For the reasons we discussed in the previous chapter, exceptional events and discontinuities play a central role in our book. At least two well-known approaches are often thought of as the solution of choice when one deals with exceptional events, namely econophysics and Extreme Value Theory. It is important to position our approach in relation to these well-established disciplines, and to explain why we borrow little from their tool-kit. This we do in the next two chapters.

Econophysics, tails and exceptional events

In this and the following sections we look at econophysics from the rather reductive prism of its treatment of extreme events in general. The econophysicists' programme is far broader (and methodologically very interesting), but doing justice to it would entail too long a detour – hence our narrow focus.

In order to appreciate how extreme events fit in the broader philosophy of the econophysicists, we look at two distinct aspects of their research progamme – namely, the quest for ‘more realistic assumptions’, and the belief that valuable insight into economic and financial phenomena can be obtained using the techniques and the conceptual framework offered by the physical sciences. We start our discussion by giving a brief definition of what econophysics is.

The scope and methods of econophysics

Econophysics is a proteiform beast, and no single definition will be found satisfactory by all of its practitioners.