This fascinating article appeared in The Wall Street Journal yesterday. It tells the story of how the “legendary” investor Bill Miller (cf. https://en.wikipedia.org/wiki/Bill_Miller_(finance)) is exploring whether insights from geophysics can help him to forecast future market shocks (which in theory, could potentially be helpful in determining when to get out of the market before a crash and back in before a rise). I expect that this will be a failed experiment, but at least he is running this experiment with his own (and not other people’s) money.
The article consists of a couple of memorable quotes which are important for our study of financial derivatives in Finance 4366:
1. “The search for connections between physics and finance isn’t new, either. In 1900, French mathematician Louis Bachelier likened the path of stock prices to Brownian motion, the random diffusion of particles throughout a liquid or gas. Decades later, financial economists Fischer Black and Myron Scholes borrowed an equation from thermodynamics to develop an influential method of valuing stock options”, and
2. “Predicting earthquakes is hard. Predicting human behavior, especially tens of millions of people at a time, is harder. As Newton is reputed to have said, he “could calculate the motions of the heavenly bodies, but not the madness of the people.””
Investor Bill Miller is hoping to develop a financial seismograph that would predict market shocks. He’s already testing out the idea in a personal portfolio.