Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 544

Einstein's relativity theory and finance

The life and works of Albert Einstein have long fascinated me and reading a book on his famous theories over the summer break, brought out my inner physics geek. As I delved deeper into his Theory of Relativity, I wondered, could any metaphorical parallels be drawn with money and finance?

The theory, simply put

Einstein concluded that because the speed of light is absolute no matter one’s frame of reference, then time and space are relative concepts.

For example, if I am at rest and a friend flies past me in a rocket at 90% of the speed of light, both of us will measure the speed of an oncoming photon of light to be the same. That speed being a universal constant and upper limit on the speed of any physical particle in the universe at 3.0 x 10^8m/s. How can that be?

When Einstein realised that the speed of light was absolute, it set him on a path towards his theory of relativity. Which basically infers that the invariance of the speed of light is such that time and space must compensate. That they are malleable and can vary depending on an observer’s relative motion. That time and space are intertwined.

How does Einstein’s theory align with money and finance?

Just like time and space, money is relative. Both in terms of perceived value compared to others, and in individual terms at various stages in life. A million dollars may be of huge value to most of us, but to an elite cohort, it may just be a rounding error in their high-life transactions. And money that may be frittered away with gay abandon in one’s youth, suddenly becomes far more protected in retirement.

The constancy of the speed of light to all observers in relative motion might be comparable to the importance of financial concepts that are also constant over time. Such as supply and demand, and risk and reward. Just as space and time are inextricably linked in Einstein’s world, so too are risk and reward in the world of finance, and supply and demand in economics.

Consequences of relativity theory are time dilation and length contraction. An object moving at a constant velocity experiences time more slowly than if it had been at rest. And as time and space are interdependent, then a reduction in time must be accompanied by a reduction in space, known as length contraction. This also ensures the speed of light remains constant, no matter the frame of reference.

Note that only at speeds of a significant fraction of the speed of light, does time dilation and length contraction become material. This is shown here diagrammatically for the brave.

Just as speed squeezes time, so too does the speed with which the price of goods and services rising in the economy, squeezes money. This has never been more evident than in recent times, with inflation reducing the purchasing power of money within a short space of time. The value of money today can be very different to that in the past and in the future.

And the length of time required to achieve financial goals, contracts with compounding interest. Einstein once said, “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”. Invested wisely, time grows money. Time can lengthen money.

Relativity equations map space and time coordinates in one frame of reference, to a different set of coordinates in another relatively moving reference frame. Similarly, financial modelling and economic forecasting may map to different outcomes on for example, movements in regulatory or geopolitical settings, and market shocks such as pandemics and wars, which may severely impact supply chains and monetary settings.

Finally, depending on one’s motion according to Einstein, observations can be relative. Perspectives on certain asset types can similarly be relative and influenced by factors such as risk appetite, investment horizon, and market conditions.

There you have it. Physics and finance may not form quite the continuum that space and time does, but sometimes trying to align underlying principles on unrelated topics can inspire new thinking, reinforce concepts, and offer insights into sometimes complex issues.

 

Tony Dillon is a freelance writer and former actuary. This article is general information and does not consider the circumstances of any investor.

 

  •   24 January 2024
  • 5
  •      
  •   
5 Comments
Steve
January 25, 2024

There is another analogy between a physics concept and people which can clearly apply to finance. It is called the Dopeler effect (analogous to the well-known Doppler effect), which is the ability for someone to appear brighter the further away they are! I'm sure we all know someone with this trait....

Allan
January 26, 2024

"[..]" ...the ability for someone to appear brighter the further away they are! [..]" Would that be 'the further away they are, 'from the truth', Steve? Then there's the 'Dunning-Kruger effect' for one to ponder upon. 

Pradip
January 26, 2024

Fact of the matter is that even if you look at the most beautiful person or thing under a microscope, you will see the cells and molecular activities - all the beauty would seem to disappear. And, furthermore, under the microscope, all will appear to be the same. Ask all the ex's of Liz Taylor and they will be able to elaborate on this with first hand experiences

richard goers
January 28, 2024

popup thinking here, as getting mind around this is extremely stretching to my intelligence, but in the investment space, HFT that makes small change or cents per trade but in continuous time and reinvests those 'cents in fractions of time' into the capital for trading makes significant more than Buy - Hold investment time line [years / so reinvestment of profit into the equity curve must be exponential to the linear return of long term passive - given also the HFT mathematics suggest it is most improbable you lose money in any 1 day even with a 50% win rate [a document on Virtue Financial IPO shows the math] = 50% win, 25% loss, 25% scratch = with thousands of trades per day [diversified portfolio] - effort : reward [+ cost]

George Bijak
January 28, 2024

Great analogy, Tony! While the laws of physics can be tested repeatedly with the same result, the world of investments is less predictable and repetitive. The dynamics of investment returns are also cyclical, meaning the driving forces carry varying weight at different stages of the cycle. The cycles themselves are not fixed in length and amplitude. It appears, in order to outperform the market, investors need more intellectual power than rocket scientists :)

 

Leave a Comment:

banner

Most viewed in recent weeks

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

Latest Updates

Investment strategies

War can’t be good, can it?

War brings immense human suffering and geopolitical chaos, but historically, equity markets have shown a certain detachment and resilience amid conflict, leading to increased profitability despite initial panic.

Property

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

Superannuation

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Investment strategies

There’s more to software than just code

AI-driven fears of collapsing software moats has triggered indiscriminate sell-offs. This has created mispricing opportunities as markets overreact to uncertainty and rising discount rates.

Economics

Europe: A new growth trajectory powered by reform and investment

Europe is undergoing a major transformation driven by security threats, US pressure, and a shift from austerity to growth. EU member states are taking proactive measures to enhance competitiveness and resilience.

Investment strategies

Orbital AI data centers prepare for launch

The new space race is driven by AI as data centers in space offer continuous solar power and reduced environmental impact. Orbital AI aims to speed data processing and ease Earth's resource strains.

Retirement

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.