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March 09, 2009


Prof. Thiele,

You might be interested in taking a look at this article too:

Though I am quasi-certain you've read it already (it's on today's NYTimes, after all).

Nice synopsis and explanation of how we got here, Dr. Thiele. In "Frankenstein," the monster killed the scientist and then disappeared to commit suicide. I'd say that the oversimplification of Li's model helped to kill Li's career, but do you know if his model still used today?

Quant-bashing seems to be a new fad. There's something interesting about these articles on Wired and NYTimes: though my friends in academia enjoy them, the ones who work in the financial services industry greatly despise them.

Finance is complex. Almost all journalism on the topic is mediocre. Same goes for Science journalism: it does not matter how amazing one's writing skills are... it just isn't possible to explain stuff like Quantum Chromodynamics in a non-technical manner (IMHO, that is).

I'm not sure if it's quant-bashing. The articles I've read seemed to blame the quants' bosses, who couldn't understand the limitations of the models (or refused to), and applied them anyway. It's very tempting, when the model is simple and elegant, to convince yourself the assumptions always hold. I remember doing that in high school on some physics exams, when there was a theorem vaguely related to the question asked. (Let's just say physics wasn't my strong suit.) I think finance companies realize they still need the quants' models, but they also need top people who understand math and aren't afraid of speaking up about models' flaws. The quants' bosses should be closer to being quants themselves. You have to remember that financial engineering only became a discipline in the 1990s - Wall Street hired physics PhDs because it didn't have a choice; there weren't too many financial engineering programs back in the days when Emanuel Derman joined Goldman Sachs. As time goes by, more quants will have the seniority necessary to be promoted to higher, more influential positions, and hopefully prevent another fiasco.

The article on Wired was a bit of "quant-bashing". The one on NYTimes was much more balanced and accurate. These days, the fad seems to be to bash and blame anyone who works in Finance (not just quants). Most people don't know the difference between a trader, a broker, a quant, or an investment banker. It's understandable. Finance is now much more specialized than what it was some decades ago when we only had vanilla instruments such as stocks and bonds.

I wholeheartedly agree with you that people in positions of power in banks should be more "quantish", and understand the limitations of their models better. However, I am not sure this will ever happen. Wall Street always had a sort of "frat house" culture. Until not long ago, Goldman Sachs bankers would shmooze with their clients at strip clubs. Bankers doing cocaine and spending money on prostitutes is not unheard of. Traders insulting, harassing and terrorizing women and "over-educated" PhD's is tolerated. I know a guy who has a PhD in Math from UC Berkeley and works for a major French bank (you easily guess which), and his boss is a former US Marine Corps fighter pilot who knows little to nothing of financial mathematics. There's a culture of the "alpha male", and quants are viewed as a necessary evil. In such testosterone-driven environments, one cannot find much rationality.

The bright side is that a new Wall Street will likely emerge from this crisis. More intellectual firepower in top positions, and less irrational monkeys with giant egos in positions of power. Hopefully that would prevent future fiascos of such doomsday proportions.

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