Economic Jujitsu: the Efficient Market Model

The efficient market model states all security prices today reflect all available information and only new information is going to change the price.  

People tried for centuries to predict where asset prices would go, whether it was wheat or gold and eventually the stock market.  And eventually, sometime around the ‘60s, academics began to realize that you really couldn’t say what was going to happen tomorrow and that you had, most of the time, no better facility than just chance in saying whether a stock price would go up or down tomorrow.  

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Why Math Can't Bail Us Out

I don’t think mathematical models can do much to get us out of the mess that we’re in. 

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What's a Physicist Doing on Wall Street?

Mathematics is a way of formulating an idea, not an idea itself. 

I think having a background as a physicist is kind of fortuitously good for people who work on Wall Street because there are a lot of fields that use mathematics, but physics is sort of the field par excellence. It has made the best use of mathematics.  And I think physicists understand what’s a really good theory and what’s accurate and they also, in their every day life, work on models which are like approximations that give you some idea of the way something behaves. And they have a good sense for what’s a good theory and what’s a good model and where the boundary lies between them.  

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It’s interesting to think about why people confuse models with theories.  I think probably there are two reasons. One is the incredible effectiveness of mathematical theories in the physical and natural sciences and how well they behave, how well they work.  

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