WARNING: Physics Envy May Be Hazardous To Your Wealth
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Physics Envy.pdf
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1.58 MB
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Adobe PDF
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Author(s)
Mueller, Mark
Lo, Andrew W
Date Issued
April 2010
Journal
Journal of Investment Management
Publisher
Stallion Press for the Journal of Investment Management
Citation
Lo, Andrew W. and Mark T. Mueller. "WARNING: Physics Envy May Be Hazardous To Your Wealth." Journal of Investment Management, 8.2 (2010).
Version
Author's final manuscript
Abstract
The quantitative aspirations of economists and financial analysts have for many years been
based on the belief that it should be possible to build models of economic systems—and
financial markets in particular—that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, “physics envy” has
also created a false sense of mathematical precision in some cases. We speculate on the origins
of physics envy, and then describe an alternate perspective of economic behavior based
on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two
concrete examples: the classical harmonic oscillator with some new twists that make physics
look more like economics, and a quantitative equity market-neutral strategy. We conclude
by offering a new interpretation of tail events, proposing an “uncertainty checklist” with
which our taxonomy can be implemented, and considering the role that quants played in the
current financial crisis.
Description
Cannot access final published version online
MIT Department
Massachusetts Institute of Technology. Center for Theoretical Physics
Massachusetts Institute of Technology. Laboratory for Nuclear Science
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike 3.0
Persistent DSpace Link
DOI of Published Version
https://www.joim.com/abstract.asp?IsArticleArchived=1&ArtID=354
