The mathematician who cracked Wall Street

Chris Anderson: You were something of
a mathematical phenom.

You had already taught
at Harvard and MIT at a young age.

And then the NSA came calling.

What was that about?

Jim Simons: Well the NSA --
that's the National Security Agency --

they didn't exactly come calling.

They had an operation at Princeton
where they hired mathematicians

to attack secret codes
and stuff like that.

And I knew that existed.
And they had a very good policy

And they had a very good policy
because you could do half your time

at your own mathematics

and at least half your time
working on their stuff.

And they paid a lot.
So that was an irresistible pull.

So, I went there.

CA: So you were a code-cracker.

JS: I was.

CA: Until you got fired.

JS: Well, I did get fired. Yes.

CA: How come?

JS: Well, how come?

I got fired because,
well the Vietnam War was on,

and the boss of bosses in my organization
was a big fan of the war

and wrote a New York Times article,
a magazine section cover story,

about how we're going
to win in Vietnam and so on.

And I didn't like that war,
I thought it was stupid

and I wrote a letter to the Times,
which they published, saying

not everyone who works for Maxwell Taylor,
if anyone remembers that name,

agrees with his views.

And I gave my own views.

CA: Oh, OK. I can see that would --

JS: Which were different from General Taylor's.

But in the end nobody said anything.

But then, I was 29 years old at this time
and some kid came around

and said he was a stringer
from Newsweek magazine

and he wanted to interview me
and ask what I was doing about my views.

And I told him, I said,
"I'm doing mostly mathematics now,

and when the war is over
then I'll do mostly their stuff."

Then I did the only
intelligent thing I'd done that day --

I told my local boss
that I gave that interview.

And he said, "What'd you say?"

And I told him what I said.

And then he said, "I've got to call Taylor."

He calls Taylor; that took 10 minutes.

I was fired five minutes after that.

But it wasn't bad.

CA: It wasn't bad, because
you went on to Stony Brook

and stepped up your mathematical career.

You started working
with this man here. Who is this?

JS: Oh, [Shiing-Shen] Chern.

Chern was one of the great
mathematicians of the century.

I had known him when
I was a graduate student at Berkeley.

And I had some ideas,

and I brought them to him
and he liked them.

Together, we did this work
which you can easily see up there.

There it is.

CA: It led to you publishing
a famous paper together.

Can you explain at all what that work was?

JS: No.

(Laughter)

JS: I mean, I could
explain it to somebody.

CA: How about explaining this?

(Laughter)

JS: But not many.
Not many people.

CA: I think you told me
it had something to do with spheres,

so let's start here.

JS: Well, it did. But I'll say about that work --

it did have something to do with that,
but before we get to that --

that work was good mathematics.

I was very happy with it; so was Chern.

It even started a little subfield
that's now flourishing.

But, more interestingly,
it happened to apply to physics,

something we knew nothing about --
at least I knew nothing about physics,

and I don't think Chern
knew a heck of a lot.

And about 10 years
after the paper came out,

a guy named Ed Witten in Princeton
started applying it to string theory

and people in Russia started applying it
to what's called "condensed matter."

Today, those things in there
called Chern-Simons invariants

have spread through a lot of physics.

And it was amazing.

We didn't know any physics.

It never occurred to me
that it would be applied to physics.

But that's the thing about mathematics --
you never know where it's going to go.

CA: This is so incredible.

So, we've been talking about
how evolution shapes human minds

that may or may not perceive the truth.

Somehow, you come up
with a mathematical theory,

not knowing any physics,

discover two decades later
that it's being applied

to profoundly describe
he actual physical world.

How can that happen?

JS: God knows.

(Laughter)

But there's a famous physicist
named [Eugene] Wigner,

and he wrote an essay on the
unreasonable effectiveness of mathematics.

Somehow, this mathematics,

which is rooted in the real world
in some sense -- we learn to count,

measure, everyone would do that --
and then it flourishes on its own.

But so often it comes back
to save the day.

General relativity is an example.

[Hermann] Minkowski had this geometry,
and Einstein realized,

"Hey, it's the very thing
in which I can cast General Relativity."

So, you never know. It is a mystery.

It is a mystery.

CA: So, here's a mathematical
piece of ingenuity.

Tell us about this.

JS: Well, that's a ball -- it's a sphere,
and it has a lattice around it --

you know, those squares.

What I'm going to show here was
originally observed by [Leonhard] Euler,

the great mathematician, in the 1700's.

And it gradually grew to be
a very important field in mathematics:

algebraic topology, geometry.

That paper up there had its roots in this.

So, here's this thing:

it has eight vertices,
12 edges, six faces.

And if you look at the difference --

vertices minus edges plus faces --
you get two.

OK, well, two? That's a good number.

Here's a different way of doing it --
these are triangles covering --

this has 12 vertices and 30 edges
and 20 faces, 20 tiles.

And vertices minus edges
plus faces still equals two.

And in fact you could
do this any which way,

cover this thing with all kinds
of polygons and triangles

and mix them up.

And you take vertices minus edges
plus faces -- you'll get two.

Here's a different shape.
This is a torus, the surface of a donut,

16 vertices covered by these rectangles,

32 edges, 16 faces,
vertices minus edges comes out 0.

It'll always come out 0.

Every time you cover a torus
with squares or triangles

or anything like that,
you're going to get 0.

So, this is called
the Euler characteristic.

And it's what's called
a topological invariant.

It's pretty amazing,

no matter how you do it
you'll always get the same answer.

So that was the first sort of thrust,
from the mid-1700s,

into a subject which is now
called algebraic topology.

CA: And your own work
took an idea like this

and moved it into
higher-dimensional theory,

higher-dimensional objects,
and found new invariants?

JS: Yes. Well, there were already
higher-dimensional invariants:

Pontryagin classes --
actually, there were Chern classes.

There were a bunch
of these types of invariants.

I was struggling to work on one of them
and model it sort of combinatorially

instead of the way it was typically done,

and that led to this work
and we uncovered some new things.

But if it wasn't for Mr. Euler --
who wrote almost 70 volumes of mathematics

and had 13 children

who he apparently would dandle on his knee
as he was writing --

if it wasn't for Mr. Euler, there wouldn't
perhaps be these invariants.

CA: OK, so that's at least given us
a flavor of that amazing mind in there.

Let's talk about Renaissance.

Because you took that amazing mind
and having been a code-cracker at the NSA,

you started to become a code-cracker
in the financial industry.

I think you probably didn't buy
efficient market theory.

Somehow you found a way of creating
astonishing returns over two decades.

The way it's been explained to me,

what's remarkable about what you did
wasn't just the size of the returns,

it's that you took them
with surprisingly low volatility and risk

compared with other hedge funds.
So how on earth did you do this, Jim?

JS: I did it by assembling
a wonderful group of people.

When I started doing trading, I had
gotten a little tired of mathematics.

I was in my late 30s.
I had a little money.

I started trading and it went very well.

I made quite a lot of money
with pure luck.

I mean, I think it was pure luck.

It certainly wasn't mathematical modeling.

But in looking at the data,
after a while I realized:

it looks like there's some structure here.

And I hired a few mathematicians,
and we started making some models --

just the kind of thing we did back
at IDA [Institute for Defense Analyses].

You design an algorithm,
you test it out on a computer.

Does it work? Doesn't it work? And so on.

CA: Can we take a look at this?

Because here's a typical graph
of some commodity.

I look at that, and I say,
"That's just a random, up-and-down walk --

maybe a slight upward trend
over that whole period of time."

How on earth could you trade,

looking at that and see something
that wasn't just random?

JS: In the old days -- this is
kind of a graph from the old days,

commodities or currencies
had a tendency to trend.

Not necessarily the very light trend
you see here, but trending in periods.

And if you decided, "OK, I'm going
to predict today, by the average move

in the past 20 days -- there's 20 days --

maybe that would be a good prediction,
and I'd make some money.

And in fact, years ago
such a system would work --

not beautifully, but it would work.

You'd make money,
you'd lose money,

you'd make money.

But this is a year's worth of days,

and you'd make a little money
during that period.

It's a very vestigial system.

CA: So you would test
a bunch of lengths of trends in time

and see whether, for example,

a 10-day trend or a 15-day trend
was predictive of what happens next.

JS: Sure, you would try all those things
and see what worked best.

Trend-following would've
been great in the '60s,

and it was sort of OK in the '70s.
By the '80s, it wasn't.

CA: Because everyone could see that.

So, how did you stay ahead of the pack?

JS: We stayed ahead of the pack
by finding other approaches --

shorter-term approaches to some extent.

The real thing was to gather
a tremendous amount of data,

and we had to get it by hand
in the early days.

We went down to the Federal Reserve
and copied interest rate histories

and stuff like that.

Because it didn't exist on computers.

We got a lot of data.

And very smart people -- that was the key.

I didn't really know how
to hire people to do fundamental trading.

I had hired a few -- some made money,
some didn't make money.

I couldn't make a business out of that.

But I did know how to hire scientists,

because I have some taste
in that department.

So, that's what we did.

And gradually these models
got better and better,

and better and better.

CA: I think your credited with
doing something remarkable at Renaissance,

which is building this culture,
this group of people,

who weren't just hired guns
who could be lured away by money.

Their motivation was
doing exciting mathematics and science.

JS: Well I'd hoped that might be true.

But some of it was money.

CA: They made a lot of money.

JS: I can't say that
no one came because of the money.

I think a lot of them
came because of the money.

But they also came
because it would be fun.

CA: What role did machine learning
play in all of this?

JS: In a certain sense,
what we did was machine learning.

You look at a lot of data, and you try
to simulate different predictive schemes

until you get better and better at it.

It doesn't necessarily feed back on itself,
the way we did things.

But it worked.

CA: So these different predictive schemes
can be really quite wild, quite unexpected.

I mean, you look at everything, right?

You look at the weather,
length of dresses, political opinion.

JS: Yes, length of dresses we didn't try.

(Laughter)

CA: What sort of things?

JS: Well, everything.
Everything is grist for the mill --

except hem lengths.

Weather, annual reports,

quarterly reports, historic data itself,
volumes, you know it. Whatever there is.

We take in terabytes of data a day.
And store it away, massage it,

get it ready for analysis.

You're looking for anomalies.

You're looking for, like you said,

the efficient market
hypothesis is not correct.

CA: But any one anomaly
might be just a random thing,

so is the secret here
to just look at multiple strange anomalies

and see when they align?

JS: Any one anomaly
might be a random thing.

However, if you have enough data
you can tell that it's not.

You can see an anomaly that's persistent
for a sufficiently long time --

the probability
of it being random is not high.

But these things fade after a while.

Anomalies can get washed out;
you have to keep on top of the business.

CA: A lot of people
look at the hedge fund industry now

and are sort of shocked by it --

by how much wealth is created there
and how much talent is going into it.

Do you have any worries
about that industry

and perhaps the financial
industry in general?

Kind of being on a runaway train that's,
I don't know, helping increase inequality?

How would you champion what's happening
in the hedge fund industry?

JS: Actually, I think
that in the last three of four years,

hedge funds have not done especially well.

We've done dandy,

but the hedge fund industry as a whole
has not done so wonderfully.

The stock market has been on a roll,
going up as everybody knows,

and price-earnings rations have grown.

So an awful lot
of the wealth that's been created

in the last, let's say, five or six years
has not been created by hedge funds.

People would ask me,
"What's a hedge fund?"

And I'd say, "One in 20."

Which means -- now it's two in 20 --

it's two percent fixed fee
on 20 percent of profits.

Hedge funds are all different
kinds of creatures.

CA: Rumor has it you charge
slightly higher fees than that.

(Laughter)

JS: We charged the highest
fees in the world at one time.

Five and 44, that's what we change.

CA: Five and 44. So 5 percent flat,
44 percent of upside.

You still made your investors
spectacular amounts of money.

JS: We made good returns, yes.

People got very mad at my investors:
"How could you charge such high fees?"

I said, "OK, you can withdraw."

"But how can I get more?"

(Laughter)

But at a certain point, as I told you,

we bought out all the investors
because they's a capacity to the fund.

CA: But should we worry

about the hedge fund industry attracting
too much of the world's great mathematical

and other talent to work on that

as opposed to the many
other problems in the world?

JS: Well it's not just mathematical.

We hire astronomers and physicists
and things like that.

I don't think we should worry too much.
It's still a pretty small industry.

And in fact, bringing science
into the investing world

has improved that world.

It's reduced volatility.
It's increased liquidity.

Spreads are narrower because
people are trading that kind of stuff.

So I'm not too worried about Einstein
going off and starting a hedge fund.

CA: You're at a phase in your life now
where you're actually investing, though,

at the other end of the supply chain --
in boosting mathematics across America.

This is your wife, Marilyn.

You're working on
philanthropic issues together.

Tell me about that.

JS: Well, Marily started --

there she is up there,
my beautiful wife --

she started the foundation
about 20 years ago.

I think '94.

I claim it was '93,
she says it was '94,

but it was one of those two years.

(Laughter)

We started the foundation
just as a convenient way to give charity.

She kept the books, and so on.

We did not have a vision at that time,
but gradually a vision emerged --

which was to focus on math and science,
to focus on basic research.

And that's what we've done.

Six years ago or so, I left Renaissance
and went to work at the foundation.

So that's what we do.

CA: And so Math for America here

is basically investing in math teachers
around the country,

giving them some extra income,
giving them support and coaching.

And really trying
to make that more effective

and make that a calling
to which teachers can aspire.

JS: Yeah. Instead of
beating up the bad teachers --

which has created morale problems
all through the educational community,

in particular in math and science --

we focus on celebrating the good ones
and giving them status.

Yeah, we give them extra money,
15,000 dollars a year.

We have 800 math and science teachers
in New York City in public schools today

as part of a core.

There's a great morale among them.
They're staying in the field.

Next year, it'll be 1,000 [teachers],
and that'll be 10 percent

of the math and science teachers
in New York public schools.

(Applause)

CA: Jim, here's another project
that you've supported philanthropically:

Research into origins of life, I guess.
What are we looking at here?

Well, I'll save that for a second.

And then I'll tell you
what you're looking at.

Origins of life is a fascinating question.
How did we get here?

Well, there's two questions.

One is, "What is the root
from geology to biology?

How did we get here?"

And the other question is,
"What did we start with?

What material, if any,
did we have to work with on this route?"

Those are two very,
very interesting questions.

The first question is a tortuous path
from geology up to RNA

or something like that --
how did that all work?

And the other,
"What do we have to work with?"

Well, more than we think.

So that picture there
is a star in formation.

Now every year in our Milky Way,
which has 100 billion stars,

about two near stars are created.

Don't ask me how, but they're created.

And it takes them
about a million years to settle out.

So, in steady state,

there's about 2 million stars
in formation at any time.

That one is somewhere along
this settling down period.

And there's all this crap
sort of circling around it.

Dust and stuff.

And it'll form probably a solar system,
or whatever it forms.

But here's the thing -- in this dust
that surrounds a forming star,

have been found, now,
significant organic molecules.

Molecules not just like methane
but formaldehyde and cyanide --

things that are the building blocks,
the seeds, if you will, of life.

So, that may be typical.

And it may be typical

that planets around the universe start off
with some of these basic building blocks.

Now, does that mean
there's going to be life all around?

Maybe.

But it's a question
of how tortuous this path is

from those frail beginnings,
those seeds, all the way to life.

And most of those seeds
will fall on fallow planets.

CA: So for you, personally,

finding an answer to this question
of where we came from,

of how did this thing happen,
that is something you would love to see.

JS: Would love to see. And like to know.

If that path is tortuous enough,
and so improbable

that no matter what you start with,
we could be a singularity.

But, on the other hand,

given all this organic dust
that's floating around,

we could have lots of friends out there.

It'd be great to know.

CA: Jim, a couple of years ago,

I got the chance to speak with Elon Musk,
and I asked him the secret of his success.

He said taking physics seriously was it.

Listening to you, what I hear you saying
is taking math seriously,

that has infused your whole life.

It's made you an absolute fortune,
and now it's allowing you to invest

in the futures of thousands and thousands
of kids across America and elsewhere.

Could it be that science actually works?
That math actually works?

JS: Well, math certainly works.
Math certainly works.

But this has been fun.

Working with Marilyn and giving it away
has been very enjoyable.

CA: I just find it --
it's an inspirational though to me,

that by taking knowledge seriously,
so much more can come from it.

So thank you for your amazing life
and for coming here to TED.

Truly. Thank you.

Jim Simons.

(Applause)