Impact of Physics on the Economy

 It is not know if the public is aware of the economic impact of physics, not just in terms of industry to support the workings of physics, but also how new ideas and technologies have sprung new innovations and devices that made our world the way it is today. Of course, the most obvious example would be the invention of the solid state transistor, which is the heart of every modern electronic devices that we have now.

This Swiss study tries to quantify the impact of physics on the Swiss economy. One can clearly see the breath of the impact across many different disciplines and sector of the economy.

This is not that much different than the previous similar studies that were done for the US economy and for Europe. The significant conclusion one can draw out of these data is that one gets a lot of returns for the initial investment. But it is not just that. If one looks at the nature of the returns, many of them are vital to the advancement of our civilization, so these investments are important not merely for financial reasons.

BTW, I still encounter people (a few of them my students) who are surprised that physics has anything to do with their smarphones.

Zz.

Comparing Understanding of Graphs Between Physics and Psychology Students

I ran across this paper a while back, but didn't get to reading it carefully till now.

If you have followed this blog for any considerable period of time, you would have seen several posts where I emphasized the importance of physics education, NOT just for the physics knowledge, but also for the intangible skills that comes along with it. Skills such as analytical ability and deciding on the validity of what causes what are all skills that transcends the subject of physics. These are skills that are important no matter what the students end up doing in life.

While I had mentioned such things to my students during our first day of class each semester, it is always nice when there are EVIDENCE (remember that?) to back such claim. In this particular study, the researchers compare how students handle and understand the information that they can acquire from graphs on topics outside of their area of study.

The students involved are physics and psychology students in Zagreb, Croatia. They were tested on their understanding of the concept of slope and area under the graph, their qualitative and quantitative understanding of graphs, and comparing their understanding of graphs in the context of physics and finance. For the latter area (finance), both groups of students did not receive kind of lessons in that subject area and thus, are presumably unfamiliar with both groups.

Before we proceed, I found that in Croatia, physics is a compulsory subject in pre-college education there, which is quite heartening.

Physics is taught as a compulsory subject in the last two grades of all elementary schools and throughout four years of most of high schools in Croatia. Pupils are taught kinematics graphs at the age 15 and 16 (last grade of elementary school and first year of high school). Psychology students were not exposed to the teaching on kinematics graphs after high school, while physics students learned about kinematics graphs also in several university courses. Physics and psychology students had not encountered graphs related to prices, money, etc., in their formal education.

So the psychology students in college are already familiar with basic kinematics and graphs, but did not go further into it once they are in college, unlike physics students. I'd say that this is more than what most high school students in the US have gone through, since Physics is typically not required in high schools here.

In any case, the first part of the study wasn't too surprising, that physics students did better overall at physics questions related to the slope and area under the graph. But it was interesting that the understanding of what "area under the graph" tends to be problematic for both groups. And when we got to the graphs related to finance, it seems clear that physics students were able to extract the necessary information better than psychology students. This is especially true when it comes to the quantitative aspect of it.

You should read the in-depth analysis and discussion of the result. I'll quote part of their conclusion here:

All students solved the questions about graph slope better than the questions about the area under a graph. Psychology students had rather low scores on the questions about area under a graph, and physics students spent more time than psychology students on questions about area under a graph. These results indicate that area under a graph is quite a difficult concept that is unlikely to be developed without formal teaching and learning, and that more attention should be given to this topic in physics courses.

Physics and psychology students had comparable scores on the qualitative questions on slope which indicates that the idea of slope is rather intuitive. However, many psychology students were not able to calculate the slope, thus indicating that their idea of slope was rather vague. This suggests that the intuitive idea of slope, probably held by most students, should be further developed in physics courses and strongly linked to the mathematical concept of slope that enables students to quantify slope.

Generally, physics students solved the qualitative and the quantitative questions equally well, whereas psychology students solved qualitative questions much better than the quantitative questions. This is further evidence that learning physics helps students to develop deeper understanding of concepts and the ability to quantitatively express relationships between quantities.

The key point here is the "transfer" of knowledge that they have into an area that they are not familiar with. It is clear that physics students were able to extract the information in the area of finance better than psychology students. This is an important point that should be highlighted, because it shows how skills learned from a physics course can transfer to other areas, and that a student need not be a physics major to gain something important and relevant from a physics class.

Zz.

Why Do Physicists Gravitate Towards Jobs In Finance?

This is a take on why physicists gravitate towards a job in the finance world.

Then again, perhaps it is not surprising that so many physicists wind up working in finance. After all, they are good at using mathematics to solve real-world problems and the money is good. There is more to it than that though. There are mathematical links between physics and finance that go back at least to 1900, when Frenchman Louis Bachelier wrote his Theory of Speculation, in which he used the mathematics of a random walk to analyse fluctuations on the Paris stock exchange. Five years later, the same ideas were used by a young Albert Einstein to explain why pollen grains zigzag when they are suspended in water. His explanation invoked the idea that very large numbers of tiny molecules, much smaller than the pollen grains, are responsible for kicking the grains around. This was a crucial insight and provided one of the earliest convincing confirmations of the existence of atoms. To make the parallel with the financial markets, we might say that stock prices are kicked around by myriad unknown factors in the marketplace. Today, these ideas have been developed into a means of computing the value of sophisticated financial instruments and the management of risk.

Now, I'm skeptical with the first assumption that there are physicists who "gravitate" towards a job in finance. I am not sure to what extent these people AIMED for such a job, or rather if they took it due to other circumstances. Would they have taken it if they had other jobs in physics that pay close to what they would be making? Did they graduate with the intention of take such jobs in finance?

Furthermore, I've mentioned a few articles in which these theoretical model in finance and areas dealing with social and human interactions and activities (what is often called as psychophysics) are being called into question.

In any case, this is an article that covers what is going on in the UK, and it doesn't look to be that much different than what is happening here in the US.

Zz.

From CERN To Goldman Sachs

When I read this article, my first reaction was "Is this new?"

This news article is describing the case of a CERN physicist being hired by Goldman Sachs, thus changing his career from high energy physics (presumably) to quantitative finance.

Ryan Buckingham, a particle physicist with a PhD from Oxford University, spent three and a half years at CERN before joining Goldman Sachs in London as an associate in the credit and mortgage structuring team earlier this month. He declined to speak to us and Goldman didn’t return our request for comment, but it seems that the path from CERN to investment banking is a well trodden one.

“CERN is the place to find top PhDs in physical sciences and computing,” said Dominic Connor, head of quantitative finance recruitment firm P&D Quant Recruitment. “Working at CERN is one step up from having any old PhD. There a lot of people who have doctoral degrees, but you know that if someone has worked at CERN they will be very good indeed.”

Buckingham isn’t the only CERN alumni working in finance. Alexey Afonin, a vice president in strats and modelling at Morgan Stanley used to work there too. So did Anne Richards, the chief investment officer at Aberdeen Asset Management. So did Nikolaos Prezas, a quantitative researcher at J.P. Morgan and plenty of others. Most people seem to work at CERN early in their careers, and then move into finance.

Which is the reason I am puzzled at why this latest "acquisition" by the financial world making it into the news. Especially here in the US where funding for high energy physics is so crappy, a lot of PhDs in this field have to go look for employment elsewhere. Most of the people who work at CERN are not guaranteed at a long-term employment. Postdocs, for example, don't get to stay for as long as they want. And with their knowledge in statistical analysis and computational analysis skills, it is not a surprise that the field of quantitative analysis would swallow these people up.

Zz.

Physicists Going Into Finance

This is an excellent article that explores one job path outside of Academia for physicists.

Today that balance has changed. According to AIP data, in 2010 the number of physics bachelor's degrees and Ph.D.s awarded in the United States set or equaled respective all-time highs. One year after finishing their Ph.D.s, 60% of physicists were in postdocs. Nearly half of all physicists work in industry, and only about 35% work in academia. This reflects two trends, Czujko says: a relative decline in the number of tenure-track academic jobs in most physics fields, and increasing opportunities in certain fields for math-savvy physicists.

If you are in the middle of pursuing your PhD, even if you have no interest in pursuing the financial field for a career, this article should be read so that you are aware of the job situation that you are going into. In all my advice to physicist students pursuing a career in physics, I've always stressed that need to have as wide of an experience as possible, and to be open to explore other areas. Most of our plans do not happen the way we intended, and you just never know what you will need when you jump into the job market.

Zz.

Physics Envy?

This is a rather interesting article. It is actually a book review of Emanuel Derman's "Models Behaving Badly". In it, he looked at why mathematical models used for human behavior, such as in economics and the financial world, are really not the same as mathematical models and theories done in physics. And this is written by someone who has a background in physics, and has worked in the financial world.

Mr. Derman's particular thesis can be stated simply: Although financial models employ the mathematics and style of physics, they are fundamentally different from the models that science produces. Physical models can provide an accurate description of reality. Financial models, despite their mathematical sophistication, can at best provide a vast oversimplification of reality. In the universe of finance, the behavior of individuals determines value—and, as he says, "people change their minds."
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The basic problem, according to Mr. Derman, is that "in physics you're playing against God, and He doesn't change His laws very often. In finance, you're playing against God's creatures." And God's creatures use "their ephemeral opinions" to value assets. Moreover, most financial models "fail to reflect the complex reality of the world around them."

Other than his unfortunate use of the term "God" in this case, this is a fairly accurate reflection of my view when something like this is used to model human activities and interactions. I find that the effort in trying to find analogies from physics to fit itself into such human fields to be a bit strange and sometime amusing, thus generating the possibility of some of them having this "physics envy".

Zz.

High Heels, Physics, and Finance

While we have seen Physics and Finance being mixed, it isn't everyday that we see high heels and physics being mentioned in the same breath. But that's what is happening in this profile of a physicist who have made that jump into the world of finance, but still try to retain some feminine quality.

At work, Debbie Berebichez is a quantitative risk analyst. On her own time, she's the Science Babe. She's also an inspiration to young women interested in righted-brained careers, including finance.

It's good that, even though she has left the science world, she is still dedicating her effort towards encouraging more female into science. The timing of this article is also rather appropriate, because I'm in the middle of running the contest to find the most attractive physicist. Wonder if someone will nominate this "science babe"? :)

Zz.

Newton's Laws Do Not Ignore Friction

Usually, if this was made by some obscure individual on some obscure website, I wouldn't have given it a second thought. After all, you can find a lot of such garbage all over the 'net. But this is from a supposedly-respected financial publication, and made by someone from New York University. Therefore, it deserved to be addressed and corrected. It is also another example on why the general public often have faulty knowledge of physics, even basic physics that we teach kids in high school.

This article comes from Barrons.com, and talks about the future of the Dow Jones. Inevitably, people who don't know enough physics will want to make either a comparison, or an analogy, to some aspect of physics.

"Economics used to ignore liquidity risk, like Newton's laws ignore friction in physics," says Lasse Pedersen of New York University "However, now people are realizing similar frictions are central to what is going on in the economy."

This, of course, is totally wrong. Any physics student taking intro physics in college would have known this. Example: body on an inclined plane problem with friction involved. The whole point of drawing the free-body diagram in such a case is so that one can find the NET force acting on the body and applying F=ma (which is ONE of Newton's laws) to find the dynamics of the body. So Newton's Laws DO NOT ignore friction. The frictional force is like any other forces and there's nothing special about it.

This is another black eye for those in the economic/financial sector. It seems that, based on the past few posts in this blog, that I'm taking aim at this field. I'm not! It is the people who represent such a field and making stupid statements that are giving this field a bad name. If they just stick to what they know and keep their mouth shut on things that they don't, we would get along very well. But nooooo.... they somehow want to show off their ignorance of physics and hoping that those who read what they say don't know any better. And the sad thing is, they'll probably get away with these things too.

Zz.

So You Want To Be A Quant

We have all heard about the flood of theorists who left physics and turned to the dark side of the force - going into quantitative finance (quant).

{OK, OK, I was just having fun. Don't send me hate mail about it being the dark side of the force}.

The NY Times has an article on this, detailing the stories behind the physicists who are now getting blamed for the economic collapse.

Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science.

As Dr. Derman put it in his book “My Life as a Quant: Reflections on Physics and Finance,” “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a useable theory of anything.”

It's a fascinating article, and certainly should be read especially for anyone who thinks that this option might be something they might think about if he/she is leaving physics to go into this sector.

Zz.

Scientists As Financial Analysts/Quantitative Analysts

The timing of these two articles is all wrong, especially with the meltdown of the financial sector. Oh sure, each of them acknowledges this fact, but somehow managed to put a spin on it and seem to imply that this is the perfect time to consider a job on Wall Street. I'm highly skeptical of it.

In any case, these two articles from Science Career section actually do a good job in clarifying what scientists, especially theoretical physicists, can do in the financial sector, and why they are sought-after (before all the economic crisis, that is). It certainly explains what type of skills they are looking for.

Scientists as financial analysts
Scientists as quantitative analysts

At least now, you have a bit more information on your option if and when the financial sector recovers.

Zz.