Jim Simons is an American mathematician turned hedge fund manager when he founded Renaissance Technologies, hiring several physicists, mathematicians, astronomers, and statisticians to work on the Medallion Fund, which is effectively the best counterexample to the efficient market hypothesis. Essentially, he and his team beat the market.
Listen beautiful relax classics on our Youtube channel.
But the story behind his journey toward becoming the greatest Wall Street investor is one built on the shoulders of other greats in the past. It’s no surprise why many mathematicians and physicists would excel in financial markets as many of the formulas that make these markets go round can be expressed in mathematical terms.
In fact, one of the earliest works on being able to predict one aspect of financial markets, derivatives, came from the PhD student Louis Bachelier, whose doctoral thesis focused on figuring out what the best price is for options.
He saw that the movements of stock prices over time form a normal distribution, and also found that the best price for options was that which both buyer and seller would stand to gain the same amount for the risk that they are taking.
Building upon this idea, other mathematicians, namely Fischer Black and Myron Scholes were able to formulate an equation that would allow stock traders to plug in the numbers and come up with an exact price for the option. Meanwhile, Robert Merton had an independent paper published with his version of the same concept in option pricing, and so he was later credited along with Black and Scholes.
Although the secrets have been let out of the bag, Simons was able to use his background in mathematics and all of these derivations and formulas to exploit the inefficiencies in the market. To do that, he and his team gathered data from the stock market and the federal reserve, on which they used machine learning to find patterns in the stock market, and use models to become the highest-returning fund of all time. – via Digg
(Video credit: Veritasium/Youtube)
Source: neatorama