The subtitle to Graham Farmelo’s stimulating account of the possible future of mathematics and physics is: How Modern Maths Reveals Nature’s Deepest Secrets.
Forgive the spoiler, but neither book, nor apparently maths, are yet in a position to deliver this revelation.
Indeed, Mr Farmelo “doubts the quest will ever end”.
As an investor tasked with reviewing the book I could not help considering the validity of a related proposition – ‘how modern maths reveals the stock market’s deepest secrets’.
Because it is true modern maths not only makes grand, but controversial, claims about the universe, it also makes them about capital markets.
Mr Farmelo begins with an account of how Albert Einstein gave up observational physics and instead assumed pure mathematics would allow him to “know how God created the world”.
Einstein’s ambition, perhaps his hubris, reminded me of Roger Lowenstein’s book When Genius Failed: The Rise and Fall of Long-Term Capital Management – the tale of the LTCM hedge fund collapse.
A collapse made possible and worsened by the dogmatic conviction of LTCM’s Nobel Prize winning economists that their mathematical models did indeed reveal the deepest secrets of the markets and were infallible.
In the aftermath, Mr Lowenstein reports one of those prize winners, Robert Merton, “though tactically conceding that the models had failed... insisted that the solution was to design ever more elaborate and sophisticated models”.
Mr Farmelo’s book is full of similar episodes, where mathematicians are sent back to their blackboards because of the pesky unwillingness of reality to confirm their abstract theories – although not many such theories threaten to bring down the global financial system as did LTCM’s blow-up.
Consider Mr Farmelo’s prediction: “Maldacena duality – the idea that a string theory of gravity can be exactly equivalent to a corresponding gauge theory – will prove to be relevant to the real world.”
Most readers, certainly this one, will not be qualified to comment.
Mr Farmelo says: “According to quantum mechanics, the quantum world is inherently unpredictable.”
Similarly, the nature of financial markets means they are inherently unpredictable. Not difficult to predict, but impossible to predict.
Nick Train is co-founder of Lindsell Train
Published by Faber & Faber
