Jim Simons: Unusual lessons from a maths Titan

Everyday, on average, about 4 papers cite the Chern-Simons forms theory. Jim Simons along with Shiing-Shen Chern wrote a paper on mathematical topology in 1974. Because both of them were interested in differential geometry.

But you know what? Their paper is not cited by other mathematicians. Nope. It’s cited by people deep in the field of physics. For a few years after Simons and Chern had published their paper, not much happened. But about 5 years later, the Godfather of string theory Edward Witten read the paper and applied it to physics. And since then, its popularity has only soared higher and higher.

The whole thing was very surprising for Simons. Because he realized that you never know where things take you. “You think that you’re doing maths and it turns out that you’re actually doing physics.”

You never know where you are going

A few years before Jim Simons wrote his pivotal paper, he worked at Institute for Defense analysis working on code-breaking problems. It’s here that he honed his skills on gathering a lot of data, analyzing it, and finding patterns in it. 

Simons recognized that pattern recognition has huge potential. And so, he starts a company called Perception Technology to work on the problem of speech recognition with computers.

The whole idea bombed. 

4 years later, when Simons used the same principles of pattern recognition with the financial markets, it succeeded! In fact it succeeded so well that Simons became a billionaire. His Medallion fund is said to be the most successful hedge fund ever – generating annual returns of over 66% for more than 35 years!

Why did one pattern recognition idea fail and yet another succeed?

The formula for making billions

For his financial hedge fund, Simons famously hired no financial analyst. Instead he hired mathematicians and statisticians and computer engineers. He bet on finding patterns in noisy data and pioneered the whole field of quantitative finance. 

When Simons is asked how he made his billions, he explains that his algorithm is simple:

  • Hire smart people
  • Give them freedom
  • Get everyone to talk to everyone
  • Give them the best infrastructure
  • And make them partners

But it’s the last part that may have been the difference. Giving the right incentives to his team. Case in point, Simon’s company Renaissance Technologies runs a bunch of funds. And during the 2008 financial crisis, just like the whole financial markets, their funds didn’t perform well as well. All of their funds were in negative – except one. The Medallion fund which is only available to Renaissance employees did well.

  • S&P 500 declined by 37%
  • 3 of Simon’s funds open to outside money declined by 6% to 16%
  • But the Medallion fund earned 80%!

Skin in the game

When people have something to lose, their cognition: attention and concentration – drastically improve. Because when you have skin in the game, you are emotionally invested as well. The increased salience boosts the cognitive resources your brain allocates to the task.

Action Summary:

  • Freedom + accountability = magic. Let people chase their curiosity because you never know what will end up working. But at the same time, make them accountable. Skin in the game improves cognition and motivation. Increases chances of success.