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

“. . . Friedman wrote him a letter . . .”: this is from Milton friedman’s foreword 
to Melamed (1993).
116
“Bretton Woods, named for the town in New Hampshire . . .”: for more on the 
Bretton Woods system, see Markham (2002) and MacKenzie (2006), as well as eichen-
green (2008) and Melamed (1993).
117 “. . . Leo Melamed, the chairman of the Chicago Mercantile Exchange . . .”: for 
more on the history of the cMe and the IMM, see Melamed (1993).
118 “What does the IMM have to do with Black and Scholes . . .”: I am grateful to 
John conheeney, former chief executive of Merrill Lynch futures and former board 
member of both the chicago Board of trade and the chicago Mercantile exchange, for 
pointing out the relationship between the decay of Bretton Woods and the rise of deriva-
tives trading.
119 “The distinction may seem inconsequential . . .”: I am grateful to emanuel der-
man for pointing out to me how consequential the differences are, from the perspec-
tive of practicing bankers. See, however, derman and taleb (2005) and Haug and taleb 
(2011).
120 “This led him to a new theory of macroeconomics . . .”: General equilibrium has 
its roots in Samuelson (1947), and in his Gibbsian heritage. Black’s contributions to the 

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idea were original, however. See Black (1987) for a collection of essays on this topic, and 
Black (2010) for his later views on the subject.
121 “But after Sputnik was launched . . .”: for more on the effects of Sputnik on 
U.S. science, see Wang (2008), cadbury (2006), and collins (1999). the data presented 
here on physics Phds are from the American Institute of Physics Statistical research 
center, at http://www.aip.org/statistics/. the data on the nASA budget over time are 
from the office of Management and Budget, as reported by rogers (2010).
122 “Emanuel Derman was a South African physicist who experienced . . .”: Mate-
rial on derman is from derman (2004, 2011b) and from an interview I conducted with 
him.
123 “Beginning with the Carter administration . . .”: for more on volcker’s war on 
inflation, see Markham (2002).
123
“Sherman McCoy . . . was an eighties-era bond trader . . .”: See Wolf (1987).
124 “. . . the Black-Scholes model won’t get options prices right”: to his credit, Black 
understood quite clearly that his model had shortcomings, and that it was at best a first 
approximation. See, for instance, Black (1992).
125 “Blame for the crash fell to a novel financial product . . .”: for more on portfolio 
insurance, see (for instance) Bernstein (1993). See also Markham (2002).
125
“Markets themselves seemed to change in the wake of the crash”: See MacKenzie 
(2006).
126 “The smile appeared suddenly and presented a major mystery . . .”: notably, 
clay Struve, whom I discuss below, indicated that he and his coworkers were aware of 
the volatility smile even before the crash of 1987 — that is, it didn’t appear so suddenly 
after all, if you knew to look for it!
126
“. . . Emanuel Derman came up with a way of modifying the Black-Scholes 
model . . .”: See derman and Kani (1994).
126
“There’s an interesting, and rarely told, twist to the story . . .”: this story is based 
on an interview I performed with clay Struve, as well as a published interview with Mi-
chael Greenbaum (Jung 2007), and cone (1999). Greenbaum mentions that o’connor 
was using jump diffusion models in the late 1970s; Struve confirmed it. cone (1999), 
meanwhile, described how Struve saved o’connor in october 1987.
127 “Models have failed in other market disasters as well . . .”: for more on Long-
term capital Management, see Lowenstein (2000).
6. the Prediction company
130 “When the Santa Fe Trail . . .”: for more on the Santa fe trail, see duffus 
(1972).
130