Tuesday, March 10, 2009

The Rise (and Fall?) of Quants

An interesting article in the NY Times about the role physicists have played on Wall Street in recent years... sort of a continuation of how math abuse played such big role in our current terribleness.
Physicists began to follow the jobs from academia to Wall Street in the late 1970s, when the post-Sputnik boom in science spending had tapered off and the college teaching ranks had been filled with graduates from the 1960s. The result, as Dr. Derman said, was a pipeline with no jobs at the end. Things got even worse after the cold war ended and Congress canceled the Superconducting Supercollider, which would have been the world’s biggest particle accelerator, in 1993.

They arrived on Wall Street in the midst of a financial revolution. Among other things, galloping inflation had made finances more complicated and risky, and it required increasingly sophisticated mathematical expertise to parse even simple investments like bonds. Enter the quant.
As John Cole remarks... maybe we should have just bought them a Supercollider? It would have been cheaper. But seriously, it seems that quants greatest failure lay here:
By their activities, quants admit that despite their misgivings they have at least given cover to some of the wilder schemes of their bosses, allowing traders to conduct business in a quasi-scientific language and take risks they did not understand.
But as the article explains, that's sort of how the business world works... they're trying to make money, not unearth the underlying truths of financial markets... sound mathematics and statistics that casts doubt on a successful money making model was not going to be paid attention to... so is there really anything to fix here? It's just the underlying nature of the enterprise.

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