Tuesday, March 12, 2013

Our Book Review on The Physics of Wall Street

While estimation is the black art that many strategists believed that they have mastered, predicting the unpredictable is the "real" holy grail of the strategy game.  

Regardless of what the pseudo experts say,  a few strategic traders have succeed at the Wall Street terrain for a minimum timeline.  Duplicating a similar success with the same approach is quite difficult due to the extreme degree of competitive darwinism that are quietly deployed in the back room of their competitors.   (Hint: Read the side note.)

James Owen Weatherall latest book- The Physics of Wall Street  was referred to us as a supplementary view to our strategic perspective  ... We found It to be quite interesting in terms of the different approaches that were used.   .  Most of the reviews on Amazon and Good Reads were quite favorable  . .  

The readers will learn the general objective and the broad approach of each trader's strategic process.  But they will not learn the specifics that are behind their methodology. 

The Kelly Criterion
Edward O. Thorpe's approach of using Kelly Criterion in the table game of 21 Blackjack was quite ingenious. We presumed that he has also successfully used it in his assortment of trading ventures. 

Our research tells us that many people have also used this process model for stock trading and Forex trading.  It has been said that Bill Gates and Warren Buffet are fans of this approach.

Side note: Sun Bin's , the great  grandson  of Sunzi, assisted Tian ji (a field general of the Qi state during the Chinese warring states era) in a "wagering horse race" situation with the Emperor of the Qi state through the utilization of a tactical mismatch is a simple example of the Kelly Criterion.

The Commonality of All Strategic Approaches
By methodically reading the book, one sees the approach that each traders were using. It is similar to the generalities of the Art of War (AoW) assessment process. They understood the  the Dao of their terrain before identifying their objective and the approach for exploiting its blind spots. 

While these common points are found in each chapter of the Art of War, the reader can pinpoint the general approach for strategic assessment in chapter four.

The AoW's Tactical Approach For Assessing Strategically
Following are those five tactical steps:
1. Measuring the dimensional factors of their situation; 
2. Estimating the potency of their measures; 
3. Calculating the efficacy in terms of the positives and the negatives; 
4. Balancing the order of the measured factors through the use of the "Victory Temple Paradigm"; and
5. Predicting the probability and the possibility of victory.
-  Art of War 4

During any strategic assessment session, the successful strategist usually filters the signal from the mountain of noise by carefully choosing the possible data.  He/she usually  has the tool box and the right data to make the correct estimation.

Having the drive to pursue the targeted intelligence from the field and collecting the right data promptly are the real challenges.

A Summation From the Compass Desk
To compete in a data-driven Wall Street terrain, knowing the basic fundamentals of physics  never hurt.  ... Applying physics and/or economics in a complex strategic setting is quite tricky. It begins by understanding the finite cycles of many factors and how it operates in the grander scheme of things. . Connecting those active dots of information under a finite timeline and reaping the rewards before the competition does, is the real challenge.  Regardless of how successful those models are, each and every good model has its limitations. Do you know what they are?

Beside comprehending the physics and the economics of their setting. it is significant to pinpoint the psychology of the various competitors.  By carefully reading this book, you will discover which "physicist-trader" succeeds in their goals and objectives..

Side note 
The clue is in the Uncertainty principle of Werner Heisenberg's. Click here for the latest update on this subject.   ...  Tao of Physics is a good book for the science neophytes who are looking for new alternatives to viewing the Big Tangible Picture. It combines the generality of physics, new age psychology and eastern mysticism in its text. ... To succeed in an ultra-competitive terrain, one must understand the game of observing and being observed and studied by others.  

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