Mar 10, 2009

Rise of the 'Quants' - A Good Thing, Or Should One Beware Of Geeks Bearing Formulas??

Hi all,

in my undergraduate degree in Australia, one of my (more irreverent) Professors told me that the economics profession is full of failed mathematicians who couldn't make the grade in their own world.

This piece of wisdom came to mind when I read this article from the IHT, about the rise of the so - called 'quants' - former physicists who were attracted to the mathematical elegance of quantitative finance - on Wall Street. Apparently, this surge of physicists into finance is quite well established, dating as far back as the 1970s. Incredibly, recent turmoil on the markets has only increased the demand for their expertise!!

Whilst most of these guys are interested in making big bucks by analysing the stockmarket or churning out complicated risk management models (gee, they did real well recently, didn't they....), there are admittedly some super interesting areas of research being pursued, such as using artificial intelligence to better understand the behaviour of humans in markets (a comprehensive listing of the research areas can be found here, where physicists post their recent papers).

One central criticism of the migration of physicists into the finance world (one acknowledged by quants themselves) is that this introduction of highly complex mathematical models has only served to lend quasi scientific legitimacy to some of the dodgier practices undertaken in relation to complex financial instruments (as seen in recent times in relation to the current crop of fraudsters). Whilst these models are developed with the sole purpose of making (lots of) money, can it really be that science is about generating cash (hang on, I thought that science was about the advancement of the state of human knowledge, or is that too naive a perspective.....)?

So is it a good thing that we have all these crazy complex mathematical models in the world of finance? Or, as Warren Buffet said, should we instead 'beware of geeks bearing formulas'?


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