Is it an accident that one of the most successful hedge funds ever, was founded by James Simons, known to many of us from Chern-Simons theory?
What unique insights might physicists bring to modelling financial markets?
Lots of fields use mathematical models to understand the world. But physicists have a particular way of thinking about approximation and idealization. To make progress on interesting problems, physicists always have to make assumptions and approximations. They work with the zero temperature limit, or the thermodynamic limit, or the mean field approximation. They are trained to think these approximations through–to justify their assumptions with physical arguments. Most importantly, physicists are taught how to think about what happens when their assumptions fail. They are taught to calculate, or at least estimate, the second order corrections to their first order equations.This is from a fascinating article Fisics and Phynance on The Back Page of the APS News. It is by James Owen Weatherall, the author of The Physics of Wall Street.
[Aside: see a review by science blogger Chad Orzel and the critical New York Times review].
Implicit in his discussion is the importance of "effective" theories for emergent phenomena, i.e. description of dynamics on some coarse-grained level.