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HyperVolatility


Total Posts: 130
Joined: Nov 2010
 
Posted: 2010-11-25 18:11

Paul W****tt the founder of the CQF during an interview stated the following:

"There are also different types of quants. I train more quants than anyone else on this planet, and there are two types—sensible and stupid. Unfortunately, the stupid—the purist, abstract mathematics-loving quants—are in the majority.

Let me explain. Many quant books contain vast volumes of unrealistic mathematics. Some people get carried away with the beauty of this mathematics with no corresponding understanding of finance and, more importantly, of human nature. These people are dangerous, as you cannot talk to them about the real world. If you tell them their models do not work, they’ll talk of all sorts of abstract notions, proving themselves right in their heads. Unfortunately, all this is without any reference to the real world. And in finance—which is as much about people as mathematics—if you can’t grasp that, then that is dangerous.

I have always advocated the mathematics “sweet spot,” that fine balance between a sufficiently advanced knowledge of mathematics to do the job in the real world, while not being so abstract as to lose your head in the clouds. You must not dumb down quantitative math, else you cannot understand more complicated derivative products. But, equally, you do not want to stray into the even more dangerous area of really high-level math, where people get carried away by the subject’s beauty. There are some 5,000–10,000 Masters in Financial Engineering graduates churned out each year, and I would not employ a single one of them myself, as they are so hopelessly out of touch.

I hope that everyone—people, banks, risk managers, hedge funds, governments, and regulators—all realize that while a certain level of mathematics is important, transparency and robustness in the models are the key, not valuing derivatives to 10 decimal places."

Do you agree with that? What is your opinion?


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athletico


Total Posts: 935
Joined: Jun 2004
 
Posted: 2010-11-25 19:11
W****tt can be a pompous ass but he is 100% spot on here - couldn't agree more.

rod


Total Posts: 287
Joined: Nov 2006
 
Posted: 2010-11-25 19:16
It's not just quants. It's everyone. It's human nature. As Tolstoy put it:

"I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth, if it be such as would oblige them to admit the falsity of conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven thread by thread, into the fabric of their lives".

cronian


Total Posts: 53
Joined: May 2006
 
Posted: 2010-11-25 20:41
Fancy elegant math shouldn't mirror the "real" world(tm). It is a form of high art. Art can be done both for its own own sake, and for other ends. Does anyone expect the real world to look like a commercial? Likewise, why should the economy function like a economic theory?

That would be ridiculous. Such theories are merely advertisements tailored to a certain audience. Although, they may still have beauty in the mathematics within themselves. Some people may have trouble appreciating art, but that is another matter.

FDAXHunter
Founding Member

Total Posts: 8252
Joined: Mar 2004
 
Posted: 2010-11-25 21:25
The statement is true, but it is hardly insightful. Most people in the real world know this.
Paul W****tt is an academic, which is perhaps why he feels the need to actually point this out.

The Chaos Army seems suspiciously well-organized.

Hansi


Total Posts: 240
Joined: Mar 2010
 
Posted: 2010-11-25 21:45
Don't know enough quants to comment on whether he's right about the model before market quants being the majority but I know both types. The ones that tend to believe in people and the market dynamics before their models tend to be in more senior positions so I think they've got the right idea.

all realize that while a certain level of mathematics is important, transparency and robustness in the models are the key, not valuing derivatives to 10 decimal places."


This is an issue I have to iterate on way too often at work. The modellers spend way to much time fitting the internals to some pre-described "true value" while they're inputs might as well be guesswork.

On the MFE grads I agree somewhat on the basis that a lot of us don't have enough business experience to be useful. I've learned at least 300 times more in the one year working after finishing my degree than I did in my four years of studying (BSc+MSc FE). But someone has to take on us lost sheep and teach us the ropes :P

MrMagoo


Total Posts: 191
Joined: Jan 2008
 
Posted: 2010-11-25 22:31

This is the best quote IMO, from MIT's Andrew Lo, who also manages a hedge fund  :

"In physics, it takes three laws to explain 99% of the data; in finance, it takes more than 99 laws to explain about 3%."


"One who says it can't be done should not interrupt the person doing it."

Cheng


Total Posts: 2629
Joined: Feb 2005
 
Posted: 2010-11-26 09:25
In essence right, but nothing truly new. P. Widdy at his best.

"And everyday when the knife in my back starts to twinge 'n' turn / My eyes are catching fire and my heart starts to burn / One foot away from you is like being closer to heaven / Then again it's like being needled 24/7"

Martinghoul


Total Posts: 740
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Posted: 2010-11-26 11:58
It's true, what he says, but I think most people with any experience know this already.

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

mingon


Total Posts: 82
Joined: Apr 2008
 
Posted: 2010-11-26 12:28
I have yet to see any quants with >1y exp that thinks his model is the master of the universe at real work.
Note I'm not talking about any of the fancy articles/conferences/workshops.
Either I haven't seen enough quants or Widdy should really get real and cut out his PR crap.

nodoodahs


Total Posts: 227
Joined: Sep 2007
 
Posted: 2010-11-26 13:09
> The statement is true, but it is hardly insightful. Most people in the real world know this.

In my experience about 2/3 of the ACAS and FCAS that I have worked with do NOT know this.

> while a certain level of mathematics is important, transparency and robustness in the models are the key, not valuing derivatives to 10 decimal places.

Again, a majority of the P&C actuaries I have worked with have "issues" in differentiating between precision and accuracy.

I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

Tradenator


Total Posts: 1375
Joined: Sep 2006
 
Posted: 2010-11-26 13:09

See the first chapter of von Neumann and Morgenstern for a discussion on the role of mathematics in economics, including a comparison to physics. 

Regarding the Lo quote, I think it takes a little bit more than that if you want to get beyond the undergraduate physics laboratory exercises, and more so if you are pushing the envelope.

EDIT: Regarding pwiddy, well, even a broken watch is right twice a day.

EDIT2: nodoodahs, in infantry school they taught us how to sight in a rifle for accuracy.  Once you were dialed in for accuracy, then precision was left to your technique as evidenced by a tight shot group.  When differentiating between accuracy and precision, I always think of the rifle range for some reason.


chiral3
Founding Member

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Posted: 2010-11-26 14:12
I'd also point out that PW only ratcheted his rhetoric up above the noise floor after the crisis on this front. Prior to that he was running the only business that he has ever been successful in, lecturing; nor I have never heard of anyone failing the cqf that submitted everything to the end (if it happens it must be rare). Also never saw modules designed around ethics (cf. cfa) or anything remotely correlated to the popular beliefs around the origins of the crisis and the limits of mathematical techniques. So while what he says is true and in many ways a platitude that has always been uttered in one form, coming from him it not without irony.

Recent BICEP2 data does not rule out the existence of Nonius.

Graeme


Total Posts: 1629
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Posted: 2010-11-26 17:27
I think if the statement is aimed at academics - who are the first milk nurse of the quant - then it is useful.

But academics won't read it, so I guess it doesn't serve much purpose.

There is a real disconnect between what is rated in academia and what might be actually useful. As an example, I have a half-time position in academia, and am treated like a pariah - what I have published `is not mathematics'.

Graeme West

granchio


Total Posts: 1490
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Posted: 2010-11-26 17:58
I agree with Graeme on academia. People do Levi processes, but don't know the basics of dividend modelling on volsurfaces.
But similar happens in the business. Derivative models applied, prices and greeks computed, when not only the inputs are crap - as already pointed out below - but also when hardly any of the underlyings are tradable.
In my limited experience, I think it's pretty common - in fact it is necessary to sell some of the products that are driving P&L in some of the sale-side shops.
Are people (quants, traders, managers) unaware of the issues, blind believers in the beautiful math, or they know, and do not care as long as it pays the bonus at year end?

Who knows. As usual, the answer is probably not unique.

"Deserve got nothing to do with it" - Clint

HyperVolatility


Total Posts: 130
Joined: Nov 2010
 
Posted: 2010-11-29 15:07

Quote: "Are people (quants, traders, managers) unaware of the issues, blind believers in the beautiful math, or they know, and do not care as long as it pays the bonus at year end?"

This is a very good question and I'd like to reply by quoting the answer that a CEO of a bank gave to a journalist when asked why they were blindly packaging risky subprime loans in CDOs and CDSs

"I never fully understood those products.We used to follow the instructions provided by the quantitative department. Frankly,I did not know what they were doing down there"


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sv507


Total Posts: 148
Joined: Aug 2010
 
Posted: 2010-12-05 15:02
Graeme, isn't that because what you do and what is done in the industry is not mathematics - it's engineering.

The problem we have now is that all the courses, MFEs etc are taught by maths departments, because stoch calculus is too difficult mathematics. Delta functions are also difficult maths, but you don't need to prove theorems to use them, and of course are taught v successfully in engineering depts.

I hope(?!) that in 20 years they might teach MFEs in engineering depts rather than maths.

sv507


Total Posts: 148
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Posted: 2010-12-05 15:02
Graeme, isn't that because what you do and what is done in the industry is not mathematics - it's engineering.

The problem we have now is that all the courses, MFEs etc are taught by maths departments, because stoch calculus is too difficult mathematics. Delta functions are also difficult maths, but you don't need to prove theorems to use them, and of course are taught v successfully in engineering depts.

I hope(?!) that in 20 years they might teach MFEs in engineering depts rather than maths.

Hansi


Total Posts: 240
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Posted: 2010-12-05 15:36
sv507
I hope(?!) that in 20 years they might teach MFEs in engineering depts rather than maths.


My BSc FE was in an engineering department but the MSc FE I did was in a business school. The BSc was much more useful and better structured.

I guess it's just different from one school to another.

doctorwes


Total Posts: 574
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Posted: 2010-12-05 18:53
What will the MFE curriculum look like in 20 years' time?



Graeme


Total Posts: 1629
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Posted: 2010-12-05 19:36
sv507, your first and second paragraphs basically take contrary views, I think.
The view that much work, including the style of my own research (which of course was a criterion for getting the job) is more engineering than maths is fine. However, the attitude permeats to the entire subject. There are lots of reasons why it shouldn't, not just the stoc calc.

Graeme West

sv507


Total Posts: 148
Joined: Aug 2010
 
Posted: 2010-12-05 22:15
Graeme, I don't understand where I am contradicting myself.

I am not being critical of engineering. I am saying that the questions people face in the industry are -

how do I interpolate the smile curve
how do I hedge an exotic with vanillas...
how do I build an efficient 3-D pde solver

to my mind these are engineering questions not maths questions.

I am saying that the reason most maths finance departments produce nothing of relevance is precisely because they are trying to do good (difficult) maths rather than good engineering.

karabouchi!


Total Posts: 28
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Posted: 2010-12-08 04:01
As a slight aside, is it true that building "an efficient 3-D pde solver" is currently a hot topic in industry? I'm quite curious Smiley

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Graeme


Total Posts: 1629
Joined: Jun 2004
 
Posted: 2010-12-08 12:38
sv07: I'm now not sure whether you think programmes should be taught
a) in maths departments
b) in engineering departments, without stoc calc
c) in engineering departments, with stoc calc farmed out to math dept.

Graeme West

sv507


Total Posts: 148
Joined: Aug 2010
 
Posted: 2010-12-08 12:54
I don't know about now? It was...

Basically its the method of choice for long dated exotics in fx, most notably power reverse dual structures (callable 30 year products where you exchange fixed coupons in say dollars for fixed coupons in yen). A lot of these were issued (2000-2007).

There are certainly other applications (but whether they are used, I don't know) eg pricing callable products on CMS in interest rates?)

2d PDEs are pretty standard (eg LSV)
I had heard that some people in the industry are starting to look at 4-d.
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