Quants destroy: How physicists tried to bring down the global financial market

In my continuing list of things to blame physicists for, we can now add the near crash of the global financial system. Apparently, the volatile investments called derivatives, which resulted in some of our largest banking corporations going under and the massive bailout of countless others, was all the idea of some punk physicists trying to make it rich on Wall Street.

While the guy who actually brought the idea to the Chicago Mercantile Exchange some decades ago wasn’t a physicist, apparently we still get the wrap for pushing it with that spell-binding thing called math.


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From 60 Minutes:
“They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today.”

What’s more startling? They were already predicting that it would be our fault in 1995. Some whiz kid PhD physicists and mathematicians were recruited by investors to make use of the computer technology that had become available to model investments and bring a risk management element into the world market. The idea was that a derivative, if based on the best data, could insure everyone against falling prices by allowing them to hedge their bets.

The problem with the logic though, was that it assumed all of us humans would make rational decisions in our real estate and other investments. Instead, to their surprise, people started buying more than they could afford on the assumption that prices would continuously go up. The price continued to rise while the value dropped until suddenly someone realized that the investments were of no value and everyone sold at once, effectively dropping the price to zero.

A number of people tried to warn the public off about what derivatives were doing, but you know us physicists; our diabolical plans can never be thwarted once we’ve set them in place. So, all the physicists got rich while the poor investment bankers sat there and helplessly tried to warn the world. Wait, no that didn’t happen. Oh well, it was still our fault.

But if your parents are grilling you about what the heck you could actually do with a degree in physics, tell them you could make millions on Wall Street as a “quant.”

So, what’s next on our list of things to destroy after the Gulf of Mexico and the world financial market? How about the very earth itself, after all that is why we built the LHC.

Actually interested? Check out PBS’s Mind Over Money

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