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.
"Fascinating history...Happily, the author has a gift for making complex concepts clear to lay readers."and#160; Booklist "A lively account of physicists in finance...An enjoyable debut appropriate for both specialists and general readers." Kirkus "Anyone interested in how markets work will appreciate this serious hypothesis."and#160; Publishers Weekly
"Fascinating history...Happily, the author has a gift for making complex concepts clear to lay readers."
and#8212;Booklist "A lively account of physicists in finance...An enjoyable debut appropriate for both specialists and general readers."
and#8212;Kirkus "Anyone interested in how markets work will appreciate this serious hypothesis."
and#8212;Publishers Weekly "A compelling case for models in economics and an important book for anyone who embraces the scientific method for improving the lot of mankind."and#12288;
and#8212;Michael Brown, former CFO of Microsoft Corporation, past chairman of NASDAQ "Weatherall probes an epochal shift in financial strategizing with lucidity, explaining how it occurred and what it means for modern finance."
and#8212;Peter Galison, author of Einsteinand#8217;s Clocks, Poincareand#8217;s Maps "Weatheralland#8217;s rollicking tale of science and profit has relevance to us all.and#12288; He goes beyond the and#8216;Frankensteinand#8217;s monsterand#8217; clichand#233; to argue that mathematical models are an essential foundation of a saner future."
and#8212;William Poundstone, author of Fortune's Formula "This book will lead you to reexamine what you thought you knew about the financial markets, and why it is so important for the economists to actually listen to what the physicists have been trying to tell them."
and#8212;Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion, University of California, Irvine "Weatherall has a rare talent for making the complex comprehensible, and he puts it to excellent use explaining the role of physics and mathematics in financial markets. This is a book anyone concerned with the unforeseen consequences of financial innovations will want to read."
and#8212;Lee Smolin, author of The Trouble with Physics "Beautifully written, with clarity, understanding, and a broad view that is rare in these domains.and#12288; Even those of us who are unconvinced physics has played an important role in finance will be carried along and learn from this engaging book."
and#8212;Stephen M. Stigler, Ernest DeWitt Burton Distinguished Service Professor of Statistics, University of Chicago "James Weatherall channels the sheer intellectual excitement of unlocking the secrets of nature, whether they relate to fundamental particles or financial markets."
and#8212;Hans Halvorson, professor of philosophy, Princeton University "With The Physics of Wall Street, James Weatherall has announced his arrival as one of our leading young science writers. This smart, fast-paced history of ideas--which is packed with vivid portraits of brainiacs famous and obscure and offers a provocative analysis of our current economic woes--should appeal to a broad range of readers, from hard-core science junkies to business folks trying to make sense of modern finance."
and#8212;John Horgan, Director, Center for Science Writings, Stevens Institute of Technology
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.
About the Author
JAMES OWEN WEATHERALL is a physicist, philosopher, and mathematician. He holds graduate degrees from Harvard, the Stevens Institute of Technology, and the University of California, Irvine, where is presently an assistant professor of logic and philosophy of science. He has written for Slate and Scientific American.
Table of Contents
Introduction: Of Quants and Other Demonsand#8194;1
From Coastlines to Cotton Pricesand#8194;49
Beating the Dealerand#8194;76
Physics Hits the Streetand#8194;105
The Prediction Companyand#8194;130
Tyranny of the Dragon Kingand#8194;159
A New Manhattan Projectand#8194;181
Epilogue: Send Physics, Math, and Money!and#8194;205