When most people think of money, they imagine bank accounts, investments, and spending decisions. Rarely does anyone link money to physics. But if you look closely, the rules of the universe—particularly the second law of thermodynamics—tell us something profound about wealth: just like physical systems, financial systems tend toward disorder. Without active management, money disperses, leaks, and loses value over time. This “financial entropy” is one of the most overlooked forces in economics.
Understanding Entropy in Physics
In physics, entropy is a measure of disorder. The second law of thermodynamics states that in a closed system, entropy always increases. Heat spreads out, structures decay, and energy becomes less usable. Unless energy is constantly added to maintain order, systems fall into chaos.
Think of a hot cup of coffee left on a table: eventually it cools down as heat spreads into the air. The once-organized, high-energy system becomes disordered. You don’t need to do anything for this to happen—it’s natural law.
Translating Entropy to Finance
Now replace “heat” with “wealth.” Money, like energy, is constantly in motion. And just as energy disperses, money too tends to scatter unless it is managed.
- Inflation erodes value: The longer you hold cash, the less it buys. This is entropy at work—value dissipates.
- Expenses accumulate naturally: Bills, lifestyle upgrades, and small purchases chip away at savings.
- Markets fluctuate: Without hedging or balancing, investments drift into risk and potential losses.
- Wealth transfer across generations: Studies show inherited wealth often disappears within three generations. Disorder catches up.
Wealth naturally “decays” unless energy (effort, strategy, discipline) is applied to counteract it.
Why Financial Entropy Happens
- Human Behavior
People are emotional, not rational. Greed, fear, and short-term thinking push them to overspend or chase risky investments. Left unchecked, money slips away. - Systemic Forces
Taxes, inflation, fees, and debt act like friction in physics. They constantly eat away at financial energy. - Inefficiency of Markets
While markets are often described as “efficient,” in practice they’re full of noise, volatility, and unequal access. These imperfections generate disorder for participants who lack discipline.
Fighting Entropy: The Financial Equivalent of Work
In physics, you fight entropy by adding energy. In finance, the same rule applies—you must apply effort and systems to resist the natural drift toward disorder.
- Budgeting as a Thermostat
Just as a thermostat resists the natural cooling of a room, a budget resists overspending. It applies “work” to keep finances stable. - Investing as Energy Capture
Instead of letting wealth decay in cash, investing channels it into productive assets that can grow and counteract inflation. - Diversification as Balance
A diversified portfolio spreads risk so that one chaotic event doesn’t collapse the system. It’s like using insulation to slow energy loss. - Automation as a Perpetual Motion Machine (Almost)
Automated savings and investments reduce reliance on willpower, ensuring continuous “energy input” to sustain order.
Entropy in Global Finance
Zooming out, entropy shapes entire economies as well.
- Currency Depreciation: Over decades, nearly all fiat currencies lose value. The U.S. dollar of 1900 buys almost nothing today.
- Boom-Bust Cycles: Like waves of heat exchange, economies expand and contract. Disorder is inevitable without stabilizing policies.
- Wealth Inequality: Concentration of wealth in few hands often results in social unrest and redistribution—a form of systemic entropy.
Even global financial institutions constantly battle entropy through regulations, central banking, and monetary policy. Without these “forces,” chaos could spread faster.
Philosophical Angle: Money as Energy
Another way to frame this is to see money as a form of stored energy. Just as calories fuel biological life, money fuels economic life. But stored energy always depletes unless replenished. Spend all your calories without eating, and you collapse. Spend all your money without reinvesting, and your wealth collapses.
This perspective reminds us that finance is not just numbers—it’s physics in disguise. The rules are universal.
Practical Lessons from Financial Entropy
- Accept Decay, Plan for Renewal
Don’t assume money will “stay put.” Plan for erosion through inflation and expenses. Build systems that replenish what is lost. - Regular Maintenance is Non-Negotiable
Just as machines require upkeep, financial systems need reviews, adjustments, and rebalancing. Ignoring them accelerates disorder. - Energy Flows, Not Storage, Create Stability
A pile of cash is like a battery that slowly leaks energy. Flowing money—investments, cashflow-producing assets—is what sustains order. - Entropy is Not Evil—It’s Natural
You can’t eliminate entropy. But you can design your financial life in harmony with it, slowing the decay and channeling the flow productively.
