Since the 1969 moon landing, the American government had cut funding for science programmes and diverted it to the war in Vietnam.It's not clear from the story whether the expertise is going into designing ever-better trend-extraction techniques or ever-faster searches for arbitrage opportunities, but at least one trader notes that incentives matter.
“A generation of physicists who had gone to graduate school left with their PhDs and entered a severely depressed job market,” explains James Owen Weatherall, author of The Physics of Finance. They had to earn a living somehow, and, seeing how much money that there was to be made on Wall Street, many decided to move into finance.
In Britain, the fall of the Soviet Union led to an influx of Warsaw Pact scientists. In both cases, these scientists brought with them a new methodology based on analysing data and also a faith that, using sufficient computing firepower, it was possible to predict the market. It was the start of a new discipline, quantitative analysis, and the most famous “quant” of all was a shambling donnish maths genius with a scraggly beard and aversion to socks called Jim Simons.
For those who know their physics, Simons is a living legend. A piece of mathematics he co-created, the Chern-Simons 3-form, is one of the most important elements of string theory, the so-called “theory of everything”. Highly academic, Simons never seemed the sort of person who would gravitate to the earthy environs of Wall Street. But in 1982, he founded an extraordinarily successful hedge fund management company, Renaissance Technologies, whose signature fund, Medallion, went on to earn an incredible 2,478.6 per cent return in its first 10 years, way above every other hedge fund on the planet, including George Soros’s Quantum Fund.
After 16 years in the City, Simon Jones is now planning to go travelling. “A quant can earn up to seven figures,” he tells me, “but sometimes I do wonder whether I contributed positively to society.”Is the absence of such a bonus structure a consequence of the National Health Service, or other rate-of-return regulations in medicine?
And what does he conclude? He pauses. “I was working with the best of the best,” he says. “My bank employed the brightest engineers, chemists and scientists – and we were all working together to get richer. The chemical and physics and health industries are worse off because of what we do because I tell you this: if there was a pay bonus structure similar to what we had in the City for curing cancer, we’d have found a cure for cancer.”
I find that sad and a little bit frightening. So, I ask, quants: good or bad? Jones looks at me and says, “Humans just found a new way of being greedy.”