This Black-Scholes/Merton equation, the most famous equation in finance came from physics. It launched an industry worth four multi-trillion dollars as it led to the world’s best investments by transforming everyone’s approach to risk.
At its core, this equation comes from physics, from discovering atoms, understanding how heat is transferred, and how to beat the casino at blackjack. So maybe it shouldn’t be surprising that some of the best to beat the stock market were not veteran traders, but physicists, scientists, and mathematicians.
Example: In 1988, a mathematics professor named Jim Simons set up the Medallion Investment Fund, and every year for the next 30 years, the Medallion fund delivered higher returns than the market average, and not just by a little bit, it returned 66% per year. At that rate of growth, $100 invested in 1988 would be worth $8.4 billion today. This made Jim Simons easily the richest mathematician of all time. But being good at math doesn’t guarantee success in financial markets. The size, scale, utility of derivatives are not enough. At its core, this equation comes from physics, from discovering atoms…
