"Trading as a Business" quant interview, highly recommended

Quote from Martinghoul:

Of course they didn't... 'Cause guess what was going through their heads? It wasn't the gaussian copula and its flaws.

What I'd like to understand is at which point in the whole toxic CDO chain you absolve the actual decision-makers of the responsibility for their decisions and start suggesting that they're just innocent victims of the evil quants with their models.

EDIT: That Wired article about David Li is not a very good one...
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Once again, putting words into my mouth.

When I say Quants are misguided, I am not by definition absolving anyone else.

Of course people were complicit BUT the issue runs deep into the heart of the Business Schools and the fact that they have been hijacked into teaching finance as a mathematical science when it isnt.

Imagine a doctor being taught by someone with no practical experience but who's theories on surgery are well published to the point he's considered a leader in his field. Would you have one of his students operate on you ? Of course not.

Yet business schools are full of theorists not practitioners. What matters most to the business schools is that their professors get theories published in influential journals. In 2008, Olin Business School terminated one of their best professors of accounting - Tzachi Zach because he wasn't a 'serious theoretical researcher'. So what matters most in the business schools is the creation and publishing of new theories. Not the teaching of students (Zach had many awards for that) and not the user of real-world practical knowledge.

So - the implication here is that the important ideas come from mathematical theoretical research and not the developments in the real world.

If this is the way the business schools are - what kind of future is there for the businesses that their graduates run ?
 
Quote from pedro01:

If this is the way the business schools are - what kind of future is there for the businesses that their graduates run ?
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Why do you want everyone to get smart, don't you realise that your ability to make money depends on everyone else's mistakes. :D
 
Quote from pedro01:

Once again, putting words into my mouth.

When I say Quants are misguided, I am not by definition absolving anyone else.

Of course people were complicit BUT the issue runs deep into the heart of the Business Schools and the fact that they have been hijacked into teaching finance as a mathematical science when it isnt.

Imagine a doctor being taught by someone with no practical experience but who's theories on surgery are well published to the point he's considered a leader in his field. Would you have one of his students operate on you ? Of course not.

Yet business schools are full of theorists not practitioners. What matters most to the business schools is that their professors get theories published in influential journals. In 2008, Olin Business School terminated one of their best professors of accounting - Tzachi Zach because he wasn't a 'serious theoretical researcher'. So what matters most in the business schools is the creation and publishing of new theories. Not the teaching of students (Zach had many awards for that) and not the user of real-world practical knowledge.

So - the implication here is that the important ideas come from mathematical theoretical research and not the developments in the real world.

If this is the way the business schools are - what kind of future is there for the businesses that their graduates run ?
More...
Rightie, so you're making a few distinct points here... Please correct me if my summary below is wrong.

Firstly, we seem to be agreeing that quants, whatever their other faults might be, are NOT to blame for the calamities that mkts periodically experience. Ultimately it's only the people who make the investment decisions that are to blame for whatever losses they incur.

Secondly, you are not happy with the extent to which quantitative methodologies have come to dominate modern finance.

Thirdly, you are not happy about the current state of the education establishment, as it, in your view, focuses excessively on the theory at the expense of practice.
 
fool, the market prices options exactly according to BS and then makes adjustments for skew, fat tails, and the like. There are a few French models out there, one of which was developed by a whale at the Deutsche index options desk in NYC but I dont wanna go into depth o tn that. Fact is BS has since its introduction been extensively used, everyone knows its shortcomings and everyone works around it because there simply are very few alternatives.

You cannot model rare events nor can someone with whatever amount of work experience predict rare events. You use the models until you get to the points where you know the models dont hold and then you manage risk in "manual" mode (meaning most of the time risk reduction) until the storm is over. Simple as that. Thats how some guys struck it rich. Other, more impatient natures, frequently blow up, get fired, suck the tits of head hunters and get their new job. Thats how it works and no politician nor crisis is gonna change that...





Quote from pedro01:

The market can price options better than any computer model and certainly the probability estimates of outlying events in the most widely used quantitative models has been show severely lacking. [/B]
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very well said. This is not an issue of man vs machine. This is simply an issue where people were given a free option. They loaded up on risk knowing that when the shop blows up they will only be one out of many and that after the smoke clears things will be reset and everyone starts over (with the same free call options, unfortunately). I am 100% convinced this is exactly how its gonna happen because this is the only way to get a lot of heavy hitters to the gambling table.

Re Taleb, he says not else than that there are rare events out there that occur a lot more frequently than being priced. He admits there is no way of predicting them...hmm...anything new there?



Quote from Martinghoul:

You misread my comment.

It's not your choice. By 'you' I was referring to the risk manager/trader that chooses to believe blindly in numbers that are given to him by whatever system he uses.

The point that you keep making is misguided. All you're saying is that if everyone simultaneously subscribes to the same model, whether it's CPPI, gaussian copula or whatever else, the world goes to hell when the underlying assumptions are violated (e.g. liquidity disappears, etc). Well, DUH!

You completely fail to see two very simple points: a) the issue you describe is not about quant models, but rather about humans (recall the tulip mania and the South Seas Co; no quant models there); b) it's not the failure of the model, but a failure of incentives that cause 'herding', which exacerbates the boom and bust.

EDIT: As I keep saying, time and again, I'd go with Fisher Black over Taleb any day. Taleb has nothing constructive to say, while Mssrs Black & Scholes, regardless of whether right or wrong, have increased our understanding of the world immensely.
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you really think so? I beg to disagree. After digesting all the stories I heard I am pretty sure that everyone knew what was going on. It was exactly like the "beat the earnings expectations game" e. Everyone knew the market was overpriced yet everyone chased it higher. Reminds you of any of the previous bubbles in the past 2000 years?



Quote from pedro01:

Nope - I don't disagree with any of that. I agree with all of it except the part about complicity.

When Moodys rated a derivative AAA, I don't think the buyers of the derivatives understood the risks they were taking, although I may be wrong.
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often times the truth is very simple such as here. All can be explained by the already mentioned herd-effect. Unless we find out how to stop giving incentives to excessive risk taking the exact same thing will happen again. That is, quite frankly, the little point I tried to make, and we have already reached page 10 for something that , at least to me , seems very simple to analyze yet impossible to solve (because unless you pay top talent top dollars you dont find them back at the Wall Street banks but some engineering shops across the boarder. Thats something banks cannot afford. Nothing that you or I or B. Franks will ever be able to do about.

Quote from HiddenAgenda:

I'm sorry, but I think you have to do a little better than that. Everything is about sychology. This is just another commonplace statement, which can be applied to any area of life.

Quite frankly, I don't see what your point is.
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to the point...hey, I like your posts here, I am sure you dont share the same enthusiasm about my posts, I freely admit I never trained or showed interest in refining my articulation skills. Just wanted to mention I think you are pretty straight to the point. Do/did you work for any sell side firm before?


Quote from Martinghoul:

Of course they didn't... 'Cause guess what was going through their heads? It wasn't the gaussian copula and its flaws.

What I'd like to understand is at which point in the whole toxic CDO chain you absolve the actual decision-makers of the responsibility for their decisions and start suggesting that they're just innocent victims of the evil quants with their models.

EDIT: That Wired article about David Li is not a very good one...
More...
 
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