After the economic meltdown of 2008, Warren Buffett famously warned, "beware of geeks bearing formulas." 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-siècle 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. 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 didn't understand their purpose, and didn'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.
©2013 James Owen Weatherall (P)2013 Tantor
This is a wide survey of founders in quant finance -- Bachelier, Black and Scholes, Ed Thorp, and others of that stature, as may have been heard in other audible offerings such as "The Myth of the Rational Market" and "The Quants." Here also are some more recent thinkers' explorations in modeling of complexity and catastrophes, and herding behaviors. The concepts as explained are accessible, a bit too spare and simple, but clear as far as they go (not far). There is nothing directly actionable here, it is more an introduction and popularization, a story-based work; much is anecdotal biography stuff. I like that, for the most part. What is described is an attempted adaptation by various thinkers of math and methods of physics to admittedly social sciences, finance and economics. The fit is quite imperfect, as is discussed. It is listenable and I thought it worthwhile, though little here was new to me. I did like the explanation of ruptures in bubble (also tank and missile compartment) structures, as adapted first to earthquake prediction and then to market crashes -- that was thought-provoking. The author unfortunately at the end droned on about this dream of a financial-economic (presumably publicly funded) Manhattan project that I quickly found starry-eyed, naive, repetitive and tedious -- one point off for that.
Audible is a life-enhancing channel, depending, of course, on choosing mind-enriching books. I mix them up, but even trash can be good.
Great writing and narration. Simple and clear. Like Hemingway. (But print out the pdf before you start listening, to make it even easier to follow this history-type book that brings us up to speed on probability theory applied to the stock market, in clear English.) Do you need to know math or physics? Nope. But you do need to be open to learning. And able to concentrate. That's it.
Have you ever wondered what theory explains the movement of dust particles (the ones you see in a stream of sunshine flowing through an attic window)? It's the same theory that explains the movement of stocks. The Random Walk theory is the main thrust. Based on the Bell Curve. Don't worry, it's clearly explained by a physicist who's obviously a good professor too. (FYI: As we listen/read, we learn that this theory is quite old. But like the Heliocentric Theory - which was silenced for over, what, 15 hundred years(!) - this old/new theory, too, was silenced, but not as long. But for the same reasons; because the people with political clout in physics in the day didn't want anyone to publish a theory that would cause too much change. In short, it was 'ahead of its time'. (Similarly, the Heliocentric Theory was silenced because the anti-Science Inquisitors of the time, i.e., the religious right, would've lost their power over the world. So you can say that both theories were 'ahead of their time' or that 'they both upset the status quo'. P.S. Think 'astrology', and you'll embody the same mindset of people who poo-pooed these two theories. But that's another subject, related but way too 'ahead' of the status quo.)
Anyway, what we learn about in The Physics of Wall Street is apparently quite old, well not like the Heliocentric Theory, but only decades old. It was a theory that was then 'rediscovered' around the 1980s or so, by an econ professor who thought he was inventing it for the first time. Until he found out. Ah, what a disappointment, imagine.
The book's narrator relates all this related history at a clear, simple, and fascinating clip. You'll be glad your read this.
Learn about what makes this Fund earn over 40%-plus returns since the 1990s - twice the annual average returns of Warren Buffet. (This Fund also made 70%-plus returns during the 2008 meltdown, while Buffet lost half the 'value' of his fund.) And did you know, this 2008 meltdown wasn't caused by the middle class buying subprime mortgages, Oh No!. (Isn't that special.) Instead the 2008 debacle, which is still melting our socks off was caused by this cadre of 'specialist physicists' on Wall Street, who used math to create computer models (that didn't work). These specialists are called Quants, and initially caused the HUGE multi-Billion dollar loss in August 2007 (called the Quant Crisis, which was pretty much covered up. Did you know about it?) Well, these same fund physicists kept their fingers crossed, hoping that the worst was over w/o having a clue as to what caused the original fiasco. Unfortunately, the Quants' prayers didn't work, just like their models. The same thing brought everything down around our ankles in 2008, which led, and continues to affect, our current situation. Those quants!
Everyone lost their shirt in 2008 (even Buffet, right!) -- everyone lost, except for this one Fund that we start hearing about from the beginning of this book. And few of us off of Wall Street have heard about this fund, right? They're like EF Hutton. "When they talk, everyone Listens. (Whoever wrote that ad campaign was great in the day, but is currently one of the many reasons why advertising is currently ineffective now. Unlike Public Relations, which includes customer referrals like this one. Note: Don't use customer referrals/testimonials w/o using the person's first & last name. Why? Credibility is King in the Internet Age.)
Ok, enough. Read it so you don't weep. But just so you know -- the founders of this Fund won't hire anyone associated with Wall Street nor anyone coming from a related, traditional background in Finance or Trading etc - because they know these folks don't have a clue. (Yet its 40%-plus returns - except for 2008, when it had 70%-plus returns -- these returns are enough to convince you of this Fund's effectiveness, at least for me.)
Note: A fascinating read for astrologers who know there's a link btwn physics and astrology (a la Will Keepin, the physicist-astrologer-environmentalist, and a contemporary who's coined astrology as "the Science of Meaning.").
The Physics of Wall Street. And it comes with a pdf so you can follow along and see the figures used in the book.
Fascinating stuff. All of it.
This is a brief history of various scientists' and scholars attempts to explain and predict the behavior of the stock market. It begins in the 19th century with basic descriptive statistics and ends near the crash of 2007-8 and applications based on complexity and chaos theory. Fascinating for someone with a bit of statistics in their background... but for non-quantitative listeners it may fall flat.
Although the author presents a well-researched and interesting history of quantitative finance, he exhibits an almost fawning lack of objectivity with regard to the men behind it. Weatherall seems equally interested in placing them on a pedestal and absolving them of any responsibility for their contributions to global economic instability.
Much of the book is devoted to the roots of quantitative finance in gambling and money making schemes. Yet the narrative somehow never comes full circle to acknowledge that the sophisticated trading strategies which have evolved are simply more of the same.
Instead, the author concludes that the pioneers of the field who profited handsomely even during the 2008 meltdown, are all perfectly entitled to their fortunes because, well... they are just the best and the brightest. This is an argument that should sound familiar to most people by now in the aftermath.
Certainly the heroes of Weatherall's tale are worthy of praise for their insight and achievements, but he seems oversensitive to any criticism leveled at academics in his own discipline of Physics. Without this personal bias throughout the book it would have been a respectable primer on the application of higher mathematics to finance, but in the end, he should have stuck with the history, exhibited more scientific objectivity, and learned more about the very real differences between the world of finance and the real economy before tackling the topic.
The book was well written and entertaining, weaving together anecdotal personal histories with the evolution of a field that often makes for very dry reading. I would have enjoyed it much more if he had stuck with the facts and avoided opinion and speculation.
There are some light and accessible descriptions of both financial concepts and math/physics concepts and a history of attempts to marry the two - which is why I gave the book 3 stars.
But there isn't much depth on the concepts and there is little-to-no narrative of interest to engage the reader/listener. Not exactly a nail biter!
The book could have been an engaging story of how a small group of geniuses worked some mathematical magic and became rich, or how some university professor using his economic model saw the impending '08 crash and couldn't get anyone to believe him. But alas apparently no such luck, perhaps because no such tales exist because the results of such attempts to use Math and Physics in finance have proven mixed, at best.
The extent of the success in these models seems to me equivalent to a flea identifying that the prevailing direction of hairs on a dog are to the left. Narrow in scope and highly relative. When the wind changes direction, suddenly said flea's model is broken and is no closer to understanding the shape and motivations of the dog he is on.
Whilst I think Mr. Taleb (Black Swan) is a bit of blowhard, I find this counterpoint to be unconvincing and as a book rather boring.
I finished this book in one day. The subject matter was interesting, and was a good basic overview of the history of financial markets and complex mathematics.
The author sited interesting problems throughout history which I had no idea related to each other.
DuPont used its experience with women's leggings to help drive the production of the atom bomb.
Just read "The Physics of Wall Street". Actually I listened to an Audible version of it and it was such a delightful and even inspirational surprise. Don't let the title throw you off!! Words like "Physics" and "Wall Street" can trigger dyspepsia, so it would be understandable to just walk past his book, but DON'T because it is actually about the heroic journey of an idea that started generations ago and has been guided by a lot of obscure men.
So, everyone knows that physicists and mathematicians are smart, but this books tells story after story about how "the conventional wisdom guys" have actually overlooked brilliant ideas and totally misunderstood people who were ahead of their time because they came at problems from an unconventional point of view.
Author, James Owen Wetherall is a physicist with a storyteller's soul. He strings together stories of under-appreciated and disrespected men who solved problems that the "conventional wiseguys" couldn't appreciate at the time....it took years, even generations for some of these obscure ideas to get recognition and acceptance. What a refreshing way to learn about the science of predicting investment trends, stock prices, and getting a look at the human underbelly of the investment industry.
Those of us who obsessively collect eclectic skills and knowledge in order to tinker inside our minds to see if ideas from one sphere of life can apply to another, will be inspired and gratified by these stories.
The author clearly and enjoyably relates the history of how science and mathematics became applied to finance, highly enjoyable if you have a little bit of popular science background, it serves as a gentle introduction to many statistical and mathematical relationships as well.
Not a mainstream reader.
"The Physics of Wall Street" is a fantastic introduction for someone who wants to understand the big board. James Owen Weatherall wrote this book not for the investor, but for the common Joe to understand how economic works. It does not go too much detail into stocks and bonds, but its a cheat sheet of the grand overview on the history of economics.
I'm read my fair share on this topic and and studied in depth on how the market works, but the information that Weathrall present is easy to follow. There is a pdf companion to this book of figures and charts. As someone who likes numbers and concrete evidence, I just wish that there were more examples in the footnotes of this book.
The subject is not too draining for anyone to follow. It's like reading about history in the past, this is a recommended starter read to build a prospective future.
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