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'The Physics of Wall Street': The Most Arrogant Book in the World? Part 3

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To see the world in a grain of sand, to see the financial system in a roulette wheel.

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That may sound reckless, but it's quite different. A reckless person jumps off a cliff, then thinks about what to do next. We thought things through carefully, prepared as much as possible, but then we jumped. We paid a price for that-failures, crashes, humiliations, ridicule-including ridicule because people said the problems we attacked were unimportant or disreputable, or that they were impossible, or that we were pathetic nerds without the expert training and machismo to succeed in real risk taking-but in the end, we learned to fly. It's irritating to have a guy come by after the fact, point to all the people flying around, and say because some of the people flying have PhDs in physics , and because the wings exploit Bernoulli's principle, and because Daniel Bernoulli was kind of a physicist (you could equally well say mathematician or probabilist), that physicists taught people how to fly.

Okay, people make fun of me for pushing such a heroic version of the development of finance. I am no hero. A slightly less arrogant metaphor is advances in civil engineering. As Henry Petroski describes in his classic To Engineer Is Human: The Role of Failure in Successful Design, the first implementation of a new idea (such as a skyscraper or suspension bridge) does not fail. The best engineers use the best materials and include huge safety margins in all calculations. But once something has been done, new engineers push the envelope to make things bigger, faster, and cheaper and to satisfy more demanding operational and aesthetic constraints. Eventually someone goes too far and there is a disaster. The accumulation of these experiences defines the new art.

Finance went through precisely this process, many times over. Weatherall is like a guy who points to a modern suspension bridge, in all its refined elegance purchased at great cost, and claims it demonstrates the principle of catenary shapes first discussed by Fausto Veranzio, who was kind of a physicist, and Robert Hooke, who was a physicist. Weatherall views the bridge as a physical principle, with additions to account for the physical properties of the materials and the demands of the project. I view the bridge as the original implementation of a modern suspension bridge with all the non-essentials carved away by tragic experience. He could write a history of the suspension bridge and leave out all the engineers and real bridges and aspects that proved to be non-essential, covering only some theoreticians--who he would label "physicists"-who drew catenaries on paper and mused about the implications (some of his musers were also important engineers, people like Ed Thorp, Fischer Black and Emanual Derman were among the great innovators in finance, but in his book they get credit only for their musings).

Our modern financial system is not an intellectual achievement that belongs to any field; it is an engineering feat that belongs to everyone who participated. It did not spring from a theory in any academic field that led to changes and a natural evolution, it is a system consciously designed by working engineers. Weatherall treats some of the practical problems in beating roulette-broken wires, suspicious pit bosses, burns from the equipment-as amusing sidelights. The ability to surmount real problems was at least as important to the process as the intellectual inspiration behind it.

Next week, we'll see how this attack on casinos transformed finance.
No positions in stocks mentioned.
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