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:

RELATED ARTICLES

The investing rule that explains the next market crash

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Latest Updates

SMSF strategies

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Planning

Avoid unnecessary CGT with this estate planning clause

A simple estate plan can create a ticking time bomb. One overlooked clause can pit spouses against children, delay inheritances, and potentially leave a family facing an unexpected tax bill worth hundreds of thousands of dollars.

Exchange traded products

The hidden trade-off in fixed income ETFs

Some investment trade-offs are immediately visible. Others are embedded in the way a portfolio is constructed. Understanding the difference may explain why similar-looking investments can produce surprisingly different results.

Retirement

The mortgage free retirement is fading

What happens when a generation reaches retirement carrying obligations previous generations largely avoided? New research suggests we may need to rethink both how much we need in retirement and what life could look like.

Retirement

The key question to inspire a confident and purposeful retirement

Most people spend decades planning for retirement. Far fewer plan for what happens when they get there. The difference may explain why so many find the transition harder and less fulfilling than expected, despite careful preparation.

Latest from Morningstar

Making the case for a 'good enough' portfolio

Some investors spend years chasing the perfect strategy. Others choose a path that’s simply good enough and move on. Which approach is more likely to deliver both better outcomes and a happier financial life over the long run?

Investment strategies

Is the US market as expensive as CAPE says?

Many investing ideas survive for decades. But that does not make them right. A famous valuation measure implies that US shares are dangerously expensive, but the evidence may point to a very different conclusion.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 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.