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

“As the Wall Street Journal put it in 1974 . . .”: the article was Laing 
(1974).
5. Physics Hits the street
105 “In February 1961, Fischer Black’s PhD advisor . . .”: this quote is from Meh-
rling (2005, p. 37). the biographical material on fischer Black comes mostly from the 
recent biography, Mehrling (2005), with some material from Black (1987, 1989), Merton 
and Scholes (1995), Lehmann (2005), derman (2004, 2011a), figlewski (1995), forfar 
(2007), Bernstein (2010), and Bernstein (1993), as well as from an interview with eman-
uel derman, who worked and collaborated with Black at Goldman Sachs.
105
“Within a week, Black was in jail for participating in student riots . . .”: Strangely 
enough, the impetus for the riots was Harvard president nathan Pusey’s decision to 
print diplomas in english, rather than Latin. on one day of rioting, four thousand stu-
dents demonstrated; Harvard police dispersed them using tear gas and smoke bombs. 
the sixties had begun.
105
“. . . remains the standard . . .”: Whether this position is just is an important 
question, but that the Black-Scholes model holds a privileged position in the first place 
seems clear. See Haug and taleb (2011).
106 
“. . . the American Financial Association awards the Fischer Black 
Prize . . .”: the quote is from the AfA’s website’s description of the fischer Black Prize. 
See http://www.afajof.org/association/fischerblack.asp.
110 “. . . now known as the Capital Asset Pricing Model (CAPM)”: treynor (1961) 
was not the only person to come up with the cAPM, though it is now widely recognized 
that he was the first. others with claims to have developed the cAPM include William 
Sharpe (1964), who won the nobel Prize for his contribution to asset pricing in 1990; 

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and John Lintner (1965). See, for instance, french (2003) for more on the provenance of 
the cAPM; see also Bernstein (1993).
111 “‘Equilibrium was the concept that attracted me . . .’”: this quote is from Black 
(1987, p. xxi).
111
“These states are called equilibrium states . . .” that the concepts of equilibrium 
in physics and economics are so similar traces back to Samuelson’s Gibbsian heritage.
111
“. . . an ‘interesting fellow,’ in Jensen’s estimation”: the quote is from Merton 
and Scholes (1995, p. 121).
113 “Black’s strategy of building a risk-free asset . . .”: It seems that there are several 
things that go by the name “dynamic hedging,” and indeed, any strategy that involves 
regularly changing one’s hedge deserves the name. throughout the text, however, I will 
mean something very specific: a strategy by which one constantly updates the propor-
tions of stocks and options in one’s portfolio so that the portfolio as a whole is risk-free.
114 “. . . successfully urged the Journal of Political economy to reconsider . . .”: the 
article was published as Black and Scholes (1973). See also Merton (1973) and Black and 
Scholes (1972, 1974). for more on the Black-Scholes formula and its generalizations and 
extensions, see Hull (2011) and cox and rubinstein (1985).
115 “The head of that committee was James Lorie . . .”: for more on the history of 
the cBoe, see Markham (2002) and MacKenzie (2006).
115
“On the first day of trading . . .”: these numbers are from Markham (2002, vol. 
3, p. 52).
115
“But volume grew at an astonishing rate . . .”: these numbers are from Ans-
bacher (2000, p. xii).
116 “In January 1977, the European Options Exchange was established . . .”: for 
more on options markets in europe, see Michie (1999).
116