The Predictors: How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street

Overview

Excerpted in The New Yorker and hailed by the business press, The Predictors is destined to become a classic of its generation?an antic, subversive odyssey into a universe defined by the mystical convergence of physics and finance.

How could a couple of rumpled physicists in sandals and Eat-the-Rich T-shirts, piling computers into an adobe house in Santa Fe, hope to take on the masters of the universe from Morgan Stanley? Doyne Farmer and Norman Packard may never have read The ...

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Overview

Excerpted in The New Yorker and hailed by the business press, The Predictors is destined to become a classic of its generation—an antic, subversive odyssey into a universe defined by the mystical convergence of physics and finance.

How could a couple of rumpled physicists in sandals and Eat-the-Rich T-shirts, piling computers into an adobe house in Santa Fe, hope to take on the masters of the universe from Morgan Stanley? Doyne Farmer and Norman Packard may never have read The Wall Street Journal, but they happen to be among the founders of the new sciences of chaos and complexity. Who better to try to find order in the apparently unreasoned chaos of the global financial markets? Thomas A. Bass takes us inside their start-up company, following it from its inception as a motley collection of longhaired Ph.D.s to its passage into the centers of financial power, where "the predictors" find investors and finally go live with real money. The Predictors is a dizzying, often hilarious tale of genius and greed.

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Editorial Reviews

From the Publisher
"His narrative [teaches] readers about chaos theory as it relates to economics, about the increasingly recondite instruments of investment in the age of derivatives and, perhaps most important, about the evolution of financial markets toward automation."—The New York Times

"One of the best books ever written about commodities, currency and derivatives trading."—David Lazarus, San Francisco Chronicle

Lee Dembart

Since the time of Pythagoras in the 6th century B.C., some people have believed that the world is made of numbers. And there is evidence -- in 20th century quantum mechanics, for example -- to support that view. The contemporary followers of Pythagoras include a couple of physicist-mathematicians named Doyne Farmer and Norman Packard, whom readers may remember as the stars of Thomas A. Bass' intriguing 1985 book The Eudaemonic Pie, in which the two used physics, mathematics and computers to take on the roulette wheel in Las Vegas. The tiny computer they built inside a shoe sent signals to the wearer's toes about where to place the bet based on the initial velocity of the roulette wheel and the starting point and speed of the ball that spins around it. Wonderful stuff.

Now this trio -- Farmer, Packard and Bass, the author -- is back, and this time they're taking on a much bigger casino: the stock market. Unlike most current academic thinkers, they believe that the market is neither unpredictable nor random, that patterns lie buried in the mass of data that daily gushes forth. And so they propose to apply chaos theory to that welter of information in order to find those patterns. In short, they believe they can predict -- and bet on -- the future.

The Predictors is the marvelous story of how they do it. Its strength lies in the way Bass observes and describes both the project -- an amazing story in its own right -- and the brilliant and fascinating people involved in it, dancing on a tightrope suspended above the frontiers of knowledge. At the outset, as they freely admit, Farmer and Packard don't know beans about finance. Suddenly these academic hicks (who have one expensive suit between them, which they pass back and forth as they make their pitch to some of the world's foremost financial players) find themselves hobnobbing with the officers of some very high-powered companies. They wind up with substantial backing from the Swiss Bank Corp., a major Swiss bank that became even more major last year when it merged with the Union Bank of Switzerland, the country's third-largest.

Here, unfortunately, the story gets murky. Bass leads us to believe that Farmer and Packard and their Prediction Co., based in Santa Fe, N.M., have found the pot of gold at the end of the rainbow. And indeed, Prediction has a Web site on which a company profile informs visitors, "Prediction Company continues its ground breaking work with Warburg Dillon Read, the investment banking division of UBS."

But I wish I didn't have to take it on faith. The company was founded in the early 1990s and began trading for real within a couple of years; that's the period the book covers. Five years later, the Prediction Company is still in business, but there is nothing in the book about the results. It's possible that Farmer and Packard's models have been spot on and that they've done well enough to argue that they've proved their point -- that the world is knowable by numbers.

But not so fast. Last year, Long-Term Capital Management, a hedge fund using sophisticated computer models to predict the market, collapsed, its elegant theories (based on the Nobel Prize-winning work of economists Myron Scholes and Robert Merton) trumped by reality.

It may be that Farmer and Packard have better theories. But it may also be that they've just been lucky so far, and that numbers can't completely capture the world.
Salon

Library Journal
In this sequel to The Eudaemonic Pie, which introduced physicists Doyne Farmer and Norman Packard, Wired contributor Bass explains how Farmer and Packard used chaos theory (which they helped originate) to conquer the chaos of global financial markets. Copyright 1999 Cahners Business Information.
Kirkus Reviews
A business tale that takes a different path from start-up to success. Chaos theory has been a hot topic in science for decades but until now has had little to do with business. Here chaos theory, a "branch of knowledge good at finding order within disorder," is exploited to develop an ambitious stock-trading tool. This intellectual quest is undertaken by a pair of physicists—Doyne Farmer and Norman Packard—in Santa Fe who had gained acclaim in academia for their endeavors, though their practical experience had been limited to a hobbyist-type effort. To beat the odds at roulette tables, they programmed a hidden computer to analyze patterns in the movement of roulette balls, an experience with positive results and the basis for Bass's previous book The Eudaemonic Pie (1985). Moving from gambling to the stock market, they are tempted by the potential of stock trading, because, as one of the founders states, "even a small advantage can allow you to make a huge amount of money." First, though, they have to wrestle with the usual hardships of business start-ups, including raising money and attracting a staff of expert programmers. Along the way, this story is illustrated with brief background explanations about chaos theory, as well as the workings of the stock market. Readers will not gain any practical information about how the resulting product works; this isn't a how-to manual for harnessing the market. Yet it is educational in another way, as an inside look at an unusual collusion between science and commerce. In the end, the fledgling enterprise is backed by a large corporation, rewarding the founders amply for their efforts, even before their programming output hasproven itself. One criticism: Most of the action takes place in Santa Fe, and local color such as architecture and culture frequently intrudes on the main theme. A fascinating story that suggests a wider future for one branch of physics and bigger rewards for businesses that support theoretical concepts.
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Product Details

  • ISBN-13: 9780805057577
  • Publisher: Holt, Henry & Company, Inc.
  • Publication date: 9/28/2000
  • Series: Business/Science Series
  • Edition description: First Edition
  • Edition number: 1
  • Pages: 320
  • Product dimensions: 5.50 (w) x 8.50 (h) x 0.71 (d)

Meet the Author

Thomas A. Bass is the author of The Eudaemonic Pie and several other books. He writes for Wired, The New Yorker, and many other magazines. He lives in Clinton, New York.

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