Physicists attempt to scale the ivory towers of finance

uring the past decade or so, many physicists have gone to Wall Street to work in finance. While the commonly heard statement that " Wall Street is the biggest single recruiter of physics PhDs " appears to be an urban legend, physicists working as quants—quantitative analysts—are now unquestionably common in large investment banks and other financial businesses. More recently, a countermovement has emerged as physicists have begun writing research papers on finance and economics. While this work has yet to have a major impact on mainstream economics research, papers on finance are appearing with some frequency in physics journals, with a few publications in major science journals such as Nature, and occasionally even in economics journals. A new movement sometimes called econophysics has been established. Recently, about 200 people participated in the Third Annual Applications of Physics in Financial Analysis Conference (http://www.nbi. dk/APCA), held at Dublin's Trinity College in July 1999, where speakers included both practitioners and academics. In the last five years, roughly 30 recent physics PhDs have addressed finance topics with their doctoral research. To paraphrase Jean-Phillipe Bouchaud, a pioneer in this area and the advisor of several such students: " Somebody has to train all the physics graduates going into banking and finance , and we want it to be us, not people from other disciplines. To do this we need to establish a scientific presence in the field. " There is a widespread feeling among members of this movement that finance offers fertile terrain for physicists. It might be possible, for instance, to describe the aggregate behavior of financial agents using the tools of statistical physics. Combined with a fresh point of view, this might lead to some good science. Not surprisingly, the few economists who have paid any heed at all view the entry of physicists into economics with considerable skepticism. Economics and finance, like physics, depend on a depth of domain-specific knowledge that takes years to master. Many physicists working in this area are poorly versed in the finance and economics literature. The point of view and problem solving approach are quite different. The problems presented in modeling the physical and social worlds are not the same, and it is not obvious that methods that work well in physics will also work well in economics. With some justification , many economists think that the entry of physicists into their world reflects merely audac-Physicists have …