Tuesday, March 10, 2009

They tried to outsmart Wall Street, the rest of us pay the price

Tell your kids to be very careful whom they beat up on the playground! Otherwise, those kids might just grow up to become the sort of "I'm smarter than you" math whizzes and physicists who, instead of working in academia or NASA, took on Wall Street as quantitative analysts (also known as "quants") and assumed -- erroneously, as it seems -- that their mathematical models could not only predict where bets on financial options, stocks bonds and other assets would go, but also predict human behavior. Well, they sure showed us. If only human behavior was as elegant as the structure of the universe. From a very interesting New York Times story:

They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money. This flood seems to be continuing, unabated by the ongoing economic collapse in this country and abroad.

Last fall students filled a giant classroom at M.I.T. to overflowing for an evening workshop called “So You Want to Be a Quant.” Some quants analyze the stock market. Others churn out the computer models that analyze otherwise unmeasurable risks and profits of arcane deals, or run their own hedge funds and sift through vast universes of data for the slight disparities that can give them an edge...

Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science...

Asked to compare her work to physics, one quant, who requested anonymity because her company had not given her permission to talk to reporters, termed the market “a wild beast” that cannot be controlled, and then added: “It’s not like building a bridge. If you’re right more than half the time you’re winning the game.”

There are a thousand physicists on Wall Street, she estimated, and many, she said, talk nostalgically about science. “They sold their souls to the devil,” she said, adding, “I haven’t met many quants who said they were in finance because they were in love with finance.”


From what I've been reading lately, that sentiment is shared by many.

Click here for full article.

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