Friday, April 23, 2010

The Market and Quantum Physics

These days many physics (and other math/science PhDs) go into finance - in to trading in particular. Why? Well from the point of view of the scientist there is the remunerative aspect (you will probably 3x an academic salary and possibly much more). Also, the professionalization of science has made much of science an exercise in grant writing, front running hot topics, lab management and other tasks not normally associated with the unfettered search for TRUTH.

I would even argue that the professionalization of modern science has changed the methodology of science so that it is not properly following the 'scientific method' ie -
propose hypothesis
design and run experiments to test hypothesis
data analysis of experimental results to
support hypothesis and create a theory, or to reject hypothesis and start again.

With the professionalization of science and a professional scientific class to crunch data the emphasis on the scientific method has shifted to skew the data analysis section - however with our myriad analytical tools and with our surplus of data one can prove almost anything - so we perhaps need a return to first principals.

But I digress - quantum physicists may now work in finance - designing dynamic models to figure out the correlation of asset prices or what now. But what is the real truth is the market is like quantum physics. Namely you can either figure out the price (or location) of a stock/particle or the momentum of a stock/particle but not both. If I take the price of the stock (and buy or sell a share) - i affect the momentum of the system, if i look at the momentum of the system - i may not be able to buy/sell the stock at the current price (because it is moving).

This is why stock market money is not real until you take it out (or get a dividend)


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