The Quants: Formula for a Meltdown

http://online.wsj.com/article/SB10001424052748704509704575019032416477138.html

by peter123 • 17 years ago

22 12 17 years ago

online.wsj.com

Confusion2• 17 years ago

The following quote illustrates the article pretty well:

   [..] advances that had earned their discoverers several
   shelves of Nobel Prizes

Hyperbole as a style form is all and well, but this is just misrepresenting the truth. This journalist didn't rethink what he was writing for even a second.

smanek• 17 years ago

There are lots of examples of techniques that won their inventors Nobels in Econ (and sometimes even sciences) going on to being used to make lots of money in finance.

A famous example being the Black Scholes model for option pricing, which won its inventors the Nobel Prize in Econ. Myron Scholes went on to create one of the first 'quant' funds (LTCM) back 1994 (which flamed out spectacularly during Russia's crisis in 1998.)

Confusion2• 17 years ago

Lots? Can you name a few beyond Black-Scholes that are applicable to derivatives trading? From looking at the list of Nobel prize winners, I can't.

Interestingly, in a course on statistical physics, the prof showed that by performing the correct transformations on the central equation of the Black-Scholes model, you can actually reduce it to a plain diffusion equation. He wondered whether it was reasonable to hand out a Nobel prize for that.

mschy• 17 years ago

The article struck me as anti-intellectualism run amok. I didn't even see a hint of anything indicating that quants were especially to blame.

lucifer• 17 years ago

The OP source is one of the organs of record for a specific political set and this is probably the outlines of the (official) emerging sacrificial goat theory for the collapse. The "anti-intellectual" aspect is likely incidental beyond its nice fit with a strategy designed to deflect the certain anger and energy of the ripped off population.

Tangurena• 17 years ago

I see this as a scape goating of the quants. Not the mismanagers who hired and profited from the quants. The culpability of the mismanagerial classes are being whitewashed away.

spamizbad• 17 years ago

I feel the same way. They make it sound like quants are these high falutin half-Gordon Gekko/half-Charlie Epps figures who use their sheisty siren call of maths to seduce the otherwise noble and innocent investors into foolish endeavors. That's simply not the case: it was the other way around.

KonaB2• 17 years ago

Yet another article blaming the poor quants. Anyone with nonzero experience in finance knows that quants have no power and earn no respect. Of course quants know that models have limitations, but if you tell your boss that one should be conservative, the only thing you will attain is to get yourself fired. The ones to be blamed are the ones with decision-making power, and everybody knows that quants have as much decision-making power as the IT guys.

At least they talk about Aaron Brown. In any case, I was expecting more from the WSJ. They used to be better than this...

BearOfNH• 17 years ago

In any case, I was expecting more from the WSJ.

Amen to that. The article mentions "The secretive trading operations within banks that use large doses of leverage, or borrowed money, to make huge bets on the market". This is just not true -- and the WSJ should know that. You can generate leverage without borrowing a dime. Options contracts can be highly leveraged yet involve no borrowing. Futures contracts can be highly leveraged with no borrowed money. In both cases the exchanges have put in place elaborate mechanisms to ensure a losing side can pay up, and guarantees the winning side will collect even in case of complete counterparty failure. There is no borrowing here but there's plenty of leverage.

Unfortunately a lot of the bad trades behind the meltdown (AIG derivatives, etc.) were basically private contracts, with no exchange mechanisms in place to mitigate counterparty risk. That's also one reason nobody knew what was really going on.

rortian• 17 years ago

Whoa, this really touched a nerve. I think everyone should step back and see that this is an excerpt from a book. I thought it was an interesting snippet but I would have like to see more.

The Quants: Formula for a Meltdown

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