different pricing models.

nodes, Jones polynomial nodes, invariant nodes) "shows

the parallels between the movement of the stock and the Financial systems show extremely dynamic and chaotic

movement of tiny particles" non-abelian anyons. behavior. The work is characterized by analyzes of

financially well documented methods such as

The relationship between physics and financial markets, or autocorrelation (Mantegna and Stanley, 2000), nonlinear

the relation of the principle of uncertainty in a wider sense, analysis of time series (Kodba et al., 2005), cross

has developed Werner Heinsberg in quantum physics. correlations (Coronnello et al 2005, Coronnello et al 2007,

Understanding Heinsberg's uncertainty can be applied to Garas and Argyrakis (2007), Gonzalez et al.,

financial markets. Namely, Heinsberg explains that precise 2007;Gopikrishnan et al 2000), Jung et al 2006 (Laloux et

particle identification is smaller in identifying the position of al 1999), Mantegna (1999), Noh Mantegna (1999), Noh

the same particle. An interesting and intriguing analysis of 2000; Pafka and Kondor 2004; Plerou et al 2002 (Utsugi

the application of quantum mechanics and quantum et al. such systems are extremely complex and require a

computing in solving financial problems (Quantum different approach to understanding puzzling "financial

computing for finance: overview and prospects,“ Roman mysteries. "

Orus, Samuel Mugel, Enrique Lizaso, 2018). In reference

to the quantum annealing analysis (quantum annealing is The third law states: "The perfect crystal entropy is zero

mainly used for problems where the search space is when the crystal temperature is equal to the absolute zero

discrete (combinational optimization problems) with many (0 K)." According to Purdue University, "also must be at 0

local minimums, such as finding the base state of the spin K; otherwise the inside of the crystal will get the heat

glass, T. T. Kadowaki and H. Nishimori in "Quantum movement, which leads to disorder. "Siabal Mitra (Physical

Growth in the Transverse Model", although the proposal in Professor at Missouri State University points out," One

the second form was made by AB Finilla, MA Gomez, C. version of the Third Law states that an infinite number of

Sebenik and JD Doll, in "Quantum Annealing: A New steps would be needed to achieve absolute zero, which

Method for Minimizing Multi-Dimensional Functions", means you will never get there. "If you could reach the

Wikipedia) optimization that is the nucleus of financial absolute zero, was a violation of the Second Law, because

problems. Quantum annaeling uses quantum physics to if you had a refrigerator at the absolute zero, you could

find low-energy status problems and hence an optimal or build a machine that was 100 percent effective. "The

almost optimal combination of elements. Sampling from Historical Aspect Begins" The third law of thermodynamics

energy-based distributions is a computationally intensive was first formulated by German chemist and physicist

task that suits the way the D-Wave system solves Walther Nernst In his book "Review of Thermodynamics"

problems; that is, seeking low-energy states. Thus, in (American Institutes of Physics, 1994), Martin Bailyn cites

quantum annealing we use tunnel events with the goal of Nernst's Third Law statement as "It is impossible for any

Third Law of Thermodinamics / Entropy and Financial Trading through Quantum and Shanon's Theory of Information

Njegovanović A. 122

procedure to lead to isotherm T = 0 in the final number This Benguigui, L. The different paths to entropy. European

essentially establishes absolute zero temperature as Journal of Physics, v. 34, n. 2, p. 303, mar. 2013.

unattainable in something similar to the speed of light c. Boltzmann, L. Weitere studien über das

Theoretical states and experiments have shown that no wärmegleichgewicht unter gasmolekülen. In:

matter how quickly something moves, it can always be Kinetische Theorie II. [S.l.]: Vieweg Teubner Verlag,

made faster but they can never reach the speed of light. 1970, (WTB Wissenschaftliche Taschenbücher, v. 67).

Similarly, no matter how cold the system is, it can always p. 115–225.

cool, but it can never reach absolute zero. Bandt, C.; Pompe, B. Permutation entropy: A natural

complexity measure for time series. Phys. Rev. Lett.,

According to David McKee, a professor of physics at the American Physical Society, v. 88, p. 174102, Apr 2002.

University of Missouri, "there is a field of exploration of Buchen, P.W.; Kelly, M. The maximum entropy distribution

ultra-low temperatures, and every time you turn around, a of an asset inferred from option prices. J. Financ.

new law. Nanocelvin (nK = 10-9 K) temperatures are Quant. Anal. 1996, 31, 143–159.

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picokelvine (pK =, 10-12 K) The YKI Group of Low distributions of assets inferred from option prices via the

Temperature Laboratories at Aalto University in Finland principle of maximum entropy. J. Soc. Ind. Appl. Math.

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trillion of the Celsius degree above the absolute zero, Boon, J. P.; Tsallis, C. Special issue overview

which surpassed the previous record of 280 pK set in nonextensive statistical mechanics: new trends, new

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186, 2005

Physician Valery Chalidze first suggested the existence of Baltzer, H. et al. Multi-scale entropy analysis as a method

relations between entropy and money, but did not try to for time-series analysis of climate data. Climate, v. 3, n.

make this relationship explicitly analytical. This can be 1, p. 227, 2015.

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which means that a financial transaction takes place at a With Its Applications to the Steam-engine and to the

given time interval. Physical Properties of Bodies. [S.l.]: J. Van Voorst,

The information theory is the result of a specific issue that 1867.

Shennon considered through maximizing the Costa, M.; Goldberger, A. L.; Peng, C.-K. Multiscale

communication capacity between two users. It is enough entropy analysis of complex physiologic time series.

to attribute likelihood to his activity. This is the foundation Phys. Rev. Lett., American Physical Society, v. 89, Jul

of defining a metric that allows quantification of the 2002.

information content in that event. Biological information Christoph Adami and Nicolas J. Cerf. von Neumann

can observe Shennon's theory as a communication in time capacity of noisy quantum channels. Physical Review

(where the goal of natural selection is to spread the gene A, 56(5):3470–3483, November 1997. doi:

source in the future). However, it should be emphasized 10.1103/PhysRevA.56.3470. arXiv:quant-ph/9609024.

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of neuroscience, biology, physics and engineering in informed by neuroimaging research with psychedelic

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