PRICING THE FUTURE: FINANCE, PHYSICS, AND THE 300-YEAR JOURNEY TO THE BLACK-SCHOLES EQUATION BY GEORGE G. SZPIRO (NOV 29, 2011)
THE PHYSICS OF WALL STREET: A BRIEF HISTORY OF PREDICTING THE UNPREDICTABLE BY JAMES OWEN WEATHERALL (JAN 2, 2013)
It is difficult to get around the gee-golly approach taken by science writers toward their subjects. We learn much about who, when, and how but few questions; there is typically no critique. The two book above are typical of this genre.
Every moment of life everywhere is gee-golly. Unless one tempers such intemperate attitude with the awful truth, then the story is for children. The early modern Chinese story of Ah-Q, by Lu Xun, does this by showing how an idiot persists in his happy and confused thoughts about the world right up until he is executed. Apparently, people who design the signs under which we operate are so privileged that they can act as children, like Ah-Q; perhaps also, their childhood shticks play out into a trustworthy and powerful persona in the adult world.
The extent of Mr. Weatherall’s childlike gee-golly approach to the physics of Wall Street becomes evident in a rather startling stab at unions as he attempts to explain how physicists measure and assess the probabilities of fat tail risks in complex systems:
Normally, the parts of a pressure tank are more or less independent, like workers in the nineteenth century, before collective bargaining…Sometimes, though, the various parts of material begin to conspire with on another. They display a herding effect…it’s almost as if the various parts of the material have unionized…if they are placed under stress, they will begin to coordinate their activity…All strikes are caused by the same sorts of spark: an egregious injury; an unfair termination; cut wages….A large strike looks like a small strike that..didn’t stop. In other words, if you want to predict a major strike, don’t look for grievances….Look for the unions..(165-166)…
For whom does such a wild comparison make sense? It should be obvious. But the gee-golly tone can only survive in a text so long as everyone assumes the same orientation toward the problem from the beginning. Weatherall and Szpiro never ask why it is politically and socially possible for those with the very best trained minds to spend their careers developing sure-fire statistical arbitrage systems. There is a certain catastrophe at work that eludes the authors.
Both books take up with mathematics and physics and the personages who made possible models of derivative pricing and predictions of future financial market moves. Both books are worth a read if only to familiarize oneself with evolution (or devolution) of math and physics into tools of speculation. Neither book offers much practical attention to real trading.