"The Predictors" by Thomas A. Bass

Can two mathematicians use chaos theory to master the stock market?


Lee Dembart
October 14, 1999 8:00PM (UTC)

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.

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"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.

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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.


Lee Dembart

Lee Dembart, a longtime journalist and book critic, is an editor at the International Herald Tribune. He lives in Paris.

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