Dr Bryan Roberts LAK 5.03

This course is available on the MSc in Economics and Philosophy, MSc in Philosophy and Public Policy, MSc in Philosophy of Science and MSc in Philosophy of the Social Sciences. This course is available as an outside option to students on other programmes where regulations permit.

There are no prerequisites for this course; it is accessible to students of all backgrounds.

One of the most surprising discoveries of the 20th century is that many things can be described by tiny atoms moving randomly about. Thinking about the physical world in this way led to the invention of modern particle physics. Thinking about the financial world in this way led to modern financial modeling. This course is about some of the philosophical issues underlying the relationship between physics and finance.

Students in this course will explore some of the most important conceptual and philosophical questions underlying physics and finance, like: How are assumptions about randomness compatible with observed forms of determinism? What does it mean to be an atom? How does the quantum world differ from the everyday world? What explains why physical models have unexpected applications in finance? To what extent do such applications help to underpin how the prices of financial instruments are set?

The course will proceed at a conceptual level that is suitable for students of all backgrounds. We begin by introducing the concept of atoms and of the random walk, and investigate the role it played in the development of statistical mechanics and quantum physics. We then explore how random walks and other models used in physics apply to understand financial ideas like rates of return, Black-Scholes option pricing, and stock market crashes, analysing the philosophical issues underlying this practice along the way.

10 hours of lectures and 15 hours of seminars in the LT.

One essay draft, plus weekly problem sets and short discussion questions submitted through Moodle and for review in classes.

Weekly essential readings will be provided on Moodle, selected individually from various book chapters and journal articles. Some indicative readings include:

- Malkin, Burton G. A random walk down Wallstreet, excerpts.

- Norton, John D. Einstein for Everyone, Chapters 34-37 on Brownian motion and the origins of quantum theory.

- Weatherall, James O. The Physics of Wallstreet.

- Derman, E. My Life as a Quant. Excerpts.

Exam (67%, duration: 2 hours) in the main exam period.
Essay (33%, 1500 words) in the Week 11.