• WARNING: Physics Envy May Be Hazardous To Your Wealth!

    linked to by 4 published by arXiv on Sat 13th Mar 10
    Lo, Andrew W., Mueller, Mark T.

    OAI oai:arXiv.org:1003.2688

    The quantitative aspirations of economists and financial analysts have formany years been based on the belief that it should be possible to build modelsof economic systems - and financial markets in particular - that are aspredictive as those in physics. While this perspective has led to a number ofimportant breakthroughs in economics, "physics envy" has also created a falsesense of mathematical precision in some cases. We speculate on the origins ofphysics envy, and then describe an alternate perspective of economic behaviorbased on a new taxonomy of uncertainty. We illustrate the relevance of thistaxonomy with two concrete examples: the classical harmonic oscillator withsome new twists that make physics look more like economics, and a quantitativeequity market-neutral strategy. We conclude by offering a new interpretation oftail events, proposing an "uncertainty checklist" with which our taxonomy canbe implemented, and considering the role that quants played in the currentfinancial crisis.Comment: v3 adds 2 references
  • Posts discussing this item

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      Economics is not physics, and that bothers some people. Such physics envy seems odd to me. It isn’t the fault of practitioners that economics models don’t correspond to reality with the same fidelity as physics models. A system of humans and human

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      posted to Paul Kedrosky's Infectious Greed on Tue 16th Mar 10

      I remember in grad school we used to obsess about how economics, computer science and such lacked a "reference discipline" -- you know, something legit, like physics. Here is a new paper on that subject from Andrew Lo at MIT:Warning: Physics Envy

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