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Future of Financial Mathematics?

kdawson posted more than 4 years ago | from the it-has-none-get-over-it dept.

The Almighty Buck 301

An anonymous reader writes "Nassim Nicholas Taleb, a famous 'Quant,' has long been a strong critic of the use of mathematics and statistics in the financial markets. He has been very vocal in his books The Black Swan and Fooled by Randomness. In his article on edge.org, he says 'My outrage is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to iatrogenics, the study of the doctor putting the patient at risk.' After the recent financial crisis, wired.com ran an article titled 'Recipe for Disaster: The Formula That Killed Wall Street' in which the quant David Li and his Gaussian Copula were crucified — we discussed it at the time. Now, I've recently been admitted to a graduate program of good repute in Computational & Applied Mathematics. There is a wide range of subjects in which you can pursue your PhD, one of them being Financial Mathematics. I had a passing interest in it for quite some time. In the current scenario, how advisable it is to pursue a PhD in this topic? What would my options be five years down the line? Will the so-called 'quants' still be wanted by the banks and other financial institutions, or will they turn to more 'non-math' approaches? Would I be better off specializing in less volatile areas of Applied Mathematics? In short, what is the future of Financial Mathematics in light of the current financial crisis?"

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Math with JAVA is the way to go (-1, Offtopic)

Anonymous Coward | more than 4 years ago | (#27716161)

J2EE Java Enterprise Edition
WSDL Web Services Description Language
EJB Enterprise Java Beans
JSP Java Server Pages
JSTL JavaServer Pages Standard Tag Library
JMS Java Message Service
JTA Java Transaction API
JAF Java Activation Framework
JAXP Java API for XML Processing
JAX-RPC Java API for XML-based RPC
SAAJ SOAP with Attachments API for Java
JAXR Java API for XML Registries
DOM Document Object Model
SAX Simple API for XML
JNDI Java Naming and Directory Interface
JAAS Authentication and Authorization Service

Please, help expand

Advice from a PhD student (5, Insightful)

chillax137 (612431) | more than 4 years ago | (#27716175)

Don't pick your research area based on profitability or popularity. There are always "hot" areas of research but these things are usually cyclic. Pick something interesting that excites you, and that you can spend the next 4 (or 5 or 6 or 7) years working on.

Re:Advice from a PhD student (4, Insightful)

Narpak (961733) | more than 4 years ago | (#27716333)

or the next twenty-forty-sixty years for that matter. Depending on how long you live or when Cthulhu raises from the sea.

Mathematician Becomes Defense Secretary of the USA (4, Insightful)

reporter (666905) | more than 4 years ago | (#27716519)

If you love financial mathematics, then you should definitely study that subject. Do what you love. Life is short. Enjoy your time on earth.

Do not be concerned about "restricting" your future options. The applied mathematics in financial mathematics involves all areas of probability, random variables, and stochastic processes. These topics in applied mathematics have wide application in many diverse areas: digital image processing, gambling (e. g., card-counting techniques in the casinos of Las Vegas), computer simulations of warfare outcomes, etc. A degree in financial mathematics will enable you to work in many fields outside finance.

Mathematics, in general, does not restrict anyone's options -- if you are smart and hardworking. Just ask William Perry [stanford.edu] . He received graduate degrees in "only" mathematics and eventually became Secretary of Defense of the United States. His most recent accomplishment was authoring an essay published in "The Washington Post". In the essay [stanford.edu] , he advocates using military force to destroy North-Korean military facilities. Mr. Perry is a smart person with the right solution for dealing with North Korea.

Re:Mathematician Becomes Defense Secretary of the (5, Funny)

PopeRatzo (965947) | more than 4 years ago | (#27716933)

Do what you love. Life is short. Enjoy your time on earth.

And for god's sake, smoke weed.

Everything is better with a bag of weed.

Re:Mathematician Becomes Defense Secretary of the (5, Funny)

martin-boundary (547041) | more than 4 years ago | (#27716981)

WTF? How did you get from studying mathematics to nuking North Korea? That was beautiful old-skool trolling, man :)

Re:Advice from a PhD student (2, Insightful)

averner (1341263) | more than 4 years ago | (#27716841)

Don't pick your research area based on profitability or popularity. There are always "hot" areas of research but these things are usually cyclic. Pick something interesting that excites you, and that you can spend the next 4 (or 5 or 6 or 7) years working on.

There's another reason for this: if you find something interesting to do, it also helps with motivation, and you'll end up doing better in it. Succeeding in a highly competitive field is almost always better than doing average in a field for which there is a lot of demand.

Re:Advice from a PhD student (2, Informative)

Ruie (30480) | more than 4 years ago | (#27716925)

Don't pick your research area based on profitability or popularity. There are always "hot" areas of research but these things are usually cyclic. Pick something interesting that excites you, and that you can spend the next 4 (or 5 or 6 or 7) years working on.

I generally agree with this. I would like to add a few more points from personal experience:

  • Financial mathematics booms when hedge funds or similar businesses proliferate. I remember financial mathematics being depressed after LTCP [wikipedia.org] blew up, then went up again.
  • One trend you should be concerned about is proliferation of computing power. What used to be done with approximate equations is more often than not is done with over-complicated Monte-Carlo simulations (whether they are warranted or not). These usually are hard to get statistically meaningful, so statistics is ignored as well. There will still be demand from people that think because you have a Ph.D. you just might come up with something useful (and are willing to spend $10-50k just in case), but if you do achieve anything it won't be because of Ph.D. level math.
  • However, it does pay to be familiar with terminology and current trends. Find a few applied areas and get familiar with what they do and how they talk about it.

Re:Advice from a PhD student (5, Insightful)

PopeRatzo (965947) | more than 4 years ago | (#27716927)

Listen to chillax137, he's got it right.

My wife's a mathematician researcher. She's remarked to me several times lately that some of the big financial outfits have been picking people from the non-financial math areas, such as fluid dynamics, predictive analytics, combinatorics, etc.

They're looking for sharp, dynamic people more than a particular course of study or area of research. The secret is out that a lot of second-tier mathematicians went into financial math because they thought that would be their ticket to vast wealth and like a famous capitalist said, "First you get the money, and then you get the power, and then you get the woman."* In the current environment, people who strive to get a certain type of degree because they think it's going to make them rich are not so eagerly sought.

My first rule of preparation for career advancement: Don't learn how to do anything that you don't want to be doing. I figured that out long ago when I was trying to learn how to program SQL during a time when I was sick of my job. One night I realized that I would hate programming SQL all day, so I dropped it and put that energy into the stuff that I find fun.

Re:Advice from a PhD student (3, Insightful)

Meneguzzi (935620) | more than 4 years ago | (#27717087)

Besides that, one thing you will have to have in mind is that you are expected to create novel research in the area, so going into a "hot" area also means that there will be a lot of people doing research in the same area, putting you in a position where it is very likely that someone will scoop your research, or more precisely, creating the thing you thought was brilliant and original before you. So not only you may end up doing research on an area you hate, but the novel thing you thought you had might not be novel anymore by the time you have to defend your thesis.

A bit self-defeating (4, Insightful)

russotto (537200) | more than 4 years ago | (#27716189)

Reading up on the Wikipedia article on this guy...

"Taleb appeared to be vindicated against statisticians in 2008, as he reportedly made a multi-million dollar fortune during the Financial crisis of 2007-2008, a crisis which he attributed to the failure of statistical methods in finance "

But his thesis is that such events are fundamentally unpredictable. If he made a fortune, it means _he_ was able to predict it, well enough to profit for it. Which argues not that the events are unpredictable, but rather that his model is better.

Re:A bit self-defeating (4, Insightful)

Jane Q. Public (1010737) | more than 4 years ago | (#27716247)

Distortions in the market, like over-leveraged corporations and too many risky investments hanging out, tends to make things predictable. After all, if you KNOW that the market for some commodity is over-priced, then you KNOW that sooner or later there will be a "market correction".

By and large, though, markets are unpredictable, and they need to stay that way. If markets were predictable, they would cease to exist... some one or a few would run off with all the money. To the extent that it has been "predictable" and made some corporations lots of money recently... as we have seen, that was largely due to manipulation and corruption, not the effects of free markets.

Re:A bit self-defeating (0)

Anonymous Coward | more than 4 years ago | (#27716451)

If markets were predictable, they would cease to exist... some one or a few would run off with all the money.

This week, that would be Goldman Sachs again. Not all the money, just most of it (it's been yet another week when Goldman's principal transactions on NYSE were more than half of the total members' principal transactions)

Re:A bit self-defeating (5, Insightful)

peragrin (659227) | more than 4 years ago | (#27716569)

Actually markets are very predictable. every 10 years they go boom. Which part goes boom is varies but every ten years since Nixon they go boom.

The trick is that wall street likes unlimited growth. if you don't expand your business by 10% every year then you are a failure and your company should be punished. After 10 years at 10% growth you have over saturated the market by 100% and every company that got there with unstable books and balances collapses.

I forget exactly who and when but a walmart exec once stated. If we stop building new Walmarts we will go bankrupt. As they leveraged one walmart to build the next in a terrible endless pyramid scheme. Once the bottom bursts there is nothing holding up the top.

Indeed if you look closely to all the news reports on what happened to the banks that is exactly what happened. 5% failure of loans should be expected. However a handful of banks ended up holding that entire 5% as their portfolio. As they collapsed the rest of the banks were suddenly forced to cover them, and since they over extended themselves by laying off bad loans on a small group the rest of the banks couldn't take the weight.

the housing market the past 8 years was the same way. You can't have massive growth without massive contraction.

The dot com burst. was the same. unparalleled growth but questionable accounting.

Oh and I saw the housing market ready to burst 18 months ahead of time. Just look for massive growth over 5 years in any given market. a Seller's market for a long enough time leads to collapse. timing exactly when is the trick.

Re:A bit self-defeating (1)

Jane Q. Public (1010737) | more than 4 years ago | (#27716817)

No, you missed the point. The only reason they go boom every ten years is because they are manipulated... as you then go on to point out. The essential nature of a free market is still unpredictability.

Re:A bit self-defeating (1)

maxume (22995) | more than 4 years ago | (#27716871)

Your statement about Walmart doesn't make any sense. They have ~ $42 billion in debt:

http://finance.yahoo.com/q/ks?s=WMT [yahoo.com]

But they have spent more than $60 billion in the last 3 years (Cap. Ex., Stock purchases and dividends):

http://finance.yahoo.com/q/cf?s=WMT&annual [yahoo.com]

If they were truly little more than a breath away from bankruptcy, they wouldn't be spending the equivalent of 1/3 of their debt on those things in each year.

Re:A bit self-defeating (3, Informative)

Bigjeff5 (1143585) | more than 4 years ago | (#27717077)

It wasn't so much the 5% failure rate that was the problem. That and probably more was expected. It was the fact that when those loans failed, they could not be recovered because house values had actually slipped in a lot of places - that had never happened before on any kind of wide scale. But you're right that it could be predicted, and I'd expect your formula for predicting a market collapse of some kind is probably pretty acurrate in a general "rule of thumb" sense.

This housing market collapse was predicted over a decade ago. The recipe for disaster was there, the only question was exactly how long it would take.

Heavy-handed incetives to take risky loans that were first implemented 20 some-odd years ago, but greatly ramped up by the Clinton administration, created a climate where it was quite profitable to take on bad loans, and then shift, move, and otherwise hide that they were bad. The housing market itself was able to hide the risk of taking on so much bad debt, for as long as house values went up faster than interest rates, even extremely high risk loans (like fixed payment loans, and second and third mortgages) would almost always be covered when a house was sold. Homeowners who can't pay their bill just sell, banks get their money back, and nobody loses. Even when forclosure was necessary banks could reliably recoup most of their money, though forclosure is less than ideal.

However, as soon as housing prices stagnated the model became tenuous, and when it slipped, even a little, the model collapsed. You ended up with thousands of loans that could not be covered by the sale of the home, and forclosure was the only option.

This is BAD. Forclosures are expensive anyway, and only cover the balance left on the house for the initial bank, the secondary balance if there is one, or the homeowner if there isn't gets what's left. Forclosures that can't even get the primary loan balance back are a financial nightmare. What's more, the homeowners that tended to default were also more likely to get second and third mortgages to stave off forclosure. Houses went from being "guaranteed income" for banks to a massive liability. Companies like CountryWide - which embraced the Government's high-risk low income loans and who either Fannie May or Freddie Mac, I don't remember which, touted as the "model" for lending - was the first company to fail (no bailout for you! too bad so sad!). AIG, by the way, profited by shifting the risk of these loans via a special insurance type. Obviously that worked out well for them.

I personally think the healthiest thing to do would have been to let the market collapse and allow other companies to fill the voids. Definitely more painful in the short term, but in the long term I think it would be better. We'll be suffering for a long time with the current bailout plan. Though of course, I'm no economist, but they haven't done so hot anyway so...

Re:A bit self-defeating (4, Insightful)

Black Sabbath (118110) | more than 4 years ago | (#27716621)

By and large, though, markets are unpredictable, and they need to stay that way. If markets were predictable, they would cease to exist... some one or a few would run off with all the money. To the extent that it has been "predictable" and made some corporations lots of money recently... as we have seen, that was largely due to manipulation and corruption, not the effects of free markets.

A few have run off with all the money. Who was on the other side of those massively leveraged positions that the banks lost on? It seems to me that the fact the losers are now being bailed out by the government means that effectively there has been a massive transfer of wealth from taxpayers to the "winners" of those bets.

Manipulated, corrupt and un-free markets indeed.

My suggestion to the submitter is to try a more honorable career, like record-company executive or drug-dealer.

Re:A bit self-defeating (1)

jmv (93421) | more than 4 years ago | (#27716939)

The ones who "ran away with the money" in this case are affectively the ones who sold properties just before the crash. Just like when a bubble or a pyramidal scheme busts, the ones that run with the money are those who got out just before the crash.

Re:A bit self-defeating (3, Insightful)

DriedClexler (814907) | more than 4 years ago | (#27716797)

Unfortunately, you can only exploit your knowledge that X is overpriced, if you also know *when* the correction will occur (or you already own X, in which case you can sell). Otherwise, you'll end up bankrupting yourself by being stuck in a "short squeeze"[1] or buying worthless puts.

IMHO, the problem is not the risk; it's the coupling. That is, if everyone actually bore the full cost of their investment, and knew all of the ultimate counterparties, then it wouldn't be possible for one screwup to cascade to the entire system. If some investment lost, the direct investors would be out money that they themselves put up, and maybe those who lend them the money. It wouldn't be a complex web of leverage on top of unknown leverage on top of unknown leverage, all hidden in "safe" savings accounts.

[1] that's when your short-sell X -- borrow it and sell it -- and then it rises too much, forcing you to close out your position unfavorably.

Re:A bit self-defeating (1)

Jane Q. Public (1010737) | more than 4 years ago | (#27716867)

But again, that's only a problem if you are leveraging. If your assets have been paid for, then a deal can go bust and it doesn't topple a whole chain of borrowing.

Short selling is really way on the outskirts... unless you can influence the market (against the rules), then it is a pure gamble, and has as often as not been done with someone else's money.

Naked short selling should be an automatic prison term.

Re:A bit self-defeating (2, Insightful)

maxume (22995) | more than 4 years ago | (#27716303)

He believes that they are inevitable and uses strategies that work well during them and are mediocre the rest of the time. That doesn't mean he knows when they are going to happen, or what they are going to look like.

Re:A bit self-defeating (4, Informative)

the_other_chewey (1119125) | more than 4 years ago | (#27716317)

But his thesis is that such events are fundamentally unpredictable. If he made a fortune, it means _he_ was able to predict it, well enough to profit for it.

No. His "system" is indeed based on the assumption that such events are unpredictable. That's why he for years bet
simultaneously on a sharp increase and a sharp decrease in stock values - and ran slight daily losses, in the
anticipation and expectation that once such an event inevitably happens, the profits will more than make up for those

It worked.

He basically had no idea - and didn't care too much - when this (and what this "this" would be) would happen though.

Re:A bit self-defeating (1)

Main Gauche (881147) | more than 4 years ago | (#27716399)

If he made a fortune, it means _he_ was able to predict it, well enough to profit for it.

If he were able to predict it, then he would have made a net profit over the long haul. From what I heard, he was betting on a crash for a long time now, and apparently he lost a lot before it happened. It is unclear whether he even made enough off the crisis to get back into the black. Of course when he's interviewed on national television, he doesn't bother talking about the losses. Sort of like a gambler who likes to tell you about his most recent jackpot, but not about all the losing nights at the casino.

Re:A bit self-defeating (0)

Anonymous Coward | more than 4 years ago | (#27716561)

I would suggest reading some of his writing before making unsubstantiated criticisms.

Re:A bit self-defeating (1)

olsmeister (1488789) | more than 4 years ago | (#27716743)

Well, it means his model was better during the Financial crisis of 2007-2008. I can't predict whether it will be better next year.

Re:A bit self-defeating (1)

dank zappingly (975064) | more than 4 years ago | (#27716809)

You are making the incorrect assumption that profit necessarily requires prediction. As I understand it, he buys cheap CDS's(Credit default swaps are cheap when the risk of failure is perceived to be low) with a small part of his portfolio and puts the rest in something safe that pays off a reliable amount of interest like T-Bills. If the market doesn't fail, he pretty much breaks even. If the market fails his swaps pay out huge. I guess in some sense you could argue that he did predict that eventually the market would have enough of a correction to make him some money, but it wasn't really a prediction so much as a strategy that he engaged in over the long term. When I think of guys who predicted the downturn, I think of guys like Paulson who crunched the numbers, bet against the housing market and profited when it crashed.

Re:A bit self-defeating (5, Interesting)

CompSciStud4U (877987) | more than 4 years ago | (#27717073)

I would suggest reading The Black Swan. His basic thesis is that the gaussian methods used to calculate risk in financial markets underestimate the risk by several orders of magnitude. Crashes that happen every couple of decades are considered to be once in a million year occurrences by these methods. He made his money in the crash by betting against this. He assumes that he has no clue when a crash will happen, only that the risk is much greater than the vast majority of the market thinks. Everybody else thinks it will never happen, overextend themselves, and when the crash comes he takes their money. He did it in the 80's too.

Re:A bit self-defeating (0)

Anonymous Coward | more than 4 years ago | (#27717221)

ummm no... its not self defeating at all. he couldn't predict when the event would occur, all he could see was that the probability of such an event was higher than everyone was pricing in... while everyone was picking up nickels in front of a looming steamroller, he bet on the steam roller... he had no idea when the steamroller was going to hit... just that if it hit with the predicted frequency, buying steamroller insurance would be profitable.

Re:A bit self-defeating (1)

nido (102070) | more than 4 years ago | (#27717263)

But his thesis is that such events are fundamentally unpredictable.

Taleb has said that the present crisis is not a 'black swan' event. This link [ianwelsh.net] , for example.

Black swans are predictable by some, but not by most. The impact of certain advances in technology which are considered impossible by otherwise-eductated scientists would qualify. Cold fusion became respectable again this month, so that'd be a good Swan candidate, methinks.

I'm more interested in the governance than in math (4, Insightful)

fuzzyfuzzyfungus (1223518) | more than 4 years ago | (#27716193)

As long as it is possible to get paid for the short term results of your crazy bets with other people's money, it barely matters whether the math actually works or not, you are fucked either way.

While I'm all for good mathematical modeling, the notion that our financial problems are caused by bad math is a distraction at best.

Re:I'm more interested in the governance than in m (1, Insightful)

Anonymous Coward | more than 4 years ago | (#27716467)

While I'm all for good mathematical modeling, the notion that our financial problems are caused by bad math is a distraction at best.

I agree with this statement completely. I live in Canada, and had the misfortune to pick up a Toronto Star newspaper a couple of months back. The front headline was about the Canadian financial mathematician who had created the 'equation that caused the economic meltdown'. I don't recall the specifics but I believe it was used for insurance calculations.

Instead of blaming the idiots that failed to find fault in the formula, or used it without question, they blamed the guy who wrote it. How asinine is this? They gonna come at me with pitchforks and torches when they use my special 1=0 formula for spaceflight and something goes wrong?

Re:I'm more interested in the governance than in m (1)

lgw (121541) | more than 4 years ago | (#27716489)

While I'm all for good mathematical modeling, the notion that our financial problems are caused by bad math is a distraction at best.

Nevertheless, after a major market crash people will take any scapegoat they can get, and there's always a market for pdeeling hate of "allegedly smart people in their ivory towers, out of touch with reality or the consequences of their actions". People alwa blame those who predicted the crash, those who profitied from the crash, and really anyone with any mechanical trading system.

However, 5 years later no one cares.

Our current financial problems are caused by:

(a) Financial institutions relying on "experts" (who happened to be quants) telling them what they wanted to hear.

(b) A culture that rewarded bets that "make 1% 99% of the time, or lose everything 1% of the time" above all else.

(c) Inidividuals with enough math to understand that you simply cannot afford a house that costs 6 (or 20) times your annual income, no matter what the salesman says!

The whole "black swan" thing is overblown, but in a time where every major bank was betting the company against 1% risks it became profoundly important.

Re:I'm more interested in the governance than in m (1)

lgw (121541) | more than 4 years ago | (#27716505)

Err, that should be "individuals without enough math ..."

Damn slashcode and it's last-century-forum-can't-edit-posts perl spaghetti!

Re:I'm more interested in the governance than in m (1)

martin-boundary (547041) | more than 4 years ago | (#27717113)

Well, you need both. If nobody understands math, then you'll just get an infinitely long bubble of rising debt... It's those with enough math who ultimately refuse to keep going.

Re:I'm more interested in the governance than in m (1)

julesh (229690) | more than 4 years ago | (#27716631)

Our current financial problems are caused by: [...]

You missed the big one: that when something is overvalued, its price tends (in the long run) to correct back down to being undervalued before rising again to somewhere in the region of the correct price, and that these over/underestimates of correct value are cyclic and unavoidable, because they are essentially part of human nature. And that the upshot of the 1990s and early 2000s is that both the housing market and the stock market became a long way overvalued.

OK, so that's a contentious theory that many economists dismiss out-of-hand, but you have to admit it has a certain appeal in explaining the current situation.

Re:I'm more interested in the governance than in m (1)

lgw (121541) | more than 4 years ago | (#27717119)

Bubbles bursting don't have to cause a wider crises, and I'd argue that they ususally don't. Markets seem to almost continuously pick some sector to overvalue, at the expense of the now-unfashionable previously-overvalued sector. The damage is usually limited to those who fell for it.

It only takes a little bit of conservative sense to ask "wait, what happens in the 1% worst case - do we at least survive?" You know, the sort of question every competant engineer asks every day. It's not that the large banks misjudged how likely it was for real-estate prices to fall, so much as they refused to consider it at all. So now instead of a few large idiot banks being allowed to fail, we're stuck because they sold insurace against just this situation to a ton of other banks, and didn't have the capital to back it up.

Re:I'm more interested in the governance than in m (1)

oldhack (1037484) | more than 4 years ago | (#27716855)

And then there is math and there is math. If I remember correctly, stats are exquisitely nuanced thing, mostly dealing minute details of the underlying assumptions. One thing to master the mechanical math underlying stat, actual mapping to an application in social context is a black magic.

Looking Good (1)

DirtyCanuck (1529753) | more than 4 years ago | (#27716221)

I think the future of financial mathematics is that we need more people with a fluent financial math skills. Not people who can just use the formulas and economical models in place, but rather reinvent more logical less speculative models based on harder data then prediction and statistical trends.

Specializing in this particular area and getting a PHD could potentially put you at the forefront of the inevitability that is the need for reform with current economical model.

The people that designed the models (futures market) that are some of the fundamental reasons for the recession, knew what they were doing, they were in fact so affluent with financial mathematics they were able to make it so confusing only somebody with there credentials could see how B.S there models were, you could be that person.

Re:Looking Good (1)

NonSequor (230139) | more than 4 years ago | (#27716597)

The problem with trying to use logic for a system like this is that you have to start from assumptions. There is no natural method of determining which assumptions you should start from.

This isn't like chemistry where you can try different equations for a reaction rate until you get one that fits the data and if you don't have enough data you can run more trials. Your financial model can only be tested against historical data. The very best you can do is to prove that your model explains the range of observed variation, you have no means of proving that it can explain future variation.

There are no bounds on these financial variables and there is no way of telling how far out the future outliers will be.

Quant != Finance Phd (4, Insightful)

Sprogga (893092) | more than 4 years ago | (#27716233)

There will always be a quant element in finance. I'd guess there will be fewer quants in five years than there were in (say) 2007, but there was definitely an over-supply then. Having said that, most quant jobs don't require you to have had specific training in finance or financial mathematics. For the best firms, its much more about your mathematical and programming abilities. So you definitely don't need to specialize now in finance to become a quant. You could make a case that focusing on AI would be a bigger draw with quant firms. The other advantage of not doing finance now is that it gives you five years to think about whether you want to be in a career where when you get down to it, you rent out your brain to rich people so that they can get richer. I do work as a quant and find it interesting and competitive etc, but ultimately its a money thaang.

Re:Quant != Finance Phd (2, Insightful)

mithras the prophet (579978) | more than 4 years ago | (#27716335)

Though arguably this is precisely the root of the problem. As the post above you mentions, many quants build their software around nonparametric statistics or statistical (machine) learning, without deeply understanding the domain. This can lead to an over-reliance on historical data, which in turn leads to a failure to predict rare but significant events, like, say, the current crisis. Now, I'm totally unqualified to pronounce that if only we'd had more quants who richly understood finance and economics we could have avoided the worst of current events. But I'm aware that there are those who make that claim...

Re:Quant != Finance Phd (1)

zeroword (1308031) | more than 4 years ago | (#27716345)

Sprogga is correct. Financial Mathematics/Engineering degrees are really BS flavor of the month type deals. You are better off just getting your PHD in math and just applying to Bank internships. You will get them since you actually know math and are most likely smarter than most of the guys on the trading desk.

If you enjoy it ... (1)

krou (1027572) | more than 4 years ago | (#27716237)

... then do it.

Realistically, Financial Mathematics isn't going to go away. If anything, financial institutions will want to improve the formulas and/or realise their limitations in light of what's been going on, so they're going to need Quants more than ever. Look at Taleb, for example. I seriously doubt he would be railing against his own field if it meant an end to employment opportunities. He seems to be advocating a more realistic assessment of what financial mathematics can do, rather than having a blind faith in the numbers, and for people like that, there's always going to be opportunities.

Re:If you enjoy it ... (5, Informative)

Anonymous Coward | more than 4 years ago | (#27716365)

As a former Wall Street trader turned academic, I can agree that the demand will continue to grow for financial mathematicians. The "old school" trader is a former ivy-league athlete who is good at networking and teamwork, but can't do a lick of math. The D.E. Shaw's and hedge funds are crushing the "old school" traders as trading becomes more about speed (esp. algorithmic trading) and liquidity and less about connections. The large banks still have plenty that follow the old mindset, but they are slowly being replaced by the more successful "quant" traders. Granted, the current crisis was caused by over-reliance on models, but that happened because most traders and managers did not understand the models and their limitations. To rectify that, there will be an even greater need for those trained in financial mathematics.

What's more important money or ... (2, Insightful)

blahplusplus (757119) | more than 4 years ago | (#27716263)

... your passion? Are you the kind of person that gets bored even about things you are passionat about? You can study something if you believe it will bring you more money in the future.

What people don't understand is you can LEARN to love doing something by looking at it from another perspective - i.e. take joy in solving problems and strategizing in general and then it shouldn't matter what 'speciality' you go into specifically.

taleb = wrong (0)

Anonymous Coward | more than 4 years ago | (#27716277)

taleb is a self-promoting idiot. he is right that distributions are fat-tailed, and normal distributions are sometimes a poor approximation. (he also did not invent this; he only popularized it.) taleb's solution is stupid: he claims we should ask "wise old men" who somehow know more.

it's like concluding that cars are dangerous, so we better ask stone-age men about their views on transportation.

Go with what you like (1)

ermintru (797621) | more than 4 years ago | (#27716301)

If you pick the "Hot Topic" remember so will many others, also it's the "Hot Topic" now, not what will be hot when your looking for a job 3 - 5 years down the line. In IT this frequently seen hot topic "X" earning big money so loads of people train in it and it becomes a cheaper skill and now "Y" is the new hot topic as "X" is now mainstream. Go with what interests you but keep an eye on the horizon for new things and check them out and chase if they interest you. This will give you the best chance of being in the right place with the right skills. My personal opinion is if your interested in then "Financial Mathematics" do it and it may be a good chance of being "Hot", if because of current problems few people will take this problem so 3-5 years down the line this may be a scarce skill

Psychohistory (1)

gmuslera (3436) | more than 4 years ago | (#27716305)

I would call that the future. But you will need a second foundation, to maintain the predicted events unknown for the people that affect those events, or things will not work.

wrong way to think about it (1)

PDAllen (709106) | more than 4 years ago | (#27716307)

Lots of questions.

There aren't really any viable 'non-math' approaches to finance these days. However if you want to work in finance, you need to have in mind ideas of risk, profit, and so on. 100 years ago when there was some idea of 'any profit is good' you could hire an expert in mining to advise you on which mine stocks to buy, and that would be all you'd need - these days, small percentage profits are actually bad for your business (your market value is better if you make £100 on a £1000 investment compared to £500 on a £10,000 investment, so it can be good to sell off bits of a business that make a profit). So, banks will continue to want quants.

On the other hand, something that isn't well-enough realised is that ultimately what banks are playing with is quite close to a fixed-total-reward game. If you make a huge profit then someone has to be making a huge loss to compensate. What confuses the issue is that various financial tricks - hedging and the like - mean that you're effectively playing not only against every other bank on the planet, but also against future time versions of yourself and your competitors. If you and everyone else are doing too well now, then what you are doing is beating up on the future-time versions of yourselves. Which is fine for a while - those future-time versions can in turn beat up on their futures: but eventually you end up claiming that you hold a certificate now for 100 years of future work, and people refuse to believe in its value. At this point you get an economic collapse.

Short version: you should not go for a PhD just because you think it will increase your salary later. If that's all you want, drop your graduate program and get a job, it will save you several years of misery trying to work on something you're not really interested in. If you are actually passionate about some subject, then that is what you should do a PhD on.

Re:wrong way to think about it (1)

Swanktastic (109747) | more than 4 years ago | (#27716613)

On the other hand, something that isn't well-enough realised is that ultimately what banks are playing with is quite close to a fixed-total-reward game. If you make a huge profit then someone has to be making a huge loss to compensate.

1) It's not really a zero sum game the way you're pitching it. It's not even close. If you're expecting to make money day in and day out on the market, then yes, you are essentially gambling. But for folks who follow an advisable savings plan of gradually moving from a diversified portfolio of equities early in their career to a diversified portfolio of fixed income assets later in their career, it's actually a miracle of the modern age. We're fairly fortunate that, unlike all of humanity up till now, we don't actually have to work until the day we die. Every single person who claims "Hey, my 401k disappeared and I'm one year from retirement!" was either an idiot or got greedy gambling on high-risk investments.

2) Banks don't make payroll by winning bets against other bankers- they're the realtors of the financial world taking a commission on every transaction that happens. NYC, London, Hong Kong exist because there is a net influx of cash into the regions, not because the banks are only betting against each other. The way it works is primarily that the banks take a small amount of money from all of us and concentrate the wealth in a small number of people. Those people then spend their money on fancy kitchens, nice cars, etc, and "support" the whole region. Your 401(k) could have made 6 percent, but instead it made 5.5 percent because of the management fee. Add all that up across all savings in the world, and you're talking about a massive amount of money flowing into bank coffers. Sure, they trade money back and forth every day making big bets, but those bets tend to cancel each other out and are dwarfed by the management fees they collect. It's not a coincidence that the resurgence of NYC from 1985 to present also happened to coincide with the largest growth of the financial industry in history (from roughly 10% of US GDP in 1985 to ~22% today).

Re:wrong way to think about it (1)

zippthorne (748122) | more than 4 years ago | (#27717223)

Wait.. Paper-pushers amount to 22% of the economy? (23, when you add in tax preparers...)

In the words of Jamie Hyneman, "Well, There's your problem."

Re:wrong way to think about it (1)

xelah (176252) | more than 4 years ago | (#27717003)

On the other hand, something that isn't well-enough realised is that ultimately what banks are playing with is quite close to a fixed-total-reward game.

No-one should be put off studying such things from a belief that it's a zero sum game, or that it's close to one, though. What's happening now is clearly not zero sum: banks, borrowers, governments, the property industry and whoever else everyone blames this week have cause an avoidable huge loss of beneficial economic output because they made poor investment decisions, backed up in part by poor models. Improving the pricing of stocks is not zero sum, either, because it affects real economy investment, management and take-over decisions. Maybe most of the activity financial market participants engage in is mostly zero sum, but that doesn't mean that the bit that remains doesn't have a huge real-economy impact.

Or, to put it another way, a financial market could trade a dodgy investment in commercial property back and forth a thousand times, make virtually all of the activity almost zero sum. But if all that activity produces prices that mean that economic resources are spent pointlessly building more and more commercial property that isn't going to be used then that mis-pricing has a real physical cost.

How's your c++? (1)

Renegade Iconoclast (1415775) | more than 4 years ago | (#27716319)

Artificial intelligence is highly applicable to many areas, including finance, and it's very math-intensive. Plus you won't be tying yourself down to one career path.

The real problem with algorithmic trading... (4, Insightful)

thesandbender (911391) | more than 4 years ago | (#27716329)

I have worked with companies that implement and use "algorithmic" trading. The real problem is that algorithmic trading doesn't try to beat the market... it tries to beat other algorithmic traders. The idea is to get the trades in before anyone else and there is only so much analysis you can do in a given period of time. Honestly, there's no real analysis to it... it's snap judgments based off a few dozen indicators. It's the equivalent of saying you should guess all C's on standardized tests. On average it works... but you should be shooting for better than average.

Re:The real problem with algorithmic trading... (1)

wootest (694923) | more than 4 years ago | (#27716571)

The problem with beating the market is that you can't base your system on the market and consistently outperform it; definitely not all the time, but probably not most of the time either. My guess is that you have to mix in something else, but then there are the problems of choosing that "something else", and making sure that its benefits are enough to strengthen the model.

When you say algorithmic trading and "snap judgments", it seems you're referring to the kind of algorithmic trading that lives and dies by how fast it is when it's racing the rest of the algorithmic models in the order book. From what I've been able to tell, strategies that focus on finding a good signal and maximizing the market exposure at favorable times aren't necessarily subject to those typical Bid/Ask-bound restrictions and have entirely different downsides.

Not every algorithmic strategy is about "getting the trades in before anyone else", and as history shows, not every such strategy is algorithmic. No matter how it's done, it's a mug's game, as you point out. Beyond being quicker on the pedals, algorithmic trading on computers can also keep lots more state, and I think the real payoffs come when you keep the right kind of state and use that to base decisions in a way that has proven to be beneficial. (You can't ever prove that history will repeat itself or that a strategy will work tomorrow, but what else are you going to train it on that's representative of the market?)

Re:The real problem with algorithmic trading... (0)

Anonymous Coward | more than 4 years ago | (#27716747)

Algorithmic trading mostly deals with minimizing the effect of your trade on the market. Unlike mathematical modeling, it doesn't help you decide what trade to make.

That's true for exams (0)

Anonymous Coward | more than 4 years ago | (#27716987)

You should indeed be shooting for better than average (haha).
But in the real world if you make money just slighter greater than 50% of the time (let's say 51%), if the volume is large enough then guess what: you make a whole lotta money.
It's a viable strategy.

Re:That's true for exams (1)

NonSequor (230139) | more than 4 years ago | (#27717037)

You should indeed be shooting for better than average (haha).
But in the real world if you make money just slighter greater than 50% of the time (let's say 51%), if the volume is large enough then guess what: you make a whole lotta money.
It's a viable strategy.

Until you're wrong. In which case, you're wrong in a large volume.

the way it works (0)

Anonymous Coward | more than 4 years ago | (#27716373)

It's less profitable to do science than to teach science. It's less profitable to teach science than it is to fake science. That's why there will still be quants, that's why we're going to keep having these problems, why there is so much competition for faculty positions and why industrial scale research is dead in this country. I don't know the causes, but that seems to be the way it is.

Uh, it's sacred cow time (1)

GuloGulo2 (972355) | more than 4 years ago | (#27716385)

"'My outrage is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to global climate change"

Because relying heavily on statistical models is BAD for Wall Street, but GOOD for climate research, and clearly more useful and accurate when used that way.

Or maybe you should use some critical thinking skills and question some of your assumptions instead of frantically trying to conjure a refutation for my irrefutable observation.

Re:Uh, it's sacred cow time (1)

ResidntGeek (772730) | more than 4 years ago | (#27716883)

Boy, you sure are confident, huh? Go on, then, link me one of your articles proposing a better model, huh?

I'm really mystified as to why you feel qualified to comment on climatology. Perhaps you could enlighten me as to the source of your self-confidence?

the right way to get a PhD (0)

Anonymous Coward | more than 4 years ago | (#27716387)

The original poster displayed his brilliance in asking for career advice on Slashdot. I'm sure he will go far, as only good advice is given here.

Re:the right way to get a PhD (0, Flamebait)

FredThompson (183335) | more than 4 years ago | (#27716433)

...and is especially brilliant in asking for future history...

"Will the so-called 'quants' still be wanted by the banks and other financial institutions, or will they turn to more 'non-math' approaches?"

What's the matter, Brainiac? Can't come up with the odds? Forgot how to interpret tea leaves? Perhaps you should study the distribution of chicken bones thrown into dust...

The rise of Behavioral Economics (1)

Walker (96239) | more than 4 years ago | (#27716405)

The economics blogs have been talking about this issue for a while. All of the blogs that saw this coming for years (like CalculatedRisk) are very anti-quant.

What we are seeing is a push for the study of behavioral economics, as seen in the popular new book Animal Spirits [amazon.com] . This book is being heavily quoted by Obama's Budget Director Peter Orszag.

Don't do it (0)

Anonymous Coward | more than 4 years ago | (#27716409)

If you're asking this kind of stuff on slashdot, get out now, while you can. You'll end up wasting 10 years of your life in grad school, forgoing lots of money in the process. You'll also hate yourself and everyone around you.

A couple of things.... (3, Interesting)

gadders (73754) | more than 4 years ago | (#27716413)

1) Taleb has a bit of the stopped clock quality about him. Anyone saying "bad things will happen" is bound to be right sooner or later. Plus, his writing is the most self-indulgent wankfest ever.

2) I don't know whether you will choose financial maths or not, but Banks will always need people that can do "fancy" maths. Although some maths is out of favour, high-frequency (algo) trading is currently still popular, and making money.

Re:A couple of things.... (1)

julesh (229690) | more than 4 years ago | (#27716685)

Taleb has a bit of the stopped clock quality about him. Anyone saying "bad things will happen" is bound to be right sooner or later.

Well, yes. But Taleb wasn't just saying bad things would happen. He was saying that when they did happen, people who thought they were prepared for bad things would find out that they weren't. He was saying risk analysis doesn't work, and that a lot of people were putting too much faith in it.

Re:A couple of things.... (1)

martin-boundary (547041) | more than 4 years ago | (#27717201)

There's nothing wrong with risk analysis. It's what goes into it that matters. Garbage in, garbage out. And there has been a lot of garbage fed into it, as the bank deregulation of the 90s has allowed people to make claims about the riskiness of products which is wildly at odds wiht reality.

Taleb is playing semantic games to sell some books.

Does it matter? (1)

Royale_With_Cheese (1322505) | more than 4 years ago | (#27716415)

People used to tell me the same thing about IT after the .COM bust. I stayed in and it has paid off. I like what I do and that made the decision easier. True, there are rough times every now and again but you can say that about almost any profession that pays well. Also, I've been migrating my professional experience to be more financially based over the last 5 years having worked for a bank and now a brokerage firm. People are saying these things now and I can't help think we're going to be short on good financial minds after the dust settles as we were on IT minds in 2004-2008. That said, the future of quants in particular is pretty cemented. I don't see it going anywhere, if anything they are getting more and more sophisticated. Also, I see huge potential in financial trading related data mining. Imagine a database housing all kinds of information about stock performance, the overall economy, politics, etc, then being able to enter parameters and have it rank for you likely good investments given the scenario. For example, assuming the economy is in a deflationary spiral, a democrat is in the white house, the fed rate is close to zero, and the S&P 500 has rallied up 30 percent, etc... What are good investments historically? I doubt there has been an exact case like this in history, but a "google" style close intelligent match can be made. This sort of math/stats/whatever will only grow as well. In short, financial math may morph but will likely not be going away.

Turn applicaton to natural sciences (1)

kramulous (977841) | more than 4 years ago | (#27716423)

I used my skills and turned to the natural sciences. They have really, really big datasets and nobody really knows what is going on there. Salt water intrusion models, various solute transport models are crying out for application. Earthquake modeling and prediction gets big budgets. What is occurring under your feet is really complex.

I did an interview to go into the financial district about 4 years ago but I rejected it after finding out how much they would cripple me. They don't trust anybody. I had no interest in being in that sort of environment. Sure, you make some money.

'non-math' approaches? (0)

Anonymous Coward | more than 4 years ago | (#27716447)

Like astrology or tarot cards? Maybe financial institutions will start 'going with their gut'. I can't see financial institutions that abandon quantitative methods altogether staying competitive.

You've come to the right place (1, Funny)

Anonymous Coward | more than 4 years ago | (#27716473)

In short, what is the future of Financial Mathematics in light of the current financial crisis?

Jeez man this is slashdot. Wipe it and install Ubuntu.

Advice (0)

Anonymous Coward | more than 4 years ago | (#27716491)

There is a glut of "Financial Math" PhDs from second tier programs. You will find a job with this degree, but it will entail making spreadsheets for traders, 15 hour work days, a salary in the 80-110k range and hating yourself. These guys all started out thinking they'd be the next Jim Simons.

If you're in a top tier program, MIT, Stanford, Princeton, you will have a great shot at landing a "sexy" position in hedgefund land. If you're going to a Purdue or Iowa State type school(no offense to anyone in these programs), take a different path. Data Mining IS the next big thing in finance.

use math to choose (2, Funny)

Zecheus (1072058) | more than 4 years ago | (#27716591)

If math can be used to tell us which stocks/companies will profit, can't math also tell you which outcome is best for you?

Markets are PEOPLE! Not elementary particles! (1)

TheNarrator (200498) | more than 4 years ago | (#27716603)

Mathematical modeling of markets assumes that people in markets behave in a manner that can be reflected in smooth continuous mathematical functions.

People don't behave like that. They behave in a boolean fashion.

An example of a boolean function would be something like

r= ( gaussian random number between 0 and 1)

if ( marketConfidence gt 1 ) { //bubble
return yesterday + (.1 * r)
} else if (marketConfidence lt 1 and marketConfidence gt .95) { //topping
return yesterday - .05 + ( .1 * r)
else { //crash
return yesterday - (.5 * r)

When the market is going up, it keeps going up regularly. When the market confidence is broken thend the market is in crash mode, and the markets go down regularly and pessimism rules the day. The value of "market confidence" is a complicated human variable that switches from on to off at some point . The modelers had only seen the first case for the last 30 years so they only modeled for that and now assume that the current activity is a 10 standard deviations outside the norm and should only occur once every trillion years. That's because they refuse to admit that they made the error of leaving the crash scenario out of their use case.

Re:Markets are PEOPLE! Not elementary particles! (1)

ceoyoyo (59147) | more than 4 years ago | (#27716681)

Elementary particles also behave in a quantized fashion, not continuous. If you have a lot of them, their overall activity can be modeled quite successfully using continuous mathematics.

Re:Markets are PEOPLE! Not elementary particles! (0)

Anonymous Coward | more than 4 years ago | (#27716975)

What's a gaussian random number between 0 and 1? What probability density function does it have?

Population statistics should just be scrapped (2, Insightful)

viking80 (697716) | more than 4 years ago | (#27716669)

In quantum mechanics, you use statistical models because that is the true nature of the underlying physics. In financial analysis, you do not need to use statistics. A borrower ability to pay monthly payments is not some unknown quantum state, but well known (at least to himself or his employer)

It is a fallacy to estimate risk in lending and then charge interest based on this risk. All borrowers that pay on time should get the best rate and those who don't just should be denied the loan.

The only reason not to do this, is lack of information or lack of computing power.

With fast computers and good data all population statistical analysis should be thrown out, and replaced with calculation for each individual and then integrated. This will replace the entire field of mathematics from insurance to lending and investing.

Re:Population statistics should just be scrapped (1)

kramulous (977841) | more than 4 years ago | (#27716837)

Hey, that last statement of yours is actually quite insightful. I have a really hard time trying to fit people to curves (as I'm told to by others ... regardless of what I think). People are just not like that ... even large groups. Distributions of large groups are an approximation, at best. Time for these things to be rethought.

Even data mining techniques, which I normally don't think much of - given that results are not reproducible if you supply the same data but in a different order, yield results 10-15% better than a Gaussian or some such linear method.

Re:Population statistics should just be scrapped (1)

retchdog (1319261) | more than 4 years ago | (#27716889)

Fast computers and good data aren't enough. Lenders and investors tend to be conservative (or at least they demand that from their quantitative models) and thus need strong, trustworthy error bounds. Whatever "calculation for each individual and then integrated" means, it doesn't seem very amenable to error bounds/variance estimates.

Re:Population statistics should just be scrapped (1)

maxume (22995) | more than 4 years ago | (#27716915)

The beauty of the capitalist system is that you can use this superior model to drive traditional companies out of business.

Read people.. (1, Informative)

Anonymous Coward | more than 4 years ago | (#27716935)

I know it's slashdot but read his books before you sum up his crusade against statistics. Taleb is not anti-math. Instead he points out that we use a model (normal distribution) that doesn't properly apply in this arena and that the assumption that it does makes our further analysis based on that model dangerous. Also for those that are asking why he can make money in an arena he claims is unpredictable it's because the payoff for making a correct "bet" is way out of scale to the amount risked. So by making a bunch of little bets on these incredibly rare out of scale events (aka Black Swans) he waits for one to hit and provide a return on investment that is out of whack with the amount he risked. He can't predict the event but he is predicting that the return will result in a massive payback. Then he's betting on a bunch of these events. Also with some fundamental analysis (as opposed to quantitative analysis) he is able to find likely candidates for these black swans.

I'm not even sure I agree with him or don't but get his argument more or less right before you start making random comments. Also his success or failure isn't an indication he's right otherwise all those guys who made millions then lost it all were "right" at least up until they weren't. I tend to think there is more structured thinking behind Mr. Taleb's work and I respect it but success in one instance is not vindication...that's called luck as often as not.

if they think the math is wrong.... (1)

Lord Bitman (95493) | more than 4 years ago | (#27716965)

if the worry is that people don't trust the current models, wouldn't now be the perfect time to pursue studies in that field? Who wants to learn a bunch of things that people are certain of?

There's good money to be made ... (0)

Anonymous Coward | more than 4 years ago | (#27717025)

You have to be a psychopath though ...

The guys getting the multi million dollar bonuses weren't playing the market with their own money. Don't do that, nobody (except maybe Warren Buffet) can beat the market in the long term.

The talent of the big money guys is that they can convince people to let them play with their money and get a big commission no matter whether or not their customers come out ahead.

We used to talk about 'social engineering' to refer to getting lusers to give us their passwords. The 'financial wizards' are just a lot better than the average hacker at social engineering.

So ... learn to convince people that you are the greatest financial modeler of all time. Make sure they pay you really big bucks. Don't spend the money on high living and you will be rich my son. Just don't do anything that's actually illegal like Bernie Madoff. You don't have to.

There will be a continuing need (1)

hedrick (701605) | more than 4 years ago | (#27717027)

There will be a continuing need for mathematical analysis in finance. They will continue to need to assess risk and model alternatives. There will also continue to be people who try to get rich quick and want analysis to show that their approach doesn't have the risks that it actually does. So the need for good analysts will continue, as will the risks that you'll be pushed to use your analysis to support incorrect arguments. But that's going to be true of anyone in finance, quantitative or not. It's an area that is inherently subject to high pressures to do irresponsible things.

Do the math! (0)

Anonymous Coward | more than 4 years ago | (#27717041)

Focus on math that has application to the widest range of things that interest you. It's not a single purpose tool. Sophisticated data analysis has wide usage. Of course, I'm prejudiced in that after many years of analysis of seismic data, I'm now launching into an intensive effort in using statistics on other types of oil industry data using R.

However, it's more important to remember that a doctorate is different from a masters. The real purpose of the Phd is learning how to teach yourself.

Please don't do it... (3, Insightful)

mario_grgic (515333) | more than 4 years ago | (#27717059)

Studying math with some concrete career in mind is like marrying for money.

If you are going to study math, study it for the love of it, and your own soul.

Your degree will prove useful to you in what ever career you choose for yourself later.

Do whatever you want (1)

Miseph (979059) | more than 4 years ago | (#27717103)

Financial mathematics didn't become popular because it isn't effective, and large financial institutions don't get that way for being financially ineffective. They might have to change the job titles to appease minority shareholders, but there's no way they'll get rid of mathematicians who make money with magic.

The real problem wasn't that the math was done, it's that a lot of people were doing it poorly and with too little oversight because, as with any fad, people forget that they know better and trust every crackpot with a grain of insight. Everything in moderation (including moderation).

It is not the math that is the problem (1)

flyingfsck (986395) | more than 4 years ago | (#27717111)

It is the dumbass MBA managers that do not understand the math that is the problem.

A perfect subject.. (3, Interesting)

meburke (736645) | more than 4 years ago | (#27717131)

..for a Ph.D. thesis? How can Mathematics be applied to safely invest without damaging Society?

Well, first, NNT is "outraged" at the "inappropriate use" of Quantitative Analysis (according to his books and the articles I've read), not the "utility" of Quantitative Analysis. The reality is that investments' values fluctuate. The role of the Mathematician is to limit the losses, therefore the risks, involved in investing. This is a legitimate role. If you had been working for 45 years and were about to retire, wouldn't you want to know that your retirement funds were as safe as they could be?

Part of the problem comes from the fact that investment value is affected by information other than the worthiness of the investment. This value activity has created an analytical branch of its own, and subsequent buy and sell orders are based on the activity rather than the underlying fundamentals. NNT's argument in "The Black Swan" is based on the idea that since these random events are indeed "random", by definition they are unknowable, unpredictable and un-assessable. So, when these events occur, no contingency plan behaves correctly. Keep in mind, that this is only a problem if the event(s) affect the investment values, or the perception of investment values, in a negative way. Unfortunately, the use of these QA tools creates an aberration in perception, and may be creating it's own perception, and this "perception" may not conform to "reality", therefore leading to aberrant behavior based on an aberrant strategy. (Oooh, the stock market has become psychotic...) Skynet takes over the market and tries to wipe out the humans because its programming tells it that is what humans want.

Mathematics can tell us a lot about what reality "is", and there is a lot of room for a creative Mathematician to alleviate the downside and limits of financial decision-making. I say, if you like Math and this is an area that interests you, go for it. Try to be the best. Be creative and innovative instead of being a sheep.

Malcolm Gladwell's book, "Outliers" deals with somewhat the same problem in a different domain, and Ayers, "Super Crunchers" gives a good layman's view of how well Math can work for us in certain areas. Graham and Dodd, "Portfolio Analysis" may still be the best overall book touching on your field. Benjamin Graham's, "The Intelligent Investor" may still be the best basic investment book. If you want to get out there a little ways, try Prector's, "The Elliott Wave Theory." I had a friend working at Lockheed in Artificial Intelligence, who was responsible for the computer analysis of the market for Prector's newsletter. Every year they would run a 3-month test of the application, and it would consistently make money well in excess of the inflation rate (even in '89). It's been 15 years since I talked to him, and I have no idea how well it's done in the last few years, but the field seems fascinating.

I say go for it, and good luck!

There is no hard science in finance (1)

alexmin (938677) | more than 4 years ago | (#27717203)

Just glorified accounting. So find something real to study during your post-grad years.
That said, actually making money trading in many circumstances requires solid mathematical background and disciplined application of scientific method. The other alternatives are being a member of old boys club or go Madoff style.

Trading 'from the gutts' now is just asking to be ripped of by robots.

Change (1)

SIR_Taco (467460) | more than 4 years ago | (#27717213)

I think that the main thing that people miss in this whole debacle is the need for change.

      When you're working on algorithms that involve variables like these, it needs to be an on-going process. There is no equation that will remain constant (statistically and/or theoretically) for the foreseeable future. What needs to happen is people with the practical background in the field and the people with the technical background in the program to come together and see what is and isn't working on a regular basis. Finding both in one is rare, but not non-existent.

      The problem was that the people who should have known better (with the practical background) should have known better than to trust what the computer was telling them. There should have been someone, lets say the big-man or higher up in the financial mathematics field, who said: "Hey! This model doesn't work anymore."

      The fact is that the model itself wasn't broken at the time, but the system was. If you have a system in place which reviews and systematically tests the formulas being used in the field, it would have made a significant difference in the outcome that we're dealing with now.

      There should be no feed x,y,z into the black box and the results are law.

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