The Unrules by Igor Tulchinsky

Author:Igor Tulchinsky
Language: eng
Format: epub
ISBN: 9781119372127
Publisher: Wiley
Published: 2018-09-24T00:00:00+00:00

Like quantum physics and gambling, quantitative investing is all about the mastery of probability and statistics, a subject that's widely taught these days but difficult for many people to grasp. Quantitative investing is a numbers game. Once again, some of the techniques key to quantitative investing are rooted in the nuclear weapons programs during and after World War II, in particular the work of John von Neumann and one of his closest colleagues, collaborators, and friends, Polish‐born physicist Stanislaw Ulam.

After the war Ulam left Los Alamos and the Manhattan Project to teach at the University of Southern California. There he succumbed to viral encephalitis, a brain infection that almost killed him. He recovered, but barely. His doctors told him to rest and avoid mental activity, so he took up Solitaire. Soon he was trying to calculate the odds of a game of Canfield Solitaire, a variation of the popular card game with a low probability of playing out. After trying to figure the odds‐on combinations of the 52 cards – the calculations exceeded even his world‐class math mind – Ulam adopted a different approach, playing out 100 games and counting the number of successful plays. This was a rough‐and‐ready simulation, an approximation, but Ulam realized that it grew more accurate as he played more games. He quickly recognized the applicability of the technique to some of the problems plaguing the ongoing hydrogen bomb project. “It occurred to me then that this [method] could be equally true of all processes involving the branching of events,” he wrote in his memoirs.

The branching Ulam had in mind involved neutrons released by the atomic explosion initiating the hydrogen bomb. These neutrons had a number of finite options. They could scatter, be absorbed, change their velocity, or produce more neutrons by splitting a nucleus. This sort of branching, which frequently seems random, occurs often in nature, usually before some abrupt phase transition. Didier Sornette's Kevlar tanks exploded when tiny fractures suddenly proliferated in a kind of branching pattern that he also identified in the signals produced by tectonic plates under stress or by markets before a crash.

Thus was born the Monte Carlo method, a name one of Ulam's Los Alamos colleagues, Nicholas Metropolis, came up with as a secret code name. (Monte Carlo was a cheeky reference to the casino in Monaco where Ulam's uncle used to borrow money from relatives to gamble, but it also was a more serious acknowledgment that nature operates, at least in part, through probability.) Ulam and von Neumann worked out the math, and von Neumann saw that the probabilistic trajectories of a random sampling of individual neutrons – several thousand would suffice, in his estimation – could be calculated on the most advanced computer of the day: the ENIAC, by then relocated from the University of Pennsylvania to the Aberdeen Proving Ground in Maryland. (Although there's some controversy over who first thought of the idea, von Neumann did suggest to the ENIAC engineers a way of retrofitting the computer

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