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The Physics of Wall Street: A Brief History of Predicting the Unpredictableby James Owen Weatherall
Synopses & Reviews
After the economic meltdown of 2008, Warren Buffett famously warned, and#8220;beware of geeks bearing formulas.and#8221; But as James Weatherall demonstrates, not all geeks are created equal. While many of the mathematicians and software engineers on Wall Street failed when their abstractions turned ugly in practice, a special breed of physicists has a much deeper history of revolutionizing finance. Taking us from fin-de-siand#232;cle Paris to Rat Pack-era Las Vegas, from wartime government labs to Yippie communes on the Pacific coast, Weatherall shows how physicists successfully brought their science to bear on some of the thorniest problems in economics, from options pricing to bubbles.
The crisis was partly a failure of mathematical modeling. But even more, it was a failure of some very sophisticated financial institutions to think like physicists. Modelsand#8212;whether in science or financeand#8212;have limitations; they break down under certain conditions. And in 2008, sophisticated models fell into the hands of people who didnand#8217;t understand their purpose, and didnand#8217;t care. It was a catastrophic misuse of science.
The solution, however, is not to give up on models; it's to make them better. Weatherall reveals the people and ideas on the cusp of a new era in finance. We see a geophysicist use a model designed for earthquakes to predict a massive stock market crash. We discover a physicist-run hedge fund that earned 2,478.6% over the course of the 1990s. And we see how an obscure idea from quantum theory might soon be used to create a far more accurate Consumer Price Index.
Both persuasive and accessible, The Physics of Wall Street is riveting history that will change how we think about our economic future.
"UC-Irvine professor Weatherall looks at the role played by physicists and their ideas in financial markets, and argues persuasively that their contributions should be more widely used and recognized. Himself a physicist, philosopher, and mathematician, Weatherall suggests that the profession's essential contribution to finance is to develop models of how financial markets operate using insights from science. Answering the concerns of skeptics like Warren Buffett, he cautions that physicists approach their models simply as useful tools, and that the 2008 Wall Street crisis partly reflects financiers' difficulty in appreciating that models offer only a simplified representation of reality. Though this book is hardly beach reading, even laymen can enjoy Weatherall's sketches of eccentric theoreticians and his examples of unexpected patterns gleaned from such unrelated fields as the study of migratory salmon and the discovery of nylon. Weatherall also adeptly simplifies information for the uninitiated, for example, illustrating chaos theory by discussing the behavior of gas particles and ants. Finally, Weatherall acknowledges that no single unified law can fully cover the ever-evolving nature of markets. While all attempts to divine the future smack a little of the Delphic oracle, anyone interested in how markets work will appreciate this serious hypothesis. Agent: Zoe Pagnamenta, Zoe Pagnamenta Agency." Publishers Weekly Copyright PWxyz, LLC. All rights reserved.
A young scholar tells the story of the physicists and mathematicians who created the models that have become the basis of modern finance and argues that these models are the solution toand#8212;not the source ofand#8212;our current economic woes.
andldquo;Weatherall probes an epochal shift in financial strategizing with lucidity, explaining how it occurred and what it means for modern finance.andrdquo;andmdash;Peter Galison, author of Einsteinandrsquo;s Clocks, Poincareandrsquo;s Maps
After the economic meltdown of 2008, many pundits placed the blame on andldquo;complex financial instrumentsandrdquo; and the physicists and mathematicians who dreamed them up. But how is it that physicists came to drive Wall Street? And were their ideas really the cause of the collapse?
In The Physics of Wall Street, the physicist James Weatherall answers both of these questions. He tells the story of how physicists first moved to finance, bringing science to bear on some of the thorniest problems in economics, from bubbles to options pricing. The problem isnandrsquo;t simply that economic models have limitations and can break down under certain conditions, but that at the time of the meltdown those models were in the hands of people who either didnandrsquo;t understand their purpose or didnandrsquo;t care. It was a catastrophic misuse of science. However, Weatherall argues that the solution is not to give up on the models but to make them better. Both persuasive and accessible, The Physics of Wall Street is riveting history that will change how we think about our economic future.
After the economic meltdown of 2008, many pundits placed the blame on "complex financial instruments" like derivatives, and the physicists and mathematicians who dreamed them up. But a young academic named James Weatherall quickly began to question this narrative. Were the physicists really at fault? In this important and engaging book, Weatherall tells the story of how physicists came to Wall Street and how their ideas changed finance forever. Taking us from fin-de-siecle Paris to Rat Pack-era Las Vegas, from wartime government labs to Yippie communes, Weatherall shows how physicists successfully brought their science to bear on some of the thorniest problems in economics, from options pricing to bubbles. But models—whether in science or finance—have limitations; they break down under certain conditions. And in 2008, sophisticated models fell into the hands of people who didnt understand their purpose, and didnt care. It was a catastrophic misuse of science. The solution, however, is not to give up on models; it's to make them better. And Weatherall reveals the people and ideas on the cusp of a new era in finance. The Physics of Wall Street is riveting history that will change how we think about our economic future.
About the Author
James Owen Weatherall is a physicist, philosopher, and mathematician, with graduate degrees from Harvard, the Stevens Institute of Technology, and an M.F.A. from Fairleigh Dickinson University. In addition to his scholarly papers, he has written for Slate, Scientific American, and Men's Journal.
Table of Contents
Introduction: Of Quants and Other Demons 1
Primordial Seeds 1
Swimming Upstream 25
From Coastlines to Cotton Prices 49
Beating the Dealer 76
Physics Hits the Street 105
The Prediction Company 130
Tyranny of the Dragon King 159
A New Manhattan Project 181
Epilogue: Send Physics, Math, and Money! 205
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