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

A New Manhattan Project 
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indices, corresponding to people working in different industries, liv-
ing in different areas, and so forth.
But this kind of variability hints at a deeper problem. If the things 
that a person or family buys can vary from family to family, or from 
place to place, these kinds of preferences can presumably vary with 
time, too. this can happen on large scales and small scales. Imagine 
the standard market basket from 1950, long before cell phones or per-
sonal computers, when relatively few people went to college or took an 
airplane on a family vacation. If you looked at the present prices of that 
standard market basket, you would not have a very good indication of 
today’s cost of living. But so too if you looked at the kinds of things 
on which someone spent money over a relatively short period of time: 
say, a standard market basket for someone immediately out of college, 
and the basket for someone a few years later, after settling down and 
getting married, or a few years later still, after having kids. changes in 
culture, demographics, and technology can all compound to make as-
signing a number to inflation, or to changes in the cost of living, seem 
impossible. this is what makes the index number problem so difficult: 
you need a way to compare values at different times, and for people 
living very different lifestyles.
the cPI is a blunt tool. virtually everyone in economics agrees 
that we need to find some way to hone it. Still, it is incredibly im-
portant for policymaking because of its central role in determining 
inflation, which in turn affects virtually every aspect of the budget. In 
the United States, for instance, the thresholds for tax brackets are tied 
to the stated rate of inflation. So are wage increases for government 
employees. Social Security outlays are also determined by inflation. 
every year, these quantities are recalculated based on the inflation rate 
of the previous year, to adjust for changes in the cost of living. In June 
1995 the U.S. Senate appointed the Advisory commission to Study the 
consumer Price Index, usually called the Boskin commission after 
Michael Boskin, the Stanford economics professor who chaired it. 
the brainchild of soon-to-be-disgraced Senator Bob Packwood, then 
chairman of the Senate finance committee, the Boskin commission 
was charged with coming up with a better way to compute the cPI, 
and by extension inflation.

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 for Malaney and Weinstein, the Boskin commission seemed like a 
godsend. A Senate-appointed committee tasked with solving just the 
problem that they had chosen to tackle made Malaney and Weinstein’s 
work immediately relevant. It was the perfect opportunity for them to 
make a contribution — not just to economic theory, but potentially to 
public policy, since Packwood planned to implement the Boskin com-
mission’s findings immediately. even better, one of the economists ap-
pointed to the commission, dale Jorgenson, was a member of the Har-
vard economics department.
Hermann Weyl was offered the position of chair of the mathematics 
department at etH Zürich (the school where didier Sornette cur-
rently teaches) in 1913, when he was just twenty-seven years old. He ar-
rived in Zürich from Göttingen, a German university that in the early 
1920s represented the very pinnacle of international mathematics. His 
advisor there, david Hilbert, was widely recognized as the most in-
fluential mathematician of his day. As Hilbert’s student at Göttingen, 
Weyl was at the center of the mathematical world.
things were different in Zürich. etH Zürich had a fine reputation, 
but it was quite new: it was only in 1911 that etH was restructured to 
become a real university, with graduate students, shedding its past as 
an engineering-oriented teaching school. the other university in the 
city, the University of Zürich, was the largest in Switzerland. But it was 
no Göttingen.
Weyl wasn’t etH’s only recent hire, however. As part of the restruc-
turing, the school had made a number of appointments to the physics 
department. one of these was a prominent young physicist, an under-
graduate alumnus of etH named Albert einstein. einstein had gone 
on to do a Phd in physics at the University of Zürich, graduating in 
1905 — the same year that he published a mathematical treatment of 
Brownian motion (anticipated, of course, by Bachelier), came up with 
a theory of the photoelectric effect (for which he would win the nobel 
Prize in 1921), and discovered the special theory of relativity, including 
his famous equation e = mc
2
. And yet, none of this led to much success 
for einstein. After finishing graduate school, he moved about 150km 
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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

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