The Predictors FROM THE PUBLISHER
It never dawned on Doyne Farmer and Norman Packard - not when growing up together in the Southwest, not during their hippie grad-school days, not even when applying their collective genius in physics and mathematics to winning at roulette in Las Vegas - that someday they would end up as players, beating the Masters of the Universe from Morgan Stanley and Goldman Sachs at their own game.. "The Predictors is Thomas Bass's engrossing and often hilarious chronicle of how these two scientists - along with their team of T-shirted and ponytailed Ph.D.'s, and with the help of some very savvy financial gurus - attempted to decode and model the complex patterns underlying the apparently random movements of commodities, currency, and equities markets. On the dizzying ride from the Prediction Company's dusty office above a Santa Fe fortune-teller to the glittering towers of Wall Street, Farmer and Packard find themselves in the company of virtually every cowboy trader and rogue millionaire who ever tackled the market. Bass spins a tale of genius and greed, power brokers and rebels, all the while providing a brisk education in chaos, complexity, and the world financial markets.
FROM THE CRITICS
Lee Dembart - Salon
Since the time of Pythagoras in the 6th century B.C., some people have believed that the world is made of numbers. And there is evidence -- in 20th century quantum mechanics, for example -- to support that view. The contemporary followers of Pythagoras include a couple of physicist-mathematicians named Doyne Farmer and Norman Packard, whom readers may remember as the stars of Thomas A. Bass' intriguing 1985 book The Eudaemonic Pie, in which the two used physics, mathematics and computers to take on the roulette wheel in Las Vegas. The tiny computer they built inside a shoe sent signals to the wearer's toes about where to place the bet based on the initial velocity of the roulette wheel and the starting point and speed of the ball that spins around it. Wonderful stuff.
Now this trio -- Farmer, Packard and Bass, the author -- is back, and this time they're taking on a much bigger casino: the stock market. Unlike most current academic thinkers, they believe that the market is neither unpredictable nor random, that patterns lie buried in the mass of data that daily gushes forth. And so they propose to apply chaos theory to that welter of information in order to find those patterns. In short, they believe they can predict -- and bet on -- the future.
The Predictors is the marvelous story of how they do it. Its strength lies in the way Bass observes and describes both the project -- an amazing story in its own right -- and the brilliant and fascinating people involved in it, dancing on a tightrope suspended above the frontiers of knowledge. At the outset, as they freely admit, Farmer and Packard don't know beans about finance. Suddenly these academic hicks (who have one expensive suit between them, which they pass back and forth as they make their pitch to some of the world's foremost financial players) find themselves hobnobbing with the officers of some very high-powered companies. They wind up with substantial backing from the Swiss Bank Corp., a major Swiss bank that became even more major last year when it merged with the Union Bank of Switzerland, the country's third-largest.
Here, unfortunately, the story gets murky. Bass leads us to believe that Farmer and Packard and their Prediction Co., based in Santa Fe, N.M., have found the pot of gold at the end of the rainbow. And indeed, Prediction has a Web site on which a company profile informs visitors, "Prediction Company continues its ground breaking work with Warburg Dillon Read, the investment banking division of UBS."
But I wish I didn't have to take it on faith. The company was founded in the early 1990s and began trading for real within a couple of years; that's the period the book covers. Five years later, the Prediction Company is still in business, but there is nothing in the book about the results. It's possible that Farmer and Packard's models have been spot on and that they've done well enough to argue that they've proved their point -- that the world is knowable by numbers.
But not so fast. Last year, Long-Term Capital Management, a hedge fund using sophisticated computer models to predict the market, collapsed, its elegant theories (based on the Nobel Prize-winning work of economists Myron Scholes and Robert Merton) trumped by reality.
It may be that Farmer and Packard have better theories. But it may also be that they've just been lucky so far, and that numbers can't completely capture the world.
Library Journal
In this sequel to The Eudaemonic Pie, which introduced physicists Doyne Farmer and Norman Packard, Wired contributor Bass explains how Farmer and Packard used chaos theory (which they helped originate) to conquer the chaos of global financial markets. Copyright 1999 Cahners Business Information.
The Standard
Werner Heisenberg was 26 when, in 1927, he laid down the law about uncertainty. Certain subatomic measurements, he found, can't be taken with absolute accuracy because the act of measuring would itself alter what was being measured.
Heisenberg's principle would make a fine epigraph for The Predictors, Thomas A. Bass' exciting account of a couple of brilliant physicists who formed a company that has managed to predict the direction of global financial markets. Doyne Farmer and Norman Packard, childhood buddies from a small town in New Mexico, grew up to become leading lights in the emergent field of chaos theory, which seeks to find some underlying structure in seemingly random events like the smoke rising from a burning cigarette. The idea behind their unorthodox new venture was that the financial markets weren't so different from, say, the flow of water through a pipe.
As Doyne Farmer said later: "The movement of money in markets resembles turbulent fluid flow. There is a high degree of randomness, but there are also deterministic patterns that ride on top of this noise and give an overall shape to the market."
In 1991, Farmer and Packard convened some of their pals in an old adobe house in Santa Fe, N.M. Bass writes that the assemblage consisted of "some of the smartest people in the new science of chaos or complex systems or whatever one calls this branch of knowledge good at finding order within disorder."
Packard and Farmer are not your standard physicists. An earlier venture, known as Eudaemonic Pie, was a high-tech collective aimed at perfecting computerized shoes that players could use to crack the physics of roulette wheels and make winning bets at the gaming tables of Las Vegas. (Bass knows these men intimately from writing the 1985 book The Eudaemonic Pie).
The Predictors is a marvelously well-written chronicle of the struggle, over the course of six years, to create not only software up to the astounding task of predicting market movements throughout the trading day, but also a firm, the Prediction Company, that could sustain this herculean effort while maintaining its independence. The story is peopled by a cast of oddball geniuses and moves along like a thriller, except the author is smarter and writes better than most people who write thrillers.
On the other hand, he never really explains just how it is that all this software works. There's a good reason for this, which is that it's incomprehensible to mere mortals. Most of Bass' readers don't want to look at pages of equations and footnotes. Still, one longs for at least a small taste of the actual science being applied here.
A bigger quibble with this book is how it handles the central contradiction of all systems designed to beat the markets. Several years after the guys who started the Prediction Company were passing around The Wall Street Journal Guide to Understanding Money and Markets, the Prediction Company succeeded. Its computers, wise to the markets thanks to a steady diet of data from around the world, make consistently profitable trades, overcoming the handicap of transaction costs to make money in options, futures, currency - you name it. The success of the firm has made its founders rich, as well as added to the bottom line at UBS, the Swiss banking and investment group that has been its partner.
Certainly this is sufficient in itself. Yet it's clear all along that Packard and Farmer are after more than money. As Farmer explains, "All this poking into the markets is really just a way to get at life's serious questions: questions about the nature of complex systems and the emergence of order in the universe."
It's strange, then, that the book pays so little attention to the essential problem it acknowledges only at the end, which is that any system that manages to beat the markets should have the paradoxical effect of rendering itself obsolete sooner or later. To cite one example, soon after it was widely publicized that you could achieve superior returns by investing each year in several Dow Jones Industrials stocks, those returns vanished.
This is the way markets are supposed to work, and in fact this is the effect the Prediction Company is having. "The world's major financial institutions have all joined this race to develop black-box financial systems," Bass acknowledges, explaining that "your edge is dulled as competitors pile on to your strategy, and if the strategy is too widely adopted it is no longer useful for playing the market; instead, it becomes the market."
Packard and Farmer have achieved something remarkable, but one wonders if it will outlive the excellent book Thomas Bass has written about it.
- Daniel Akst
Kirkus Reviews
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 hasproven 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.
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