Future of Financial Mathematics? 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?"
It will always be risky (Score:2, Interesting)
... given that people want to see subjective numbers. See:
http://www.amazon.ca/How-Lie-Statistics-Darrell-Huff/dp/0393310728 [amazon.ca]
A couple of things.... (Score:3, Interesting)
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.
Comment removed (Score:5, Interesting)
A perfect subject.. (Score:4, Interesting)
..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!
Re:A bit self-defeating (Score:3, Interesting)
Taleb undercuts his arguments by disparaging those he disagrees with and using ten paragraphs when one would suffice.
I'd go further to say (Score:5, Interesting)
Don't go getting a masters or PhD if money is the objective. I see WAY too many people who are just hoop jumpers. They are going on to get a higher degree to get a better job. Some of these people get their PhD and then do post doc work not because there's still research they want to do but because they still can't get the job they want. Never occurs to them maybe education isn't the problem, it might be their complete lack of problem solving skills or the like.
A masters and more so PhD are NOT for everyone, they are not even for most people. They are supposed to be when you really want to specialize in an area and do new research on the topic. If that isn't what you are about, then don't go for it. Unless you are going in to a field that has a specific minimum, and most don't past a bachelors, then there's no reason to go for a higher degree just for its own sake.
Any time a friend or family member talks about wanting to get a masters my question for them is always: Why? Not as a petulant "Don't do it," thing but as a challenge. I want them to give me the reason they want to do it. If they can't, or the reason is "To make more money," then I'm going to tell them it is a bad idea. If the reason is "Because this interests and excites me," then I think it is a great idea, even if there isn't going to be a return on the money spent. Education for the sake of learning about what you want is wonderful. Just make sure that is really the reason you are doing it.
Re:the right way to get a PhD (Score:3, Interesting)
No, this isn't flamebait, it's a direct insult.
Any fool who asks for a future historical perspective deserves disdain. Anyone who asks it in regard to predictive activities, doubly so.
Any fool who asks for the impossible (historical knowledge before the events occur) as a means to predict the relevance of fortunetelling...may as well invest in Bernie's fund.
Re:Advice from a PhD student (Score:1, Interesting)
I currently write software used to value structured financial transactions such as mortgage backed securities. I am over qualified for my job, but one of very few people in the world that is not under qualified for it.
Since when is a Master's overqualified? Please take a stop at 85 Broad St. [goldmansachs.com] some day. PhDs are all over the place, Master's are a dime a dozen. Your saying that you're overqualified is some of the biggest hubris I've ever seen on here.
Re:A bit self-defeating (Score:3, Interesting)
The losers don't get much press. Once in a while someone wins big and everyone wants to know how that person did it.
Even if there's a good reason why that person is "winning", often that person might not even be able to tell you how to replicate the success (he certainly can tell you lots of stuff, but that's not the same thing
Warren Buffet does appear to have a consistent track record and his method does appear to make sense.
I know someone in the finance industry and he says what he really does is transfer money from the stupid to the smart (himself ), and it's not about "making more efficient markets", "providing liquidity" and all that bullshit. He says the difference with him is at least he's honest about it ( at least to some people
Call me cynical but in my opinion all the "fancy math and investment strategies"[1] are the equivalent of smoke and mirrors magicians use to hide what they are really doing.
Think about it - what is actually happening if a bunch of people keep trading stuff amongst each other till things end up priced many times their original value, while they collect a commission per transaction (and a even bonus in some cases)? Where's the money really going?
If you really believe that sort of thing helps make the market more efficient, then there's someone out there who would like to sell you a "High Grade Structured Enhanced Leveraged Bridging Fund".
[1] Don't get me wrong - non-fancy math and strategies are OK. When it comes to investment, the fancier the math, the more likely it is to be BS.
A false, or sorry, prediction (Score:3, Interesting)
True, the sum total invested in financial math WAS TRUE, but that has since been "magically" transformed into worthless derivatives - Geithner's fraudulent PPIP program to the contrary.
There should be mass mobs on their way to Basel to burn down the Bank for International Settlements, and to D.C. to burn down the Federal Reserve Bank; both detrimental to any true progress and human development.
Have math. Will pay (Score:2, Interesting)
The financial markets run on sentiment. But no PHB will ever be caught admitting as much. Because it basically means they will lose their million dollar bonuses. They hire mathematicians to come up with a mathematical model to explain their decisionz. Taleb talked about it in his book "fooled by randomness". You can be assured that your job in the financial district is secure because the PHB don't understand math. But they want to be seen taking logical decisions. And what better field than math to "prove" that the decision is logical. Q.E.D