Isaac Newton – Granddaddy of the Quants*

October 11, 2008

Today, in the NYTimes, Joe Nocera reflects on the history, psychology, and inevitability of bubbles.  That is, as long as there is some freedom to speculate.  He begins with a melancholy quotation from the great Newton, the original “master of the universe.”

I can calculate the motions of heavenly bodies, but not the madness of people.” — Isaac Newton, 1721, after the South Sea bubble burst.

Poor Izzie lost big time, but he was comfortably off with several government sinecures, nevertheless.  This contemporary economic magus quoted by JN wasn’t so lucky:

On Friday, Mr. Shiller [an economist] told me of a conversation he had with an economist friend of his. The man had spent his entire career advocating the efficient market hypothesis, which posits that all known information about a stock is already priced into it. But with the market in collapse, the economist sold all his stocks. “I feel like a Christian Scientist who has come down with appendicitis,” he told Mr. Shiller.

I wonder where Nocera had his money!  Did he see it coming?

Well, if you’re not having enough fun yet, delve into the history of the South Sea and Mississippi Bubbles, and the Ur-Panic of them all, the Tulipomania by skimming through this Victorian classic:

That’s Extraordinary Popular Delusions & the Madness of Crowds, which you can buy for pennies in used book stores on the Net.  Or you can buy this antique edition…might be a good investment!  That’s John Law on the cover.  He’s the subject of a popular biography, Millionaire, that tells of his ill fated inteventions with the French economy a generation or so before the Revolution.  Seems he was fond of risky securities.  The plot of the novel, Manon Lescaut – adopted for opera, plays, television? – is connected with the John Law schemes:  it is the device by which the star crossed (numbskull) lovers are united in the New World, temporarily free from the oppression of class society and debt.

Gleeson seems to have a preoccupation with financial alchemy:  She has another book, The Arcanum, that describes an early case of industrial espionage regarding the secret of turning dirt into  retail gold, procelaine, that is.

Are we having fun yet?

*For those of you not in the know, “quants,” short for “quantitative analysis,” is the nickname given to Wall Street nerds doing computer model predictions of the market’s behavior.