From the City A.M.:
Since the 2008 crash, we’ve heard steady criticism of the role of physicists in finance. The terms quants, derivatives and models have all taken on nasty connotations. But if you think about mathematical modelling in the right way, this criticism is wrongheaded. One of the most prominent critiques is an argument from psychology. It suggests that ideas from physics are doomed to fail in finance because they treat markets as if they’re composed of quarks or pulleys. Physics is fine for space travel but, as Newton said, it cannot predict the madness of men. This draws on ideas from behavioural economics, which tries to understand markets by drawing on psychology. As markets are about the foibles of humans, they cannot be reduced to formulas.
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