Special thanks to James Owen Weatherall for answering 5 questions about his recently featured book – The Physics of Wall Street: A Brief History of Predicting the Unpredictable
I am a physicist, mathematician, and philosopher. I hold a position as Assistant Professor of Logic and Philosophy of Science at the University of California, Irvine, where I am also a member of the Institute for Mathematical Behavioral Science. Most of my recent work has been on the mathematical and conceptual foundations of space-time theories and on issues in general philosophy of science (and epistemology more broadly), with particular interest in questions concerning model building in finance; I also maintain serious interests in category theory and the foundations of mathematics, atomic physics and quantum control, and in the foundations of quantum theory. – Adapted from James’ Homepage
James’ Homepage: http://jamesowenweatherall.com
#1 – What was the impetus for The Physics of Wall Street?
I started working on the book in 2008, during the height of the financial crisis. At the time, I was finishing a PhD in physics and became interested in news reports that somehow physicists and mathematicians had played a role in both creating modern finance, and also in the collapse. I started digging into the history of how physicists had moved to finance and what sorts of ideas they had brought with them. What I discovered was a rich and fascinating story about how some very important science had found a home in a new field, with consequences for just about everyone with a checking account. I also realized that the methods and ideas physicists had brought to finance were poorly understood by almost everyone except the physicists themselves — including policy makers, financial professionals, and the press. So I decided to write a book chronicling the history and hopefully providing a different perspective on what mathematical modeling in finance is all about.
#2 – In your book you advocate the use of more effective modelling in economics. How has current economic modelling let us down?
In my view, the problem doesn’t have much to do with the models themselves, so much as how many of us think about those models. The physicists and mathematicians who have influenced finance and economics over the last century brought more than just mathematical know-how. They also brought a sophisticated methodology for applying that mathematics. The financial world is a complicated place and we have no real hope of writing down a mathematical formula that will predict every market move or every investor’s action. But that’s not what anyone is trying to do. What we can hope to do, and what many physicists and mathematicians have been successful in doing, is to show how in the presence of some strong simplifying assumptions we can approximate how certain financial products or markets will behave some of the time. This is a much more modest project, but it’s still been extremely fruitful. The important thing, though, is to remember that any model is at best an approximation, and to pay very careful attention to the role that specific assumptions are playing in your models. We run into our biggest problems when we mistake how our models work for how the world (or financial markets) must work.
#3 – You cover the history of finance and gambling. How did you research this aspect of the book?
Fortunately a lot has been written on the early history of finance, and also on the history of the mathematics of gambling. I relied on the existing historical literature for much of this part of the book, aiming mostly to put the financial theory I was discussing into historical context. In many cases, the people I talk about in the book are still alive and active, and most of them were willing to spend time talking to me about their lives and experiences in the field. In one case — the chapter on Maury Osborne, a physicist at the Naval Research Laboratory who made early contributions to the random walk model of markets — I tracked down Osborne’s children and discovered he had written a long autobiographical note, explaining his work in physics and finance, and also telling some colorful stories about his life. None of this material had been made public before.
#4 – What feedback have you received about the book? From economists? Physicists? The public?
I have received some very good feedback from physicists and from financial professionals, particularly those who use the sorts of mathematical models I discuss in the book. I think many of these people are pleased that the viewpoint I adopt is now out there in an accessible form, since much of what’s been written previously has either been superficial, without really explaining what these physicists, mathematicians, and financial analysts have been trying to do, or else has been unfairly critical. The book has generated some controversy, though. One of the most important criticisms the book has received has been from another set of financial professionals, who argue that I do not do justice to the legions of economists and others who have also developed sophisticated tools that (they believe) are much more sensitive to how markets really work than what physicists have done. It’s certainly true that I focus on just part of the history of financial modeling — namely, the role played by physicists and mathematicians. But one of the points that I try to make in the book is that the early work of physicists has actually formed the foundations for a great deal of what financial economists have done since. And I think along the way, some of the people who have built on this early work by physicists have lost track of the role that assumptions and approximations play in their models. So returning to the physics can provide a helpful perspective on what we can expect financial modeling to accomplish.
#5 – Are you working on any new books/projects you can tell us about?
My next book will be very different — it’s going to be a project just about physics. Specifically, it’s a book about how we represent “nothingness”, or empty space, in modern physics. It turns out that there’s a lot more to nothing than you ever imagined! The book is currently under contract with the trade division of Yale University Press.