The second law of thermodynamics as variation on a theme of Carathéodory

This paper revisits the second law of thermodynamics via certain modifications of the axiomatic foundation provided by the celebrated 1909 work of Carathéodory. It is shown that his postulate of adiabatic inaccessibility represents one of several constraints on the energy balance that serve to establish the existence of thermostatic entropy as a foliation of state space, with temperature representing a force of constraint. To achieve the thermostatic version of the second law, as embodied in the postulates of Clausius and Gibbs, work principles are proposed to define thermostatic equilibrium and stability in terms of the convexity properties of internal energy, entropy and related thermostatic potentials. Comparisons are made with the classic work of Coleman and Noll on thermostatic equilibrium in simple continua, resulting in a few unresolved differences. Perhaps the most novel aspect of the current work is an extension to irreversible processes by means of a non-equilibrium entropy derived from recoverable work, which generalizes similar ideas in continuum viscoelasticity. This definition of entropy calls for certain revisions of modern theories of continuum thermomechanics by Coleman, Noll and others that are based on a generally inaccessible entropy and undefined temperature.

An Axiomatic Foundation for the Expected Shortfall

In the recent Basel Accords, the expected shortfall (ES) replaces the value-at-risk (VaR) as the standard risk measure for market risk in the banking sector, making it the most popular risk measure in financial regulation. Although ES is—in addition to many other nice properties—a coherent risk measure, it does not yet have an axiomatic foundation. In this paper, we put forward four intuitive economic axioms for portfolio risk assessment—monotonicity, law invariance, prudence, and no reward for concentration—that uniquely characterize the family of ES. Therefore, the results developed herein provide the first economic foundation for using ES as a globally dominating regulatory risk measure, currently employed in Basel III/IV. Key to the main results, several novel notions such as tail events and risk concentration naturally arise, and we explore them in detail. As a most important feature, ES rewards portfolio diversification and penalizes risk concentration in a special and intuitive way, not shared by any other risk measure. This paper was accepted by Manel Baucells, decision analysis.

What are the appropriate axioms of rationality for reasoning under uncertainty with resource-constrained systems?

When constrained by limited resources, how do we choose axioms of rationality? The target article relies on Bayesian reasoning that encounter serious tractability problems. We propose another axiomatic foundation: quantum probability theory, which provides for less complex and more comprehensive descriptions. More generally, defining rationality in terms of axiomatic systems misses a key issue: rationality must be defined by humans facing vague information.