The Physics of Wall Street
By James Owen Weatherall
A defense of more, not less, mathematics in finance, so that we know when models break down. But can that help prevent crashes altogether?
The Black-Scholes-Merton equation made it possible to trade options before they mature by assigning an agreed value to it; in other words, it let investment banks manufacture derivatives. The renegade physicist Fisher Black’s move from academia to Goldman Sachs in 1984 initiated the era of the quants, changing finance forever. (Myron Scholes and Robert Merton won the Nobel Prize in economics in 1997, by which time Black had died.) The problem wasn’t this Midas formula, which was an attempt at a model of economics—its aim was to increase and not decrease stability in the markets. The problem was that the investors who used it to turn toxic assets into gold forgot how the story of Midas ends. “Options pricing models should have been recognized, from the very beginning, as tools with a limited range of applicability,” writes Weatherall, an assistant professor of logic and philosophy of science at the University of California, Irvine. In this enthralling short history of how physics entered Wall Street, beginning with the ideas of mathematicians Louis Bachelier and Benoit Mandelbrot, Weatherall states that blaming physicists for the 2008 meltdown is a mistake—the mistake was that there was not enough mathematics, not that there was too much mathematics. The equation is a tool, and it needs to be wielded by people of moderation who know its limitations, not people who abused it for ever more competitive gains. (This type of abuse doesn’t even include the now-standard practice of high-speed trading, where computers are programmed to buy and sell in nanoseconds, thus removing control from humans and placing it in the hands of algorithms that don’t know where the panic button is until it’s too late.)
It’s hard to argue against this view, and Weatherall even presents a few post-Black-Scholes-Merton innovators who are seeking better models of the markets. But he’s also fond of pointing out that hedge funds like the physicist Jim Simons’s Medallion Fund earned 80 percent even during the meltdown. “The physicists must be doing something right,” Weatherall writes. But this defense only makes it clear that physicists and mathematicians benefited handsomely from the instruments they created. (How many of them turned a blind eye as their equations were being abused? This book doesn’t answer that question.) They were hired by investments banks or started their own firms in an atmosphere of extreme competition, where the incentives for earning at the expense of others far outweighed the advantages of caution. Isn’t one of the ways to “identify the underlying chaotic patterns lurking in market data” to reduce the chaos and slow down the competition? The point is not to see some of the investors come out ahead (with your savings and my retirement money in jeopardy). The aim is to have most of them contribute to an economy that grows steadily in a win-win situation. In this respect, ethics is as vital as physics.
Farewell, Fred Voodoo
By Amy Wilentz
A longtime chronicler of Haiti returns after the 2010 earthquake to provide a portrait of a country more complex than the myth created by Westerners.
When Amy Wilentz interviewed Haiti’s tourism minister Patrick Delatour in 2009, just before the earthquake that devastated the country, Delatour talked about Haiti being a “problematic destination” ever since the Haitian Revolution in 1791. “You know: 500,000 Negroes running naked in the woods and claiming to be free,” Delatour said. “And speaking French!” Wilentz’s 1989 book on Haiti after the fall of dictator Jean-Claude “Baby Doc” Duvalier, The Rainy Season, was as much about a journalist’s feelings and encounters with a country’s frank, funny people, as it was reportage on an event. Farewell, Fred Voodoo follows the same model, as she confronts her emotions when she found herself in Haiti two weeks after the 2010 earthquake, because she couldn’t help it. The (one half of an) island can’t help but seem like a carnival gone awry at times, not because of its voodoo and “werewolves” and priests—but because of outsiders like Wyclef Jean (who hasn’t lived in the country since he was 9) running for president and celebrities like Sean Penn, Donna Karan, and Bill Clinton drawing aid groups, human-rights reporters, and people looking for poverty tourism, or “poorism,” which used to be called slumming. Wilentz recounts Haiti’s history ever since its slave-plantation days that offers a nuanced look at Haitians’ skepticism toward these outsiders, possibly because freedom from foreign control and enslavement was so hard fought. Even though Wilentz is an “outsider” herself, she loves and knows Haiti deeply, and her stories about her old friends and new neighbors (including a man who is permanently in a “zombie” makeup with a blue T-shirt wrapped around his head ever since he landed on the cover of Time magazine, turning himself into a living tourist attraction) shows a Haiti different and more complex than the myth created by naive though well-meaning outsiders.
Tenth of December
By George Saunders
A new collection of stories by an author with a multifarious voice.
Few writers alive have an authorial toolbox equal to that of George Saunders’s. All at once, he can be funny and terrifying, frivolous and topical, detailed and grand, cruel and redemptive, and he can do it all in a way that is excitingly innovative and “experimental” (often a pejorative term) without being one jot less readable. His new collection of short stories builds on the legacy that he began with CivilWarLand in Bad Decline. But where that campus classic established emotional resonance through the use of otherworldly, almost cartoonish characters wandering in Kafkaesque wastelands, the characters in this book are, for the most part, distinctly and recognizably human, and inhabit universes similar to our own. In one story, a sheltered young boy witnesses the abduction of his neighbor and decides whether or not to intervene. In another, a man bent on suicide is interrupted by a child breaking through a frozen pond. The effect of this nod towards realism (and it’s only a nod; Saunders’ voice is still entirely his own) is one of heightened stakes. Where the stories in CivilWarLand taught us about ourselves through transposition or metaphor, these new stories are more immediate, but equally arresting. Saunders is at the height of his powers, and it is a thrilling thing to behold.
By Nicholas Christopher
A novel about jazz's primordial age and its reverberations still felt today.
Tiger Rag opens in a smoky New Orleans hotel room in 1904, where a jazz band that includes the legendary real-life figure Buddy Bolden on cornet is recording takes of a local standard onto wax cylinders, an early medium invented by Thomas Edison. The cylinders are distributed among those present, but each were to be destroyed or lost, like Tolkien’s Rings of Power. Flash forward a century, where Dr. Ruby Cardillo’s mind is beginning to become unhinged. As she travels up the coast to New York City with her daughter, a former drug addict, criminal, and talented jazz musician, the two women slowly learn how that artifact from jazz’s primordial age still figures in their lives and personal history. This book is a three-fold success: a compelling family drama in the sections set in the present day, a well-controlled piece of historical fiction in the others, and a worthy tribute to jazz music and all its attendant liveliness and messiness throughout.
By Christopher S. Stewart
A journalist had a pretty good life in Brooklyn—until the legend of Ciudad Blanca lured him deep into the jungles of Honduras.
The premise of the new book from Wall Street Journal editor Christopher S. Stewart is so fantastic that if it were a novel, you could be forgiven for worrying that it might be a bit pulpy or clichéd. (Read our excerpt here.) An adventurer sets out to discover a lost ancient city in the jungles of Honduras, rumored by the likes of Columbus and Cortés to be either haunted, gilded, or both. While many have gone searching for the Ciudad Blanca, or White City, only a few have survived and returned with more than hints and hunches. Except for a WWII spy named Theodore Morde who claimed to have discovered it, only to die before revealing its location. The fact that this is all true turns the story from one of intrigue and odyssey into one of anthropological significance as well. Stewart may not have been, technically, the best man for the job—before departing he had spent the better part of the last 15 years in Manhattan and Brooklyn starting a family—but he’s the best equipped to tell the story; his prose makes this book hard to put down. He is, in the tradition of Morde before him, a “seasoned amateur,” powered by enthusiasm and curiosity more than experience or expertise, and his treasure hunt is as much about the hunt as it is about the treasure.