The Physics of Wall Street: a brief History of Predicting the Unpredictable

part of the story that was getting lost in the press. I wanted to get to the 
bottom of it.
So I started digging. As a physicist, I figured I would start by track-
ing down the people who first came up with the idea that physics could 
be used to understand markets. I wanted to know what the connec-
tions between physics and finance were supposed to be, but I also 
wanted to know how the ideas had taken hold, how physicists had 
come to be a force on the Street. the story I uncovered took me from 
turn-of-the-century Paris to government labs during World War II, 

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Introduction: Of Quants and Other Demons 
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from blackjack tables in Las vegas to Yippie communes on the Pacific 
coast. the connections between physics and modern financial theory
— and economics more broadly — run surprisingly deep.
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 fo-
cusing 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 mod-
els” that have become central to modern finance. even more impor-
tantly, 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.
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 com-
placent 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 rely-
ing 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 sensi-
tive 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.
there’s one shop in new York that remembers its roots. It’s renais-
sance, the financial management firm that doesn’t hire finance experts. 
the year 2008 hammered a lot of banks and funds. In addition to Bear 

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t h e p h y s i c s o f wa l l s t r e e t
Stearns and Lehman Brothers, the insurance giant AIG as well as doz-
ens of hedge funds and hundred of banks either shut down or teetered 
at the precipice, including quant fund behemoths worth tens of bil-
lions of dollars like citadel Investment Group. even the traditionalists 
suffered: Berkshire Hathaway faced its largest loss ever, of about 10% 
book value per share — while the shares themselves halved in value. 
But not everyone was a loser for the year. Jim Simons’s Medallion fund 
earned 80%, even as the financial industry collapsed around him. the 
physicists must be doing something right.

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L
a fin de siècle, la belle epoque. Paris was abuzz with progress. 
In the west, Gustave eiffel’s new tower — still considered a contro-
versial eyesore by Parisians living in its shadow — shot up over the 
site of the 1889 World’s fair. In the north, at the foot of Montmartre, 
a new cabaret called the Moulin rouge had just opened to such fan-
fare that the Prince of Wales came over from Britain to see the show. 
closer to the center of town, word had begun to spread of certain un-
explained accidents at the magnificent and still-new home of the city’s 
opera, the Palais Garnier — accidents that would lead to at least one 
death when part of a chandelier fell. rumor had it that a phantom 
haunted the building.
Just a few blocks east from the Palais Garnier lay the beating heart 
of the french empire: the Paris Bourse, the capital’s principal financial 
exchange. It was housed in a palace built by napoleon as a temple to 
money, the Palais Brongniart. Its outside steps were flanked by statues 
of its idols: Justice, commerce, Agriculture, Industry. Majestic neo-
classical columns guarded its doors. Inside, its cavernous main hall 
was large enough to fit hundreds of brokers and staff members. for an 
hour each day they met beneath ornately carved reliefs and a massive 
Primordial Seeds
c H A P t e r 1

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skylight to trade the permanent government bonds, called rentes, that 
had funded france’s global ambitions for a century. Imperial and im-
posing, it was the center of the city at the center of the world.
or so it would have seemed to Louis Bachelier as he approached it 
for the first time, in 1892. He was in his early twenties, an orphan from 
the provinces. He had just arrived in Paris, fresh from his mandatory 
military service, to resume his education at the University of Paris. He 
was determined to be a mathematician or a physicist, whatever the 
odds — and yet, he had a sister and a baby brother to support back 
home. He had recently sold the family business, which had provided 
sufficient money for the moment, but it wouldn’t last forever. And so, 
while his classmates threw themselves into their studies, Bachelier 
would have to work. fortunately, with a head for numbers and some 
hard-won business experience, he had been able to secure a position at 
the Bourse. He assured himself it was only temporary. finance would 
have his days, but his nights were saved for physics. nervously, Bach-
elier forced himself to walk up the stairs toward the columns of the 
Bourse.
Inside, it was total bedlam. the Bourse was based on an open out-
cry system for executing trades: traders and brokers would meet in 
the main hall of the Palais Brongniart and communicate information 
about orders to buy or sell by yelling or, when that failed, by using 
hand signals. the halls were filled with men running back and forth 
executing trades, transferring contracts and bills, bidding on and sell-
ing stocks and rentes. Bachelier knew the rudiments of the french fi-
nancial system, but little more. the Bourse did not seem like the right 
place for a quiet boy, a mathematician with a scholar’s temperament. 
But there was no turning back. It’s just a game, he told himself. Bach-
elier had always been fascinated by probability theory, the mathemat-
ics of chance (and, by extension, gambling). If he could just imagine 
the french financial markets as a glorified casino, a game whose rules 
he was about to learn, it might not seem so scary.
He repeated the mantra — just an elaborate game of chance — as he 
pushed forward into the throng.
“Who is this guy?” Paul Samuelson asked himself, for the second time 
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Primordial Seeds 
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in as many minutes. He was sitting in his office, in the economics de-