I thought I would take this opportunity to present one of the big ideas that I have thought of while in business school. What I spoke about earlier with ETFs and disruptive technology was along the same lines and I have one or two more, but basically these are ideas that have come to me while I should have been taking notes. I’ll be presented with a topic in class and I will think it through to some destination where it may or may not have been intended to go as part of the lecture. This is fine I’m sure, but has probably cost me an exam point or two.
The main one came about as a result of a discussion with a classmate of mine in Computational Finance. This is a class largely focused on the mechanics of financial modeling. Classes like equity analysis are focused mainly on an overall picture of what drives an asset’s value and these aspects are not only quantitative but qualitative as well. Things like looking at the feasability of a company’s business model are also involved here, but in Computational Finance we deal strictly in numbers presented in Excel with some elements of computer programming involved.
My classmate and I were talking about how a lot of financial models are developed from Physics. He and I are aware of the fact that a popular derivative pricing model equation has its roots in an equation for heat transfer. Also future asset prices are often estimated in an equation that has its roots from the observation of pollen movement in water. Despite my knowledge of both these facts he surprised me with the following statement, “Finance is nothing but the Physics of money.”
I thought about this and I think it rings true. Finance tracks money’s movement. Valuation is nothing more than a calculation of an asset’s impact. Not intirely different from calculating an object’s mass or position. Forecasting is similar to potential energy… my Physics knowledge is limited, but at first brush it seems to work.
I then wondered what other natural sciences had a corrollary in the business world.