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

Wall Street Journal put it in 1974, thorp had ushered in a “switch in 
money management” to quantitative, computer-driven methods. It’s 
amazing what a little information theory can do.
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I
n february 1961, fischer Black’s Phd advisor, Anthony oet-
tinger, wrote to Harvard’s committee on Higher degrees: “I have 
reason to be concerned about [Black’s] intellectual discipline so 
that, while recognizing his ability and his desire for independence, I 
am concerned lest he lapse into dilettantism.” two months later, oet-
tinger chaired an oral exam designed to determine whether Black was 
prepared to advance to the dissertation stage of his doctorate. Black 
passed — but with an explicit requirement that he produce “a coher-
ent, lucid thesis outline” by January 1962. Within a week, Black was in 
jail for participating in student riots in Harvard Square, and when a 
Harvard dean went to bail him out, Black was unrepentant. He railed 
against police authority, against Harvard’s authority, and against his 
advisor. January 1962 came and went, and Black had done no more 
work toward his thesis. He was informed that he could not return to 
Harvard.
today, fischer Black is one of the most famous figures in the his-
tory of finance. His most important contribution, the Black-Scholes 
(sometimes Black-Scholes-Merton) model of options pricing, remains 
the standard by which all other derivatives models are measured. In 
Physics Hits the Street
c H A P t e r 5

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1997, Black’s collaborators, Myron Scholes and robert Merton, were 
awarded the nobel Prize in economics for the Black-Scholes model. 
Black had died in 1995 and so was ineligible for the prize (the nobel is 
never awarded posthumously), but in a rare nod, the nobel committee 
explicitly acknowledged Black’s contribution in its announcement of 
the award. every two years, the American finance Association awards 
the fischer Black Prize — one of the most prestigious awards in ac-
ademic finance — to an individual under forty whose body of work 
“best exemplifies the fischer Black hallmark of developing original 
research that is relevant to finance practice.” MIt’s Sloan School of 
Management endowed a chair in financial economics in Black’s honor. 
And the list goes on.
In the broad history of physics in finance, Black is perhaps best seen 
as a transitional figure. He was trained as a physicist but was never suc-
cessful as one — in large part because he was too wide-ranging and un-
focused. though he was more successful as a financial economist, his 
career was fleeting, as he quickly became bored with the projects that 
made him famous and turned to new ideas that were met with much 
more skepticism. Yet these very qualities — the qualities that oettinger 
worried would lead Black to dilettantism — were what allowed Black 
to bring about a marriage long in the waiting. He was enough of a 
physicist to understand and develop the insights of people like Bach-
elier and osborne, and yet he was enough of an economist to express 
his discoveries in a language economists could understand. In these 
ways he was like Samuelson, though he was never as intellectually dis-
tinguished. But unlike Samuelson, Black was able to communicate to 
investors and Wall Street bankers how the new ideas coming out of 
physics could be used in practice. thorp was the first person to fig-
ure out how to use Bachelier’s and osborne’s random walk hypothesis 
to make a profit, but he did so outside of the establishment, through 
Princeton-newport Partners. Black, on the other hand, was the person 
who made quantitative finance, with its deep roots in physics, an es-
sential part of investment banking. Black took physics to the Street.
Black first arrived at Harvard in 1955, at age seventeen. If anyone asked 
why he applied to Harvard and nowhere else, he would say it was be-
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