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THE PREDICTORS by Thomas A. Bass


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

by Thomas A. Bass

Pub Date: Nov. 2nd, 1999
ISBN: 0-8050-5756-0
Publisher: Henry Holt

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 has proven 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.