Do It Yourself Masters in Financial Engineering

http://blog.hiremebecauseimsmart.com/post/2860511335/design-your-own-mfe

by genieyclo • 16 years ago

194 86 16 years ago

blog.hiremebecauseimsmart.com

verysimple2• 16 years ago

We live in the so called information age and everyday someone posts something like this on the web. Some road map to better educate yourself cheaper in x or y field.

Ironically, governments throughout the world still struggle to find solutions to education. Please, just teach people to open a book and do some damage.

crasshopper21• 16 years ago

Check out BBC Business Daily's currently running series about internet use in the developing world.

crasshopper21• 16 years ago

Verysimple, how much actual reading do you think comes out of people bookmarking and voting up these lists? I would guess very little.

verysimple2• 16 years ago

You can't know that. Reading is highly dependent on your perception of the activity. If you were conditioned to believe that learning is something that happens mostly in a classroom, then you'll perceive a book as "1000 pages to go through", a hurdle.

On the other hand, if you're conditioned to believe and trust in the transmission of knowledge through independent reading, like most autodidacts are, you perceive them as an opportunity to improve.

I, myself, am an autodidact programmer. I had never heard of many resources before encountering them in threads on HN, Reddit, or Stackoverflow. I haven't read all books, or followed all the videos, but at least, now that I'm aware of them, it prompted me to start working toward shifting a few things in my life to allow me the time and opportunity to dig deeper in the material.

It's a process.

joshkaufman10• 16 years ago

This is exactly what I did with business, instead of getting an MBA or a PhD.

Here's my reading list: http://personalmba.com/best-business-books/

Here's the book I wrote, condensing what I learned in the process: http://www.amazon.com/gp/product/1591843529/

I now own my own business, work for myself as a business teacher and consultant, have an enormous amount of flexibility in my day-to-day schedule, and make more than professors who teach at top business schools.

Education is changing.

kmfrk3• 16 years ago

Give yourself some credit for going through 99+ books, though; if something doesn't sink in after all that, then you should reconsider the way you read. :)

joshkaufman10• 16 years ago

It wasn't just 99 - it was thousands. The books on the list are just the best. :-)

monk_the_dog• 16 years ago

Nice list.

One quibble: I'd put Steve Blank's "Four Steps" under Entrepreneurship rather than "Value Creation and Design". I've read Four Steps, Universal Principals of Design, and Design of Everyday things (I have not read Rework, the other book in the category). Four Steps really covers much different material than the other other two books.

crasshopper21• 16 years ago

Rework is probably the best out of all of those!

tricky• 16 years ago

ha! i just picked your book up off the new arrivals shelf at the library. glad to see you're on hn.

joshkaufman10• 16 years ago

Great to hear - please leave a review after you read it. Helps tremendously. Thanks!

fuzzythinker• 16 years ago

Wow, incredible reviews, just picked up a copy ;)

joshkaufman10• 16 years ago

Thanks, I appreciate it!

Nrsolis• 16 years ago

Ditto. Kindle rocks.

mbesto2• 16 years ago

You've just got another sale thanks to Kindle ;)

joshkaufman10• 16 years ago

Thanks, hope you find it useful!

rlm• 16 years ago

Any chance you could put an ebook up for sale? Your book hasn't been released in Europe yet, and the import charges when buying from Amazon.com are pretty bad (~200% increase in price). :-/

joshkaufman10• 16 years ago

I can't sell an e-book directly, due to the grant of rights to the publisher. Kindle, etc. is the best option - the UK/International version comes out February 3rd, and an international Kindle version should be coming with it.

That said, I'd recommend getting your hands on a hard copy if you can - the book is designed to be equal parts primer and reference, and the hard copy is optimized for easy reference use.

crasshopper21• 16 years ago

Isn't there a limited amount of room for people to do what you did? I mean there can only be so many teachers and business consultants.

To my mind part of being an entrepreneur is leaving the world of books, professors, and ideas.

Anyway congratulations and here's to hoping that your book makes the B-school reading lists.

binarysoul• 16 years ago

I'd just like to point out that all those amazon product links have his affiliate ID in there... He's getting a cut, keep that in mind

joshkaufman10• 16 years ago

So? He put a lot of effort into that list, and he published it for free. If it sells some books, good for him.

kmfrk3• 16 years ago

I don't think there's any harm in saying that.

It was just something "for your consideration". Nothing accusatory.

crasshopper21• 16 years ago

You're quite right. But since your price doesn't go up, why should you care?

BTW, when I wrote this piece it was intended for QuantNet.com. However I pissed off the guy who runs it and now he thinks I'm a douchebag.

That's all to say, I never thought this piece would get any traffic at all. The fact that so many people are interested makes me even more skeptical of the putative value of an MFE....

nerfhammer• 16 years ago

I'll just leave this here:

http://www.khanacademy.org/

kmfrk3• 16 years ago

In its current state, Khan Academy's exercises are very basic, once you start following the courses. You learn the basics, but not enough to become an entrepreneur.

I've been mulling over a project to deliver more courses in a similar vein, but I'm still struggling with how I'll manage to collate the user-submitted YouTube-videos automatically without mandatory approval on my side.

ecounysis• 16 years ago

You're not going to learn enough to become an entrepreneur from any school. You just fucking do it. http://www.cloudave.com/1171/what-makes-an-entrepreneur-four...

dagw2• 16 years ago

Khan academy, while great, doesn't really go beyond advanced high school-simple first year university level. There is nothing there which is even close to Masters level.

crasshopper21• 16 years ago

MathDoctorBob does some higher level stuff on YouTube. I was just watching his short bits on representation theory and characters.

noname1233• 16 years ago

DIY Financial Engineering:

1. Sign up for an Interactive Brokers account; state that you want to trade options.

2. Transfer >25K (day-trading capability) or whatever is reasonable amount money for you. Enough for you to care about but not over the amount where if you lost it all, you'd lose sleep over.

3. Now use the highest/lowest volatility scanner and buy/sell some options randomly in that list; max out your real cash to accumulate positions (do not go on margin).

4. Now figure out what the fuck you just did and how much money you are going to lose. This is the most important step, nothing motivates you to learn security analysis, risk management, Black-Scholes/Bionomial Tree option pricing, post-transaction cost analysis than the threat of losing your money.

5. If you get over step 4, then you probably have a strategy that turn over 7% monthly, or turn over 100% annually. Now automate it as much as you can with IB API.

tdyo• 16 years ago

I would subscribe to your newsletter.

iwwr• 16 years ago

DIY Financian Engineering Lite Edition (TM)

1. Go to Las Vegas

2. Transfer >25K in chips (high-roller capability), or whatever is reasonable amount of money for you

3. Play the tables

4. Figure out what the fuck you're doing while you're doing it

5. If you get over step 4, you probably think you have a solid strategy for winning against a casino. Now, automate the task by getting people to pay you for your new book/DVD and public talks.

gatsby• 16 years ago

"When I was young, people called me a gambler. As the scale of my operations grew, I became known as a speculator. Now, they call me a banker. I have been doing the same thing all along." -Sir Ernest Cassel

dedward3• 16 years ago

I call shenanigans on that....

There are plenty of people who should not be in the stock market, and are basically just gambling.

But in the casino table games, in general, the odds are always against you. There IS no winning strategy.

In a market, any market, there IS a winning strategy at any given time, though the strategy will change with time along with the market.

The point of the PP was more "Pay $25k to go to school and learn about trading stocks" or "How to play with $25k on the stock market to force yourself to learn what's up in real life."

Either way you are out $25k, though in the second scenario there is the chance you may actually end up ahead.

crasshopper21• 16 years ago

What if you don't have enough money to go to Vegas at all?

genera• 16 years ago

By following Step 3, you will lose much more than whatever the amount was in Step 2.

noname1233• 16 years ago

Very true. Forgot to mention that if you sell options, you have unlimited loss potential; so by definition, this fear should motivate you to learn about delta-hedging and risk management very soon.

chrisaycock2• 16 years ago

> max out your real cash to accumulate positions (do not go on margin)

Options can't be bought on margin. They lose value over time and thus can't be used as any form of collateral.

dedward3• 16 years ago

Cool if true - the one thing you want to make sure of when using the IB interface is that you don't accidentally end up on margin - which is easy fairly easy to do by accident.

(It's not that they try to get you there - it's just a trading platform for pros. A friend once told me how part if portfolio was sold automatically because of an automatic margin call when he didn't even realize hew as on margin)

Eliezer• 16 years ago

Who on Earth was voting this up? Does nobody comprehend the concept of a not-easily-exploitable market anymore?

noname1233• 16 years ago

That's why you should plan to lose all of that money. The goal is to extend your capital loss for as long as possible while executing trades, so you can learn how to trade options; which will teach you better than a FE program can because that's what FE is all about, numerical methods/pricing model/back-testing for derivatives and hedging.

bermanoid• 16 years ago

Bah! The market is perfectly easy to exploit these days, you just need to make your bets with other people's money.

Of course, to make that work, you've got to convince people with lots of money that you'll beat the market, else they'll never hand over the cash. These people don't care for your high-falootin math, so you should probably leave out the real gory details when you talk to them, but you can't make it too obvious that you're babying them, you need them to feel like they could totally understand all of it if only they weren't too busy to listen; further, if you know anything about your math, you know that the market's not very easy to beat, and that if they knew how tough it was, they'd never give you their money.

In other words, it's bullshit time: you're gonna have to lie through your teeth if you want that money.

Having lost lots of money for other people in the past is the best way to look credible, though in some cases it's okay if you've come out ahead, too. Be careful though, if you've done too well they might start to wonder how much of your own wad you're putting into this thing, and you never want to play with your own money, so it's always better if you don't have to answer the question at all. Never mind that you took your 1% per year off the top of all the money you lost before you lost it (and really don't mention the 10% of each up year!), at least as far as your future investors know, you don't have any Real Money to speak of. :)

People with lots of money and an interest in mathy funds are often familiar with the two base trading strategy types (well, the two base types other than that boring old "buy good companies and hold them like a puss" strategy), momentum and mean reversion - "mean reversion" in particular makes these guys feel really smart when you say it and they understand what you mean, as does "volatility", so say those words a lot, it will help.

As you construct your pitch, you have to make sure to take into account the recent MFE grad, physics major, or computer geek that your mark...err, "future investor"...will hire as a consultant to look into it and see if he can automate the strategy on the cheap based on the details you've given him. The reaction you want from that consultant is less "this is a really good strategy, I should try to do it!" or "this is idiotic, I'm going to expose this" and more "this looks like a joke, but it's strung together plausibly enough that this rich moron's probably going to give these guys a lot of money, I wonder, can I get a job there in exchange for my silence?".

Taking all that into account, here's the type of elevator pitch you want to shoot for:

"Alpha will be created by constructing synthetic Asian lookback options on emerging market debt with valuations derived from our proprietary distributed high frequency mean reversion algorithm that predicts, with 98% accuracy, volatility skews at the millisecond time scale and below."[1]

Blammo.

[1] Your actual trading strategy, of course, will be "Put as much money on the line as possible without getting sent to jail. Cross fingers, pray for profit after a year. Collect huge pile of money if so, change name of fund and create new, better fund with bigger investors next year if not. Repeat."

gills• 16 years ago

You forgot "Just buy the fucking dip"...

crasshopper21• 16 years ago

Noname, what if you don't have any money?

Books are free, if you have the internet or live near a university library.

I do like your empirical attitude though.

jteo• 16 years ago

You go and get a Masters because of 2 reasons

1. Signalling to your future employer / Getting past the HR filter. 2. Networking with others.

Learning something useful is usually a bonus.

bryanh• 16 years ago

Or, if you are like me, include #3: Plenty of time to build side-projects and experiment with products that you hope will grow into something substantial by graduation.

crasshopper21• 16 years ago

I would like to hear much more discussion about these two parts of it.

crasshopper21• 16 years ago

In particular, aren't you also signalling that you're a fraidy-cat conformist who can't do things for him/herself?

localhost3000• 16 years ago

wondering how you compete with the MFEs from MIT / Harvard / Yale / [other top school] for that BSD quant job when on your resume it says "I read a lot of free shit on the internet" ?

you don't pay $100k for the knowledge, you pay $100k for a ticket to the party. everyone knows that.

of course, if you want to be an entrepreneur or trade your own $, that is a different story. but this seems unrealistic for any kind of mainstream career move.

crasshopper21• 16 years ago

Great point, I have experienced exactly this problem.

It's actually the reason I started writing on the internet (note the extremely clever site name).

thebigredjay2• 16 years ago

It would be great to develop an open directory for all DIY degress. For each degree path you would have a list of freely available resources summarizing what knowledge you need to cram into your head, like you have done. Huurmm... I really like this idea...

crasshopper21• 16 years ago

academicearth.org

Reddit has a lot of such things.

gahahaha• 16 years ago

"""But you pay someone to indoctrinate you with exactly the same methods and formulae that all of your competitors are using. Then you expect to come to not just a different conclusion, but a market-beating conclusion? That just sounds dumb."""

Counter argument: Creativity entails not only novelty (that outside the box stuff) but also utility, and in order to be useful, it has to go above-and-beyond what is already known (that inside the box stuff). It's about embracing what's been done before, because it's practice that gives us the capacity to build on the old ideas to make the new.

If you never venture outside the box, you will probably not be creative. But if you never get inside the box, you will certainly be stupid.

joe_the_user• 16 years ago

Indeed,

If you never get inside the box, you won't even know what the box means or what "outside the box" means.

tyng• 16 years ago

The question is, once you get in, how do you get out?

katovatzschyn• 16 years ago

I think the answer to that question is genius and hard work.

klbarry• 16 years ago

"If you never venture outside the box, you will probably not be creative. But if you never get inside the box, you will certainly be stupid."

I think I will use this in the future.

crasshopper21• 16 years ago

Excellent point. However I think you can learn about the box by reading books, too.

goblgobl• 16 years ago

I'm deciding between MFE/MS programs and starting independently at the moment. Here's what I've sort of cobbled together.

My understanding is that your value to a firm is directly proportional to your ability to generate alpha. Credentials would be useful for securing an entry-level position, but eventually, it is your ability to develop profitable strategies that will secure your position in this industry.

This is such a secretive business, that I doubt academia will be teaching anything other than the fundamentals/theory . As pointed out in the article, MFE employment stats are murky at best. I haven't had much luck getting confident stats. There's only a few of programs that staff actual practitioners, people who, you know, actually made/make money doing this stuff.

One of my concerns with the credential-path is future career growth. Many of the firms that hire from schools place candidates in specific roles that need to be filled. You might get stuck in an area thats not as profitable as other areas of the market. You will also not be exposed to the firm's intellectual property until they've worked you hard and for many years.

Contrast this with the option to start independently. I've spoken with quite a few people who've started out this way. Some have parlayed their experience and performance into jobs/partnerships at the big firms. Others continued to scale and build out their own fund. They all say the same thing, if you can develop profitable strategies, you will find people more than willing to invest in your strategies.

As far as networking, I think the internet is helping that immensely. Quite a few fundamental investors have received job offers or started their own hedge funds from blogging/posting on forums when it became apparent they had an edge. There's always a few headhunters and fund managers hanging around nuclearphynance, and other forums.

There is a higher risk, perhaps, of getting nowhere. But you also have the freedom, and less dogmatic structure to think independently, and the time to learn things thoroughly (vs. in a degree program).

I'd like to hear other's thoughts on this.

crasshopper21• 16 years ago

Ultimately yes, just like any business what you add to the bottom line is the brick-hard determinant of wage.

But just like in other businesses, perceptions, measurability, and org structure are very important.

It's not as simple as "can you generate alpha". Does your desk manager give you as much leeway as you desire? Does your alpha come only after your position has been underwater for weeks and you were given position to double down?

Measurement is also a huge issue. How much did you contribute to the bottom line? Can you prove it? What if you told Moira about low-discrepancy sequences, which improved her Monte Carlo sims, which somehow affected someone's trading down the line ....?

I met my current (quant fin) employer on the internet. While I was living in a trailer park.

choffstein• 16 years ago

Well, since I have a Masters in Financian Engineering (well, technically, a Masters in Computational Finance -- but same difference), I feel like I at least have to comment on a few things.

1. Just because the material is freely available on the internet does not mean you will have the ability to learn from that material. However, an inability to learn the material does not necessarily indicate a disinterest or an ineptitude. Quite frankly, it took the threat of a grade and the commitment of paying tuition for me to sit down and read through Shreve's Stochastic Calculus books, despite the fact I had picked them up almost a year before attending CMU.

2. Reading a bunch of books doesn't make you knowledgable on a subject. Deep interaction with the material does. You don't go to school just for a piece of paper -- you go for a structured learning environment. I went because I believed, and still do, that the teachers who understand this material will know the best way to organize and present it to me. Furthermore, most MFE programs stress the importance of an internship, giving students pragmatic experience. Finally, most MFE programs also offer speaker series to provide interaction with industry practitioners.

3. Whoever is saying 'Girsanov's Theorem' doesn't understand the connection. Girsanov is only relevant from the Fundamental Theorems of Asset Pricing, which is only relevant in that it translates the question of arbitrage into a question of existence of a risk neutral measure. Ultimately, pricing is merely replication.

4. "So you’re trying to get a job where you face the market everyday and disagree with it." This quote tells me you fundamentally are misunderstanding what occurs on most Sales & Trading desks, which is where most people from MFE programs try to place. Don't worry -- most people don't understand what they do. Quite simply, most Wall Street traders do nothing other than execute trades for clients and try to match and offset the risk of the trade with other clients. Sometimes traders will carry some risk in their book (most of the time, it is second-order risk) -- but for the most part, they aren't actively taking bets on market direction (though, rumor has it Goldman is notorious for this…) -- they leave that up to the hedge funds.

5. This whole notion of independent thought versus 'indoctrination' is ridiculous. I'm sorry, but math is math, whether you read it on your own or are taught by a professor. Independent thought is a characteristic of the student, and they either have it or they don't.

6. Is the degree expensive? Heck yes. Is it worth it? Only you can answer that. For me, having the degree is priceless because I own my business, and it acts as a certification of qualification when I meet with clients. It serves as one more point for them to check off in their due diligence on me.

7. You will completely miss out on the opportunity to network with peers. I now know people who I worked with on a daily basis at almost every major Wall Street firm, from investment banks to hedge funds to consultancy firms. That is a priceless network.

So can you learn the material all on your own? Sure -- but I bet it takes you a lot longer than the year and a half it took me. By going to school, I was able to dedicate myself full time (homework and classes well exceeded 40+ hours a week), to learning the material. In my opinion, this isn't really material you can learn 'part time,' and if you try, you certainly won't have the opportunity to develop any practical understanding of it.

crasshopper21• 16 years ago

Thanks for the relevant comments.

I addressed #1 in the article. Suffice to say I disagree.

#2 Who says you interact deeply with material in school?

#3 comes from Emanuel Derman's interviews of fresh grads.

#4 I do understand the difference but I would rather prop trade than make markets.

#5 There are so many sub-areas. Should you study wavelets? Finite element method? Differential geometry? EDA? Bayes? ML?

#6 Perhaps I am more risk-averse than you. Or less trusting.

#2, #7 - I said that's the irreproducible part of an MFE.

Would you mind adding your comments to the Disqus on the site? They're very thorough and as you're an MFE grad they counterbalance what I said. I think your viewpoint is quite valuable.

chrisaycock2• 16 years ago

> It was hard enough to make you feel smart for knowing that the third moment of a distribution is its skewness...

If you think that makes you smart, then I want you to be my competitor.

crasshopper21• 16 years ago

Read on, the next clause indicates that I don't think it makes you smart.

Confusion• 16 years ago

I still remember the moment in statistical physics class when my prof wrote down the Black-Scholes model, explained how people made a lot of money using it, added that the inventors had received a Nobel prize and proceeded to show that it was just the diffusion equation.

The diffusion equation. It was so underwhelming that I lost any interest in going into financial engineering.

Do It Yourself Masters in Financial Engineering

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