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

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Did physicists invent the modern global derivatives economy? Part 1 of an ongoing series.

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These changes paved the way for the total renovation of the financial system from 1980 to 1995. I compare this to the digital cameras versus film cameras. The casual user might not notice much difference. Both have lenses and flashes and buttons to push for a picture. Both run on batteries, in some cases the same batteries. Some models look pretty similar, and the final products look very similar. Both types of camera are used to take pictures of vacations and parties and events. But the underlying technology is totally different. Also, the 1995-era digital camera has since evolved into radically different types of devices.

Finally, in the fourth period from 1995 to 2010 we saw the new financial system expand explosively. Consequences, both good and bad, were enormous.

The problem for The Physics of Wall Street is few physicists were involved in the process at all until the latter years of the 1980s-that is more than halfway through the third period. Given that it took a few years to gain much influence, it's fair to say that the role of physicists was largely restricted to the period of expansion. This was not a period of major innovation, the basic ideas, tools and institutions were in place by 1995. And even in the fourth period, physicists were not over-represented compared to people in other quantitative fields, nor were ideas imported from physics particularly important.

The thesis defense is brilliantly simple. Weatherall clearly read Justin Fox's excellent book, The Myth of the Rational Market. He summarizes Justin's account, leaving out every person with any training in economics or finance. There is one small exception, the economist Paul Samuelson is mentioned, but only for his role in the rediscovery of Louis Bachelier's work, not for his original research in finance, nor for his innovations in practical investing.

This audacious plan falls short. Of the people discussed in The Physics of Finance who made contributions before the late 1980s, all were mathematicians, statisticians, or people trained in some other non-physics quantitative field. M. F. M. Osborne is the only exception, the only pre-1987 physicist. While Osborne's work was extremely important-and drew directly on his training in physics-he is not enough by himself to award all the credit for modern quantitative finance to physicists. I think it's most accurate to say that Osborne did work similar to a number of other researchers (particularly the great statistician Maurice Kendall). He broadened the understanding of that work through his physics worldview, but he was not essential to the development of finance.

So far the case is weak-if you leave out anyone trained in economics or finance and count all quantitative people as physicists then physics was central to the development of modern finance-but not arrogant. That quality begins to reveal itself in next week's installment, subtitled: "Random Walk, is that really all there is?"
No positions in stocks mentioned.
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