The Predictors, How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street,by Thomas A. Bass (New York: Holt, 1999).
Book review by Ralph H. Abraham (firstname.lastname@example.org)
This nonfiction book is the second in a sequence of reports on the romps of Doyne Farmer and Norman Packard. The first in the sequence, also by Bass, recounted their attack on Las Vegas, based in Santa Cruz, and armed with computerized boots. Like their distinguished predecessor Ed Thorp, they graduated from casinos (where you are supposed to lose) to the markets (where you are challenged to win).
This time, once again, the intrepid lads set aside their highly respected and influential research on the edge of chaos and complexity, apparently in response to the difficulty in gaining grants for frontier work. One aspires to be one's own grant source. And again, it is computational math/physics which is to provide the advantage to beat the game: this time, the method of attractor reconstruction. I found the book much fun to read, and instructive too. In it, two threads are entwined. One is the step-by-step materialization, in Santa Fe, of a data gorging trading robot, the "black box", by Doyne and Norman, along with Jim McGill and a small staff. This is excellent journalism, a good tale well told.
The other thread is a text on trading. Abstract instruments are clearly explained. Most useful. Also, Bass sketches a complex dynamical model for the entire market system itself, in which nodes (markets) are deployed in hierarchical layers of more and more abstract instruments: factories, stocks, futures, options, indices, etc. His idea is, apparently, that the growth of this tree creates the new space into which the market may evolve.
So you see, complexity theory is involved in both threads. One might have liked the black box tale to end in victory, as suggested by the subtitle: it does not. (But the project is not over.) One might also have liked the textbook on the market system to guess what would happen if the boys beat the system: it does not.
I recommend the book highly for your amusement.
Rev. 22 Feb 2000 by Ralph H. Abraham