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DDIntel - The Market’s Game of Musical Chairs: Controversies in Gauge Theory and Economics

DDIntel - The Market’s Game of Musical Chairs: Controversies in Gauge Theory and Economics
By DataDrivenInvestor • Issue #41 • View online

In many ways, the stock market’s movements can be thought of as a game of musical chairs. While the music is playing, everyone is having a good time, but when the music stops, well, someone is going to get caught with their pants down. As Warren Buffet likes to put it, “Only when the tide goes out do you discover who’s been swimming naked.”
It may seem confusing to compare the stock market, a game of up and down, with musical chairs, a game of spinning multi players, but the connection (pun intended) can be made through gauge theory. In physics, a gauge theory is a type of field theory in which the dynamics of the system itself is invariant to local transformations.
Gauge theory can be described as the next evolution of calculus. So the question naturally arises, shouldn’t economics incorporate gauges into theory? After all, mathematical economics “hit an insurmountable wall” and came to the conclusion that stable preferences must be assumed to do any economics, at least according to Gary Becker in 1976.
Fast forward to 1996, economist Pia Malaney and mathematician Eric Weinstein proposed a solution for how to incorporate gauge theory into economics by looking at issues in index number theory, a mathematical problem at the core of measuring inflation. In short, 
“By using techniques developed in differential geometry, it is shown that the so-called index number problem can be resolved by the development of a special economic derivative operator constructed for this purpose.” - Pia Malaney
Coincidentally, in the same year,
“five economists, known as the Boskin Commission, were tasked with saving the government $1 trillion. They observed that if the CPI were lowered by 1.1 percent, then a $1 trillion could indeed be saved over the coming decade. So what did they do? They proposed a way to alter the formula that would lower the CPI by exactly that amount!” - Slate
So, the Boskin Commission ignored this incredible opportunity to accelerate the scientific field of economics by adopting gauge theory, and instead chose to make the politically expedient decision to appease the powers that be.
Rewind back to the 1970s, when Becker was rising to prominence, an NSA code breaker, now known as the “greatest investor on Wall Street”, James Simons, developed the Chern-Simons Theory, a revolution in gauge theory.
“The shocking discovery that emerged from these talks was that both geometers and quantum theorists had independently gotten hold of different collections of insights into a common structure that each group had independently discovered for themselves.” - Eric Weinstein
Correlated, but likely causal, James Simons went on to crack the commodities, but his ambition for equities was unparalleled. Using insights from technical analysis, mathematical physics, and even artificial intelligence, Simons’ Medallion Fund returned annual rates of ~70% since inception, netting investors 40% after factoring in exorbitant, but justified, fees.
Economists are slowly waking up to the fact that this cannot be explained by market efficiency. And while some believe this must be evidence of a Ponzi Scheme, Simons was actually one of the first to alert Madoff’s activities to authorities.
Perhaps the reason for Simons’ success is equally implausible to that of the most successful scam in history; the discovery and creation of superintelligence. But that is a topic for a later discussion.
The bottom line is that Simons’ mathematical genius is the reason for M’s success. And economists would be wise to heed his guidance, by incorporating gauge theory into economics. From changing preferences to changing bundles, gauge theory creates a natural language to extend the scope of economics.
But the mainstream hasn’t been so quite too keen to adopt Malaney and Weinstein’s approach of “how the notion of “path dependence” in Yang-Mills theory might be used to construct a better measure of how cost of living changes over time.”
In November of 2021, Malaney and Weinstein gave a talk at the Money and Banking Workshop hosted by University of Chicago titled “Economics as Gauge Theory”.
Research Engineer at Deepmind, Timothy Nguyen, concluded “the main contribution of the Malaney-Weinstein work is that it provides a striking example of how to obscure simple concepts through an uneconomical use of gauge theory.”
This is not to dispute any of Nguyen’s points; that is beyond the mathematical abilities of the author. Nevertheless, instead of taking this opportunity to simply educate economists and mathematicians about the beauty, power, and potential of Gauge Theory, critics are simply scoring social media points about who’s math is more coherent to an extremely niche audience.
In conclusion, if one wants to understand economics better than anyone alive, look to James Simons. But the market’s game of musical chairs is sure to leave more than a few holding the bag in the short term with its twister of monetary swirls. The controversies of incorporating gauge theory into economics continues.
This week’s DDIntel tries to guide investors through Turbulent TimesThe Monetary SingularityOpen Source Exploitation, and more. Whether it’s time to upgrade your options strategy, learn about causality, or prepare for hardware supply chain disruptions, our intel has you covered.
Bonus material for ML Data Scientists and the Metaverse curious. No crypto this week! We’ve covered enough lately and will be doing an in depth intel soon. Sneak peak is we’re long term believers, but there may be short term pain ahead as crypto capitulates, and bitcoin discovers who she really is.
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Check out our previous issues. You can also learn how to work with DDI here.
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