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Cover image of The Physics of Wall Street

 

Title: The Physics of Wall Street

Author: James Owen Weatherall

Publisher: Houghton Mifflin Harcourt

Copyright: 2013

ISBN13: 978-0-547-31727-4

Length: 286

Price: $27.00

Rating: 90%

I purchased this book for personal use.

Analyzing stock markets has evolved from a series of gut feelings to applying advanced mathematics. In The Physics of Wall Street, James Owen Weatherall chronicles the evolution of stock market analysis from Louis Bachelier’s doctoral thesis, published in 1900, to the state of the art in 2012.


The efficient market hypothesis argues that traders have the knowledge and experience to take advantage of any mistakes other traders make when determining the value of a security. Regardless of the source of the mistake, or “inefficiency”, subsequent trades will push the security’s price to its proper value. If an investor believes markets are efficient and that individuals are unlikely to beat the market through anything other than luck, they can invest in an index fund that buys a piece of every security in a market. Doing so ensures that investor will do no worse than the market as a whole. If an investor believes that markets are inefficient and that they, or their hired analyst, can identify and profit on those inefficiencies, they can design tools and strategies to make money.


Quantitative analysts, usually known as quants, use advanced mathematics and mathematical physics to model the market. Based on these models, they can identify profitable long-term and short-term investments for the money under their control. The Physics of Wall Street provides a bit more of technical analysis then does the book I most recently reviewed, Automate This. The difference is that this author, James Owen Weatherall, is a physicist by training and an assistant professor at the University of California, Irvine. His physics training gives him the ability to take his detailed knowledge of a technical subject and translate the material for a general audience.


Books written by authors with general knowledge, such as the author of Automate This, work from the perspective of a new student to a subject. The results can be quite satisfying, but the author with relevant technical training and good writing skills can produce a more interesting book that an author with great writing skills and newly acquired knowledge. The difference between the two processes is editorial input. Editors can take fair writing with solid technical underpinnings and make it good, or take good writing and make it great.


The distinction can often be subtle — a lot of the difference is a function of the author’s intent. Does the author want to write in the broad, populist style of Malcolm Gladwell and craft an interesting story while glossing over all but a handpicked set of details, or does he or she want to embrace the technicalities and expect the reader to keep up? These choices exist on a spectrum, of course, but I prefer a bit more technical detail in this type of book. In The Physics of Wall Street, Weatherall and his editors managed to strike exactly the balance I prefer. I’m glad they didn’t back the level of detail down to what might have been required for other authors.

 

Curtis Frye is the editor of Technology and Society Book Reviews. He is the author of more than 30 books, including Improspectives, his look at applying the principles of improv comedy to business and life. His list includes more than 20 books for Microsoft Press and O'Reilly Media; he has also created over a dozen online training courses for lynda.com. In addition to his writing, Curt is a keynote speaker and entertainer. You can find more information about him at www.curtisfrye.com.

 

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