Posted on 03/10/2009 7:08:45 PM PDT by Lorianne
Emanuel Derman expected to feel a letdown when he left particle physics for a job on Wall Street in 1985.
After all, for almost 20 years, as a graduate student at Columbia and a postdoctoral fellow at institutions like Oxford and the University of Colorado, he had been a spear carrier in the quest to unify the forces of nature and establish the elusive and Einsteinian theory of everything, hobnobbing with Nobel laureates and other distinguished thinkers. How could managing money compare?
But the letdown never happened. Instead he fell in love with a corner of finance that dealt with stock options.
Options theory is kind of deep in some way. It was very elegant; it had the quality of physics, Dr. Derman explained recently with a tinge of wistfulness, sitting in his office at Columbia, where he is now a professor of finance and a risk management consultant with Prisma Capital Partners.
Dr. Derman, who spent 17 years at Goldman Sachs and became managing director, was a forerunner of the many physicists and other scientists who have flooded Wall Street in recent years, moving from a world in which a discrepancy of a few percentage points in a measurement can mean a Nobel Prize or unending mockery to a world in which a few percent one way can land you in jail and a few percent the other way can win you your own private Caribbean island.
They are known as quants because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.
(Excerpt) Read more at nytimes.com ...
Good article.
I think one of those geeks created a black hole that sucked all the $$$ out of Wall St.
We are told by the shills of hedge funds and crony capitalists that there is no reasonable way to separate investment from speculation and so we should not try.
They go on to argue that speculation actually helps and should even be encouraged, when in fact the latest economic calamity shows otherwise.
Quants who help venture capitalists to make reasoned investments, or who help corporations to properly price bonds, etc. should be praised.
Those that merely scan billions of financial transactions to come up with the financial equivalent of a card counting scheme should be sent back to the minors where their skills can be better used coming up with fantasy league player acquisition strategies.
... and we were worried about CERN!
Interesting article. Sometimes these guys are so smart they can’t see the forest for the trees.
Another quant or hedge fund burned by fat tails of standard distribution?
Another quant or hedge fund burned by fat tails of standard distribution?
Your statement is too sweeping. Speculation can be valuable; it's leveraged speculation by people who can't afford that potential losses that is dangerous. Keep in mind that most banks did not believe they were engaging in speculation even though they were, and that was the problem, not the fact that speculation was taking place by itself.
I've never taken the models seriously because I have never found one that factors in key variables: the corruption, cheating, and constant rule-breaking.
Maybe it’s not relevant, but all I could think is that Stalin or Mao would have had these guys locked away in Siberia or the Gobi Desert, using them to design missiles or nuclear warheads.
Is the point of the article that as smart as these people may be, they are still just tools in the service of something they can’t control?
Now let’s not drag his color into this...
Here’s a news flash to all of the quants: you have spent your life studying models and developing models, but in the last year, it is been shown that YOUR MODELS AREN’T WORTH SQUAT.
You have wasted your lives on models that only worked when the market is going up. You would have bben better off devoting your lives to better society by working on alternative energy, national security, cure for cancer, etc. Instead, you are the Captain Hazelwoods of the financial markets.
I tend to agree with Feynman: "It doesn't matter how good your theory is, it doesn't matter how smart you are. If your theory doesn't agree with experiment, it's WRONG."
Cheers!
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