ECON: "to foretell the future of the markets"

From: J. R. Molloy (
Date: Tue Sep 04 2001 - 10:32:54 MDT

Doyne Farmer Looks Back
By Nina Mehta
Starting a financial trading firm was anything but easy for physicists Doyne
Farmer and Norman Packard. Even agreeing on a suitable name was difficult. But
after dismissing Infinite Regress, Nostradamus, The Vision Thing and Dukes of
Destiny, they settled on Prediction Company-a name that calmly summed up the
firm's intention to foretell the future of the markets.

The story of the company's tumultuous evolution roars through Thomas Bass' The
Predictors: How a Band of Maverick Physicists Used Chaos Theory to Trade Their
Way to A Fortune on Wall Street.

Did the firm make money? Yes, indeed, and lots of it. Did it take money from
the capital markets like candy from a child? Not exactly.

Farmer, Packard and a motley crew of five other physicists, plus one
non-physicist, launched Prediction Company in 1991, determined to use chaos
theory to split the markets open and extract valuable patterns of information
from the murky soup of bond and stock prices. Farmer and Packard, the company'
s globetrotting stars, were two of the five physicists who, in the late 1970s,
had formed the Chaos Cabal in the graduate physics department at the
University of California at Santa Cruz-a ragtag group that helped launch the
field that launched a thousand dissertations and now feeds academic
departments around the world.

"We started out assuming that simply using sophisticated time-series
techniques would give us a clear advantage that would allow us to make
profits," Farmer says now. "But we found there were no magic bullets. We had
to think harder about how the markets worked and structure our models to make
the data speak to us. The data didn't speak to us automatically."

There were discouraging times. The firm didn't get off the ground immediately,
and it was three years after the firm settled into its offices, within sight
of the Sangre de Cristos (Blood of Christ) mountains, that it was trading in
earnest-and several years after that "before we were really trading in a way
that was profitable," says Farmer. Along the way, there were several false
starts, and the company went for months without making a profit. The
Predictors swings through the highs and lows of the company, from paying for
office furniture to hauling the company dog-and-pony show to the kingpins of
Wall Street in search of a funding partner. (The Chicago-based O'Connor &
Associates wound up spouse.)

There were also surprises. "It was easier to get Wall Street interested than
we had thought," recalls Farmer. "Perhaps the timing was right, or they just
liked our sales pitch. Also, I think Norman and I underestimated the value of
our credentials-they were taken seriously." One thing that wasn't so easy,
however, was the day-to-day logistics of production-"actually running the
models in live trading proved to be harder than we imagined," he says.

Management also proved to be something of a briar patch for Packard and
Farmer, who had previously run a small company that tried to beat the roulette
wheel in Las Vegas with a toe-operated computer. (Bass recounted that
hardscrabble effort in an earlier book,The Eudaemonic Pie.) "It was difficult
learning to listen to other people, and learning to understand other people's
psychology well enough to keep them happy and get them to work hard," says
Farmer. "Frankly, I had assumed that since I was outgoing and liked people
that would have been easier."

So what are the Dukes of Destiny doing now?

Packard remains at Prediction, modeling the future as CEO of the 24-person
firm, which now advises UBS on how to use Prediction Company models to control
a proprietary fund (O'Connor wound up in the kitty of the Swiss bank). Farmer
is at the Santa Fe Institute, developing a nonequilibrium theory for price
formation based on likening the financial strategies developed by "agents" in
the markets to the evolution of biological species. "If patterns in the market
are equivalent to food sources, for instance, speculators can formulate
strategies to exploit those patterns for profit, just as animals fight for
sources of food," he explains.

In the offing: If not another book, then at least a mathematical food-fight
theory to make sense of the ever-dyspeptic financial markets.

Useless hypotheses, etc.:
 consciousness, phlogiston, philosophy, vitalism, mind, free will, qualia,
analog computing, cultural relativism, GAC, Cyc, Eliza, cryonics, individual
uniqueness, ego

     Everything that can happen has already happened, not just once,
     but an infinite number of times, and will continue to do so forever.
     (Everything that can happen = more than anyone can imagine.)

We won't move into a better future until we debunk religiosity, the most
regressive force now operating in society.

This archive was generated by hypermail 2b30 : Fri Oct 12 2001 - 14:40:25 MDT