After the economic meltdown of 2008, many pundits placed the blame on “complex financial instruments” 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 isn’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 didn’t understand their purpose or didn’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.
“Weatherall probes an epochal shift in financial strategizing with lucidity, explaining how it occurred and what it means for modern finance.”—Peter Galison, author of Einstein’s Clocks, Poincare’s Maps
Wall Street has long attracted talented business-school graduates; only in recent years has it also drawn analysts with doctorates in physics, mathematics, and statistics. That change is the focus of this fascinating history by a young University of California, Irvine, professor. Weatherall’s narrative mixes familiar names (Blaise Pascal, Pierre de Fermat, Paul Samuelson, Fischer Black, Myron Scholes) with more obscure figures like Gerolamo Cardano, Louis Bachelier, and Didier Sornette. Many key concepts will be familiar from the financial press: e.g., random walk theory, delta hedging, dynamic hedging, and black box models. Happily, the author has a gift for making complex concepts clear to lay readers. Weatherall understands the temptation to blame the quants for the 2008 market crash but urges that the danger comes when we use ideas from physics, but we stop thinking like physicists. Thinking like physicists means recognizing that every model is based on simplifying assumptions and that model building requires a constant iterative process of testing and improvement. Using that process, Weatherall argues, quants can offer useful insights and tools for both economic policymakers and financial speculators. ~ Booklist