The Physics of Wall Street Quotes

“Lorenz never answered the question asked in the title of his talk, but the implication was clear: a small change in initial conditions can have a huge impact on events down the road. But the real moral is that, even though chaotic systems are deterministic—in the sense that an infinitely precise description at any given instant can in principle lead to an accurate prediction—it is simply impossible to capture the state of the world with such precision. You can never account for all the flaps of all the butterflies across the globe. And even the tiniest errors will quickly explode into enormous differences. The result is that, even though weather is deterministic, it seems random because we can never know enough about butterflies.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Lorenz didn’t call it chaos. That word came later, with the work of two physicists named James Yorke and Tien-Yien Li who wrote a paper called “Period Three Implies Chaos.” Lorenz called his discovery “sensitive dependence on initial conditions,” which, though much less sexy, is extremely descriptive, capturing the essence of chaotic behavior. Despite the fact that Lorenz’s system was entirely deterministic, wholly governed by the laws of Lorenzian weather, extremely small differences in the state of the system at a given time would quickly explode into large differences later on. This observation, a result of one of the very first computer simulations in service of a scientific problem, contradicted every classical expectation regarding how things like weather worked. (Lorenz quickly showed that much simpler systems, such as pendulums and water wheels, things that you could build in your basement, also exhibited a sensitivity to initial conditions.)”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“The basic idea of chaos is summed up by another accidental contribution of Lorenz’s: the so-called butterfly effect, which takes its name from a paper that Lorenz gave at the 1972 meeting of the American Association for the Advancement of Science called “Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set Off a Tornado in Texas?”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Meanwhile, hundreds of quant hedge funds have opened (and closed), trying to reproduce Princeton-Newport’s success. As the Wall Street Journal put it in 1974, Thorp had ushered in a “switch in money management” to quantitative, computer-driven methods. It’s amazing what a little information theory can do.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“They also had some impressive early admirers. One of their earliest investors, Ralph Gerard, the dean of UC Irvine’s graduate school—in a sense, Thorp’s boss—had inherited a fortune. He was looking to invest with a new fund, because his old money manager was moving on to other projects. Thorp was close to home, but before Gerard would invest with the new partnership, he wanted his old money manager, a trusted friend, to take a careful look at Thorp. Thorp agreed to the meeting, and one evening he and Vivian drove a few miles down the Pacific Coast Highway, to Laguna Beach, where the old money manager lived. The plan was to play bridge and chat casually, so that the old money manager could size Thorp up. Thorp learned that his host was leaving the money management business to focus on a new venture—an old manufacturing and textiles company that he was hoping to rebuild. He’d made his first million managing other people’s money, and now it was time to put his own money to work. But mostly, Thorp and his host discussed probability theory. While they were playing, the host mentioned a kind of trick dice, called nontransitive dice. Nontransitive dice are a set of three dice with different numbers on each side. They have the unusual property that if you roll dice 1 and 2 at the same time, die 2 is favored; if you roll dice 2 and 3 at the same time, die 3 is favored; but if you roll dice 1 and 3 at the same time, die 1 is favored. Thorp, always a fan of games and the probabilities associated with them, had long been interested in nontransitive dice. From that point on, the two were fast friends. On the ride back to Newport Beach, Thorp told Vivian that he expected their host to someday be the richest man in the world. In 2008, his prediction came true. The old money manager’s name was Warren Buffett. And at his recommendation, Gerard invested with Thorp’s company.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“This is a general property of fractals, following from their self-similarity. From one point of view, they are beautifully ordered and regular; from another, wildly random. And if fractals are everywhere, as Mandelbrot believed, the world is a place dominated by extremes, where our intuitive ideas about averages and normalcy can only lead us astray.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“One of the most striking features of the Cauchy distribution is that it doesn’t obey the law of large numbers:”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Cauchy distributions (the solid line in this figure) are thinner and taller than normal distributions (the dashed line) around their central values, but their tails drop off more slowly—which means that events far from the center of the distribution are more likely than a normal distribution would predict. For this reason, Cauchy distributions are called “fat-tailed” distributions.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Cauchy distributions (the solid line in this figure) are thinner and taller than normal distributions”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“This probability distribution is called a Cauchy distribution.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“The normal distribution shows up in all sorts of places in nature.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Du Pont’s nylon project wasn’t the only place where a new research culture developed during the 1930s, and the Hanford site and Met Lab weren’t the only government labs at which physicists and engineers were brought into close contact during World War II. Similar changes took place, for similar reasons, at Los Alamos, the Naval Research Lab, the radiation labs at Berkeley and MIT, and in many other places around the country as the needs of industry, and then the military, forced a change in outlook among physicists. By the end of the war, the field had been transformed. No longer could the gentleman-scientist of the late nineteenth or early twentieth century labor under the illusion that his work was above worldly considerations. Physics was now too big and too expensive. The wall between pure physics and applied physics had been demolished.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Ironically, this problem was solved by giving the physicists more power over engineering: Compton negotiated with Du Pont to let the Chicago physicists review and sign off on the Du Pont engineers’ blueprints. But once the physicists saw the sheer scale of the project and began to understand just how complex the engineering was going to be, many gained an appreciation of the engineers’ role—and some even got interested in the more difficult problems.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“They believed that as nuclear scientists, they were working at the very pinnacle of human knowledge. As far as they were concerned, industrial scientists and engineers were lesser beings. Needless to say, they did not take well to the new chain of command. The central problem was that the physicists significantly underestimated the role engineers would have to play in constructing the site.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“The central problem was that the physicists significantly underestimated the role engineers would have to play in constructing the site.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“After the Japanese attack on Pearl Harbor, on December 7, 1941, and Germany’s declaration of war on the United States four days later, work on nuclear weapons research accelerated rapidly. Work on uranium continued, but in the meantime, a group of physicists working at Berkeley had isolated a new element—plutonium—that could also be used in nuclear weapons and that could, at least in principle, be mass produced more easily than uranium. Early in 1942, Nobel laureate Arthur Compton secretly convened a group of physicists at the University of Chicago, working under the cover of the “Metallurgical Laboratory” (Met Lab), to study this new element and to determine how to incorporate it into a nuclear bomb. By August 1942, the Met Lab had produced a few milligrams of plutonium. The next month, the Manhattan Project began in earnest: General Leslie Groves of the Army Corps of Engineers was assigned command of the nuclear weapons project; Groves promptly made Berkeley physicist J. Robert Oppenheimer, who had been a central part of the Met Lab’s most important calculations, head of the effort. The Manhattan Project was the single largest scientific endeavor ever embarked on: at its height, it employed 130,000 people, and it cost a total of $2 billion (about $22 billion in today’s dollars). The country’s entire physics community rapidly mobilized for war, with research departments at most major universities taking part in some way, and with many physicists relocating to the new secret research facility at Los Alamos.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“The story of nylon shows how the scientific atmosphere at Du Pont changed, first gradually and then rapidly as the 1930s came to a close, to one in which pure and applied work were closely aligned and both were valued.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“But even if markets aren’t always efficient, as they surely aren’t, and even if sometimes prices get quite far out of whack with the values of the goods being traded, as they surely do, the efficient market hypothesis offers a foothold for anyone trying to figure out how markets work. It’s an assumption, an idealization. A good analogy is high school physics, which often takes place in a world with no friction and no gravity. Of course, there’s no such world. But a few simplifying assumptions can go a long way toward making an otherwise intractable problem solvable—and once you solve the simplified problem, you can begin to ask how much damage your simplifying assumptions do.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“The history I reveal in this book convinced me—and I hope it will convince you—that physicists and their models are not to blame for our current economic ills. But that doesn’t mean we should be complacent about the role of mathematical modeling in finance. Ideas that could have helped avert the recent financial meltdown were developed years before the crisis occurred. (I describe a couple of them in the book.) Yet few banks, hedge funds, or government regulators showed any signs of listening to the physicists whose advances might have made a difference. Even the most sophisticated quant funds were relying on first- or second-generation technology when third- and fourth-generation tools were already available. If we are going to use physics on Wall Street, as we have for thirty years, we need to be deeply sensitive to where our current tools will fail us, and to new tools that can help us improve on what we’re doing now. If you think about financial models as the physicists who introduced them thought about them, this would be obvious. After all, there’s nothing special about finance—the same kind of careful attention to where current models fail is crucial to all engineering sciences. The danger comes when we use ideas from physics, but we stop thinking like physicists.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“This book tells the story of physicists in finance. The recent crisis is part of the story, but in many ways it’s a minor part. This is not a book about the meltdown. There have been many of those, some even focusing on the role that quants played and how the crisis affected them. This book is about something bigger. It is about how the quants came to be, and about how to understand the “complex mathematical models” that have become central to modern finance. Even more importantly, it is a book about the future of finance. It’s about why we should look to new ideas from physics and related fields to solve the ongoing economic problems faced by countries around the world. It’s a story that should change how we think about economic policy forever.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable

“Many recalled a quote from a much earlier physicist. After losing his hat in a market collapse in seventeenth-century England, Isaac Newton despaired: “I can calculate the movements of stars, but not the madness of men.”
― James Owen Weatherall, The Physics of Wall Street: A Brief History of Predicting the Unpredictable