ECONOMIC RECOVERY

Audio-book Review
By Chet Yarbrough

(Blog:awalkingdelight)
Website: chetyarbrough.com

The Physics of Wall Streetthe physics of wall street

By James Owen Weatherall

Narrated by Kaleo Griffith

JAMES OWEN WEATHERALL
JAMES OWEN WEATHERALL

James Owen Weatherall believes in a science of economics. The thematic intent of Weatherall’s book, “The Physics of Wall Street”, is that Quants are essential resources for economic recovery, security, and stability.  Weatherall suggests that science and mathematics should be pursued in economics with the vigor of WWII’s “Manhattan Project”, the equivalent of America’s monumental scientific effort to create the first working atomic bomb.

Weatherall is a brave soul suggesting that Quants are saviors rather than devils in the financial world.    Quants are an elite group of educated mathematicians and physicists that work for major investment houses like Goldman/Sachs. Their job is to create investment bundles, like financial derivatives, to attract public investment.  Financial derivatives were not invented by Quants but Quants use the idea of asset bundling to create new investment products.

The Quants creation of mortgage-backed financial derivatives nearly collapse the world economy in 2007.  These derivatives had short-term value in enriching Wall Street and long-term consequence of beggaring the world economy.

If knowledge is power, knowledge is gathered through experience and information.  Maybe it is time for America and other struggling economies to create a team of physicists, philosophers, managers, and mathematicians to build new models for a 21st century economy.  Weatherall certainly thinks so.

Weatherall, a physicist, philosopher, and mathematician, is well suited to suggest science and mathematics are needed to improve economic policy.  Weatherall reviews the history of financial modeling in economics.  He explains modeling as a way of statistically measuring the consequence of financial theory, policy, and action in an economy.  He slyly introduces the subject by referring to highly successful Quant groups that outperform investment competitors.  Weatherall offers their success as an example of how important the introduction of science and mathematics is to economics.

Weatherall cautions readers and acknowledges the limits of modeling as a precise predictor of consequence in an economy.  Weatherall offers a Physics’ analogy.  Like Physics’ explanations of the nature of matter, all financial actions have consequences that are a matter of probability; not certainty.  Weatherall infers that having a calculated probability is better than trusting blind luck.  Financial modeling (creating a model of financial cause and effect) offers a standard of measurement to inform one of whether a financial policy and its implementation improve or diminish desired results.  A model is a tool; not an end point in the discovery of a successful economic policy.  Models, like that which led to the 2007 crisis, can be wrong.  Constant reassessment of models is critical to their continued use.

Weatherall is not suggesting that there is some undiscovered economic model that will cure the world of economic mistakes but that better use of the Sciences will improve probability of successful economic outcome.  Though Weatherall does not refer to Keynes in his book, a reading of Keynes history suggests that he would agree with Wetherall’s assessment.  Keynesian economics is a model of economics that Keynes fiddled with all his professional life.  An often told criticism of Keynesian economics is that it changes over time but Keynes always argued that a change of opinion is not a refutation of an experimental model but a revision based on changed economic circumstances.

Weatherall insists on using a scientific method to analyze economic policy.  He argues that the physical world described by the science of Physics clearly demands re-thinking theories of economics.  Current physics theory finds that certainties do not exist in the real world.  Reality is a matter of probability.  What economists believe based on the past must be tested in the present.  The test results will be probabilities but informed probability far outweighs blind luck.

Weatherall infers that economic tests are presently being done by small groups of Quants that are enriching their employers but are being ignored by governments that need Quant assistance in managing national economies.

If knowledge is power, knowledge is gathered through experience and information.  Maybe it is time for America and other struggling economies to create a team of physicists, philosophers, managers, and mathematicians to build new models for a 21st century economy.  Weatherall certainly thinks so.

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