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Rutger van Santen, Djan Khoe, and Bram Vermeer

Print publication date: 2010

Print ISBN-13: 9780195377170

Published to Oxford Scholarship Online: November 2020

DOI: 10.1093/oso/9780195377170.001.0001

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Reliable Finance

Reliable Finance

5.5 (p.239) Reliable Finance

Rutger van Santen

Djan Khoe

Bram Vermeer

Oxford University Press

As we were drafting our first version of this chapter, the world was abruptly seized by the worst economic crisis since the 1930s. Having just written about the impact that instability, the bonus culture, and the bursting of financial bubbles might have on our collective future, it was disconcerting to see those ideas leap from the page and run amok in the global economy. Rather than tempt fate any further, we put our text on hold and went back to Jean-Philippe Bouchaud, the financial expert with whom we had discussed the potential for precisely this kind of ominous development a few months earlier. Bouchaud knows just how fast money can move. He has set up his computer systems in three separate continents, as close to the major financial centers as possible, because communication between the continents can lag by a few milliseconds—a costly delay he simply can’t afford. “The speed of hot money is close to the speed of light,” he jokes. “It’s relativistic finance.” As a physicist, Bouchaud is well aware of the constraints that the theory of relativity imposes on our actions. But that’s not the only inspiration he has drawn from the laws of nature. Bouchaud’s focus is on the most refined physics, which uses the behavior of individual atoms to explain how collective phenomena such as electrical conductivity and magnetism arise. Nowadays, he’s professor at the prestigious École Polytechnique in Paris, but he has been applying his knowledge of collective phenomena to financial market prices for many years now. Together with Jean-Pierre Aguilar and Marc Potters, Bouchaud is the cofounder of Capital Fund Management, which rapidly grew into France’s largest and most successful hedge fund. What makes the fund so successful is, perhaps, that Bouchaud’s ideas differ fundamentally from the standard approach that economists have developed over the years. A huge amount of research was carried out in the 1950s and 1960s to identify patterns in financial markets. This gave rise to the “quantitative” economic theories that banks and financial institutions now use routinely.

Keywords:   bonuses, collective phenomena, economic theories, feedback mechanisms, government, hedge funds, irrationality, models, stock prices

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