The physics of Wall Street

New York Times: They are known as “quants”, physicists who have moved to Wall Street to do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.This flood seems to be continuing, unabated by the ongoing economic collapse in this country and abroad. Some quants analyze the stock market. Others churn out the computer models that analyze otherwise unmeasurable risks and profits of arcane deals, or run their own hedge funds and sift through vast universes of data for the slight disparities that can give them an edge.Lee Smolin, a physicist at the Perimeter Institute for Theoretical Physics in Waterloo, Ontario, said, “What is amazing to me as I learn about this is how flimsy was the theoretical basis of the claims that derivatives and other complex financial instruments reduced risk, when their use in fact brought on instabilities."Quants say that they should not be blamed for the actions of traders. They say they have been in the forefront of pointing out the shortcomings OF modern economics."I regard quants to be the good guys,” said Eric R. Weinstein, a mathematical physicist who runs the Natron Group, a hedge fund in Manhattan. “We did try to warn people,” he said. “This is a crisis caused by business decisions. This isn’t the result of pointy-headed guys from fancy schools who didn’t understand volatility or correlation.”