What is the key differences between the models of physics and the models of finance? (Risk...

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What is the key differences between the models of physics and the models of finance? (Risk...

What is the key differences between the models of physics and the models of finance? (Risk analysis and management course)

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Answer 1

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In physics, the models to explain the natural phenomena are mostly deterministic in nature. So if the inputs are well defined, then the output can be explained without any ambiguity for a large class of natural physical events.

In finance, the models are probabilistic, as the models can only predict with a degree of confidence about the future returns and risk and there cannot be 100% certainty about the future state. This difference is the key difference between the model of physics and model of finance.

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