The quantitative aspirations of economists and financial analysts have for
many years been based on the belief that it should be possible to build models
of economic systems - and financial markets in particular - that are as
predictive as those in physics. While this perspective has led to a number of
important breakthroughs in economics, "physics envy" has also created a false
sense of mathematical precision in some cases. We speculate on the origins of
physics envy, and then describe an alternate perspective of economic behavior
based on a new taxonomy of uncertainty. We illustrate the relevance of this
taxonomy with two concrete examples: the classical harmonic oscillator with
some new twists that make physics look more like economics, and a quantitative
equity market-neutral strategy. We conclude by offering a new interpretation of
tail events, proposing an "uncertainty checklist" with which our taxonomy can
be implemented, and considering the role that quants played in the current
financial crisis.Comment: v3 adds 2 reference
