Catch up on stories from the past week (and beyond) at the Slashdot story archive

 



Forgot your password?
typodupeerror
×
Businesses Math The Almighty Buck

Paul Wilmott Wants To Retrain and Reform Wall Street's Quants 198

theodp writes "What if an aeronautics engineer couldn't reconcile his elegant design for a state-of-the-art jumbo jet with Newton's second law of motion and decided to tweak the equation to fit his design? In a way, Newsweek reports, this is what's happened in quantitative finance, which is in desperate need of reform. And 49-year-old Oxford-trained mathematician Paul Wilmott — arguably the most influential quant today — thinks he knows where to start. With his CQF program, Wilmott is out to save the quants from themselves and the rest of us from their future destruction. 'We need to get back to testing models rather than revering them,' says Wilmott. 'That's hard work, but this idea that there are these great principles governing finance and that correlations can just be plucked out of the air is totally false.'"
This discussion has been archived. No new comments can be posted.

Paul Wilmott Wants To Retrain and Reform Wall Street's Quants

Comments Filter:
  • Wow! (Score:5, Insightful)

    by viyh ( 620825 ) on Sunday May 31, 2009 @08:23AM (#28157407)
    What a concept! Basing conclusions on experimental evidence from testing via trial and error rather than warping reality to fit your business model. That's incredible!
  • How about... (Score:5, Insightful)

    by blahplusplus ( 757119 ) on Sunday May 31, 2009 @08:24AM (#28157411)

    ... getting back to the real economy? Many financial products don't add anything to the real economy at all.

  • Re:Wow! (Score:5, Insightful)

    by dov_0 ( 1438253 ) on Sunday May 31, 2009 @08:25AM (#28157419)

    What a concept! Basing conclusions on experimental evidence from testing via trial and error rather than warping reality to fit your business model. That's incredible!

    It will never last in the 'real' world...

  • Re:How about... (Score:3, Insightful)

    by ionix5891 ( 1228718 ) on Sunday May 31, 2009 @08:38AM (#28157475)

    financial products are not the only thing that went wrong in the eCONomy, look at GM and their demise, writing was on the wall when the hummer was released

  • by Bearhouse ( 1034238 ) on Sunday May 31, 2009 @08:58AM (#28157571)

    Not entirely true, but certainly an interesting point.
    Why not true, well, the noted hedge fund that was founded by a former Nobel-prize winner, then went spectacularly bust even before the current mess, springs to mind. Can't remember the details, but the guy was certainly a (dismal) scientist before he became just another pig at the financial trough.
    All power corrupts, etc.?

  • by owlnation ( 858981 ) on Sunday May 31, 2009 @09:16AM (#28157661)
    You know, this is just tinkering. It's a way of passing the buck. It's a way of devolving blame. It MUST be the equations, or the software, or some geek or some technological prblem that caused the economics failures.

    It wasn't. It isn't.

    The reason why we have economic problems is the same old one from the beginning of time -- good old fashioned human greed.

    Equations, and new software isn't going to change that. What you need to do is ensure that the people operating systems and processes are ethical and honest. It's really that simple, and also, unfortunately, that difficult.
  • by RichMan ( 8097 ) on Sunday May 31, 2009 @09:21AM (#28157693)

    The problem with economics is that is probably more a sociological study than a idealized science.

    Economics talks of supply and demand and perfect markets.
    Yet we all know the advertising and social herd behavior affect purchases much more than any real needs or demands.

  • Comment removed (Score:3, Insightful)

    by account_deleted ( 4530225 ) on Sunday May 31, 2009 @09:33AM (#28157737)
    Comment removed based on user account deletion
  • by dplentini ( 1334979 ) on Sunday May 31, 2009 @09:34AM (#28157743)
    Nice idea, but Wilmot seems to have forgotten the most basic law of finance---nothing matters so long as you're making lots of money. Does he really think that the Quants on Wall Street and in London care about robust models and statistical significance? No! We're talking about used car salespersons in $5,000.00 suits. The financial industry is completely amoral. The only law is the law of the jungle. You can't confuse greed with a lack of quality control.
  • Re:How about... (Score:3, Insightful)

    by AlexBirch ( 1137019 ) on Sunday May 31, 2009 @09:36AM (#28157749) Homepage
    Sure they do, they ensure that the fools and their money are parted in the most efficient way possible.
  • Why should they? (Score:4, Insightful)

    by Colin Smith ( 2679 ) on Sunday May 31, 2009 @09:37AM (#28157753)

    It's your money they are paying themselves with, not their own. Until YOU sit up and take notice, then actually DO something you're going to continue to get robbed. But hey, I'm making money off you as well, so don't worry about it "nothing to see here, move along".
     

  • by Baldrson ( 78598 ) * on Sunday May 31, 2009 @09:45AM (#28157799) Homepage Journal
    Wilmott suffers from the same thing that plagues all social scientists: They can't run controlled experiments to extract causation, yet they influence public policy as though they could.

    In another time, this would have been called what it is: theocracy, rule by theory.

    Oh sure, they can try to be inductive, but there is always that old "correlation doesn't imply causation" gotcha isn't there?

    The real solution to this problem with the social sciences was almost addressed by the Protestant culture that founded the US -- the Laboratory of the States -- but the incorporation of the slave states in the 1700s, with the resulting Amendment from Hell, the 14th, in the 1800s killed off that option entirely when "social science" sunk its fangs into the body politc in the 1900s.

    "The Union" means everyone is a slave to the theocrats posing as theoreticians.

    So now we're running uncontrolled experiments on nonconsenting human subjects in the guise of "public policy" of "liberal democracy" -- tyranny of the majority limited only by a vague laundry list of selectively enforced human rights.

  • Re:Wow! (Score:5, Insightful)

    by rtfa-troll ( 1340807 ) on Sunday May 31, 2009 @09:55AM (#28157867)

    I'm glad you got insightful not funny. You are right. This is one of the case where experimentalism actually breaks down in the real world.

    The problem is that the quant's model is in its self an input to the reality and the processes aren't statistical and stochastic. When I know (or even partly correctly guess) what model you are using for investing, then I can gain several benefits from altering my behavior. I can create false investment opportunities which match well with your model. I can predict when you will need to buy something and push up the price just before hand. I can guess when you will become over exposed to some asset and force you to sell too cheap.

    The models are useful, but in the end lots of business stuff just has to come down to gut feelings and judgement. You also just have to do analysis which goes beyond the empirical (nobody has ever tricked us before) into risk control (what can we do to make sure nobody can do that in the future; how would we tell if they were trying to).

  • Re:Wow! (Score:5, Insightful)

    by BlackSabbath ( 118110 ) on Sunday May 31, 2009 @10:01AM (#28157903)
    > I reject your reality and substitute my own!
    > /mythbuster
    > or /Wallstreet broker

    Disdain for the "reality based community" [wikipedia.org] is nothing new.

    > In all seriousness, this does not sound like a field that needs saving from itself.
    > ...
    > Something doesn't get to be common practice unless a good portion of the field believes that it is good to do so, or at the very least, not harmful.

    I agree with your last statement in application to almost any discipline other than economics and (more specifically) finance. I must disagree with your first though. The ability of greed to short-circuit the mind's ability for critical thought is unparalleled as is the obstinate willingness of great swathes of people to swallow snake oil by the gallon on the merest suggestion of the slightest whiff of profit. My memory may be hazy, but I can recall at least two occurrences of a "new economy" in the last three decades. And of course each "new economy" marks a break with "outdated" beliefs/dogma/tradition (you know - like that outdated belief that you can't make something out of nothing, or that other one about a "turd by any other name would smell as sweet").

    I don't doubt that given another fifteen years or so, we'll have forgotten the "hard lessons", the sincere abjuration of pernicious practices and every other skerrick of common sense. The new "new economy" will have arrived. Only a fool would fore-go the chance to make real money. May I suggest however, that you watch this infotaining interview [youtube.com] before you invest in the new "new economy".
  • by dloyer ( 547728 ) on Sunday May 31, 2009 @10:17AM (#28158011)
    Betting too large on any trading system will gurentee that you blow out your account.

    Hardest part is controling the emotions of greed and fear. When things are working, it is temping to make bigger bets. If the bets are too large, they will wipe out the account, or even fund when the natural and normal losses hit.

    Risk Managment often goes out the window during good times.

  • Re:Wow! (Score:3, Insightful)

    by the_womble ( 580291 ) on Sunday May 31, 2009 @10:20AM (#28158035) Homepage Journal

    The problem is that management do not want quants who rigorously test models - especially risk models.

    They would far prefer to be allowed to collect fees while business is doing well, and if they are taking more risks than they are supposed to, well, its not their money is it?

  • by allmanbro2 ( 1271890 ) on Sunday May 31, 2009 @10:28AM (#28158111)
    I would say he has kept this in mind: he is making (boatloads of) money teaching people how to magically mathify finance. This is infinitely less risky than investing.

    Analogously: if you want to make money at a casino, get a job as a dealer.
  • I dont get it (Score:2, Insightful)

    by Antisyzygy ( 1495469 ) on Sunday May 31, 2009 @11:02AM (#28158309)
    Why is everyone blaming the mathematics for the financial problems? Its quite clear that its the industry as a whole is at fault. Greed and corruption are in all facets of the industry. I have a feeling that alot of so-called quants and finance professionals are completely under-qualified for what they do. It has been my experience that most people in finance and business are diletants that just took business in college so they could have it easier than the engineers and science majors. I am sure that a REAL mathematician that specializes in finance could handle the uncertainty in the models accordingly. -I am a mathematician, but my specialty has nothing to do with finance.
  • by mqsoh ( 1002513 ) on Sunday May 31, 2009 @11:03AM (#28158317)
    Theocracy and theory don't have the same root.

    Theocracy [reference.com], from theokratia
    Theory [reference.com], from theoria

    I also tried to see if they had the same root in Greek, but theos and thea aren't related as far as I can tell. Please defend that correlation.

    I'm not sure how that got you here:

    So now we're running uncontrolled experiments on nonconsenting human subjects in the guise of "public policy" of "liberal democracy" -- tyranny of the majority limited only by a vague laundry list of selectively enforced human rights.

    ...but our constitution tries to limit the tyranny of the majority as much as possible. This is what's happening with gay marriage; we're trying to limit the tyranny of the majority -- legally, through our constitution. We're adding entries to the vague laundry list.

  • by Anonymous Coward on Sunday May 31, 2009 @11:53AM (#28158679)

    Right, quants are not financially impacted to any real extent and can retire in comfort. You should tell that to all those thousands of quants who were laid off along with everyone else in the financial sector and who are still struggling and looking for work. I'm sure they would be delighted to know that they haven't been affected and could just retire. They just didn't realize it until an internet blogger told them.

    Seriously, what's with all the antipathy on slashdot towards quants? They're just normal people doing their job. And they don't get paid millions either. The problem is not the quants building fragile models, but non-quants using them without understanding. It usually goes something like this:

    Quant: I've managed to create a model here, but I have to warn you that it's not infallible, you have to realize all the risks and think of -
    Trader: I don't care! Where's the nice, shiny number?
    Quant: Uh, here, but really...
    Trader: Okay good. Now get back to work!
    Trader (to boss): Look at this! We'll make a lot of money from this!
    Quant: Sigh...

    So people, please stop blaming the quants for everything. And yes, IAAQ.

  • by ClosedSource ( 238333 ) on Sunday May 31, 2009 @12:15PM (#28158849)

    it's if having a model is right. There's no reason to assume that prior market data contains information that can accurately predict the market in the future.

  • Re:Wow! (Score:1, Insightful)

    by Anonymous Coward on Sunday May 31, 2009 @12:32PM (#28158977)

    This is basically correct. The quants underestimated two risks. Liquidity risk and counterparty risk. Backtesting a strategy cannot adequately address these problems. Its unsuprising physics PhDs who were trained under the assumption that the laws of physics remain constant failed to consider that the laws of finance could shift under their own weight.

    100 physicists dropping an apple will all find the same result for the accelleration due to gravity. 100 bankers buying CDOs will find that their mutual presence alters the risk profile.

  • It's only a "black swan" [debtdeflation.com] if you ignore debt levels. Anyone who's been watching the growth of debt in western economies could see this crisis coming [debtdeflation.com].

New York... when civilization falls apart, remember, we were way ahead of you. - David Letterman

Working...