Quantum Financial Entanglement: The Case of Strategic Default

Abstract

According to the field of quantum cognition, a decision to act is best expressed as a quantum process, where entangled ideas and feelings combine and interfere in the mind to produce a complex, context-dependent response. While the quantum approach has proved successful at modelling many aspects of human behaviour, it is less clear how relevant this is to the economy. This paper argues that the financial system is characterised by three kinds of entanglement: at the individual level between concepts, at the social level with other people, and at the financial level through the use of credit. These entanglements combine in such a way that cognitive processes at the individual level scale up to affect the economy as a whole, in a manner which is best modelled using quantum techniques. The approach is illustrated by making a retroactive “postdiction” about the prevalence of strategic mortgage default during the financial crisis, and a prediction for future such crises.

Keywords: quantum social science, quantum economics, entanglement, mortgage default

JEL Classification: D00, D81, G01