A Dystopian Alternate History That Actually Happened: From USSR Armageddon to the 2008 U.S. Financial Meltdown

(Distilled from notes by technologist, author and entrepreneur Chris Anderson.)

After the collapse of the Soviet Union, we worried about their nuclear physicists helping create weapons of mass destruction elsewhere.

A less heralded — and possibly more destructive — migration happened in the U.S. around the same time, when Congress cancelled the SSC. The SSC (Superconducting Super Collider) was meant to be the future of physics but, after budget overruns, the project was cancelled in 1993.

Many of the physicists in grad school who were training to work on the SSC went to Wall Street instead to work as “quants”, a new field at the time. Those quants created the algorithmic trading and incredibly complex derivatives that eventually led to 2008 crash.

Here’s a book on that migration:

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman

Derman was one of the heroes of risk management in the 1990s, constantly pushing at the boundaries of what was possible, coming up with ever more sophisticated and ingenious structures. And yet a sober scepticism, learned the hard way all those years ago in university libraries, underpins his world view.

He is sardonic about his work: “The capacity to wreak destruction with your models provides the ultimate respectability,” he says. “Many of the Long Term Capital Management protagonists are back in business.”

Now teaching again full time, Derman has grown even more sceptical. “A decade of speaking with traders and theorists has made me wonder what ‘correct’ means,” he writes. “The more I look at the conflict between markets and theories, the more that limitations of models in the financial and human world become apparent to me.”

. . .

“We are still on a darkling plain,” he writes toward the end of his new book. “If you are a theorist you must never forget that you are traveling through lawless roads where the local inhabitants don’t respect your principles.”

That sense of being an intruder in outlaw territory lends an intriguing mood to Derman’s My Life As a Quant, a literate and entertaining memoir of his two-stage career — in physics and then financial engineering. Wall Street looks quite different from a nerd’s-eye view: “Geeks were fair game,” Derman reflects. Once, a chief trader who passed between him and a fellow quant “winced, clutched his head with both hands as though in excruciating pain, and exclaimed, ‘Aaarrggh-hhh! The force field! It’s too intense! Let me out of the way!”‘

Worth noting that the other things that came out of physics from that 1993 migration were the Web (CERN) and Big Data (supercomputers).

(PS: I was one of those physics students, but wasn’t clued in enough to even know what a quant was. So I did the Web thing instead.)

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