Quants and the financial mess

[Jake]

Interesting read on Quants. No Nobel Prizes awarded here!
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant

Jake

[robert99]

A classic example of dumb group "think" that has already done more damage to world economies than the Nazi group think of WW2.
The last dumb equation to be misused was the Black and Scholes.
You would have thoughts some warning lights would have come on when people are all using a one line formula essentially to predict the future. But no, the regulators used the exact same models and got the same wrong answers - so AAA my son.

Mandelbrot exposed all this in 1998 with his fractal models and Taleb has commented again on this:

"Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.
As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."

[ddog]

the quants were used as a cover for the boys running the game.

after all , nobody could be expected to understand the process, yeah, hoocoodanode!!!

the guys running the firms , in days gone by , in a land far far away were responsible for the stuff they churned out.

not anymore.

there are THOUSANDS at the top and mid level in some firms that committed outright fraud and crimes and should be put in jail but we can't go after all of them, safety in numbers, since they were all doing it.

[robert99]

It is a strange world where those starting out towards the bottom may now need reams of academic qualifications, good experience, sit lengthy interview tests, plus psychometry etc all for a humble pittance, whilst those at the top on obscene salaries and perks flit from disaster to disaster and firm to firm on the good old boy's network.

Those failed UK banks did not have one single qualified banker running them - it all went wrong due they say to "a turn of events". One has now "retired" at age 50 with a $942,000 per annum pension. The state pension is $122 a week. The retired banker "talent" caused the biggest annual loss, $41B, in UK history - the state pensioner has to work for 42 years to get his full $122.
I hope the law gets to them first as the lynch mob paying for it all is getting beyond incensed.

[NJ Stinks]

Thanks for the link, Jake. :ThmbUp:

I think I learned something....but I sure wouldn't want to be tested on it. :blush: :)

[Jake]

Thanks for the link, Jake. :ThmbUp:

I think I learned something....but I sure wouldn't want to be tested on it. :blush: :)

You're more than welcomed. There is actually some hidden value revealed there for handicapping. There's a conceptual approach explained--if you can wrap your mind around it--that is hugely applicable to value handicapping. Figuring it out probably requires a tall glass of Maker's and some additional reading, but it's there.

Jake