2010 IAFE Annual Conference Recap

Joy Pathak

So yesterday I attended the International Association of Financial Engineers Annual Conference. It was truly an amazing event. Some of the greatest minds in the world presented. The speakers included, Andrew Lo, Richard Roll, John Hull, Mark Flannery, and many others. The event was held at Goldman Sachs building on New Slip in the financial district of New York City. Here is a recap of few of the talks and what went on majorly. Thanks to Stefan and Vladimir, Baruch MFE Current Students/Alumni for showing up. Also, thanks to the upcoming students, Billy, Amanda, William and David for coming too. This event was sponsored by Quant Network along with UCLA and Berkeley MFE programs.


The first talk that I saw was by David Martin of AllianceBernstein. (Nobody to famous. Just getting the crowd warmed up mostly with the first set of talks).

Here are some of the key points regarding Financial Reform he touched on:
  • Financial Reform would lead to Heightened Supervision
  • You have not seen enforcement of this magnitude ever and it is about to get worse
  • SEC will become A LOT stronger in the upcoming years
  • Every financial crisis needs a bad guy and the public has found them
  • Compliance cost will impede hedge fund formation.
  • Boards of companies will be more pro-active
  • Overall Financial reform is bad and harmful
  • His cleaning lady had a 500K house (his e.g. of Sub-prime mortgage behind Financial Crisis)
The second talk I witnessed was by Conrad Voldstad-CEO of International Swaps and Derivatives Association.
Here are some of the key points regarding Scenarios for US Derivatives Market place especially related to clearing that he talked about:
  • In 3 years all derivatives will be cleared
  • About $200 Trillion are currently being cleared
  • More and more clearing houses will pop up over the next few years
  • Each asset class will have an individual clearing house.
  • Clearing house are designed to handle multiple bankruptcies
  • Work to reduce notional by $100 trillion is currently going on at the London Clearing House
  • Banks were hit primarily due to real estate problems (AIG, B of A, Washington Mutual, etc)
  • Expansion of clearing will decrease systematic risk.
Ah, then came the great Andrew Lo. What an AMAZING speaker. Definitely the best talk of the day. I was too engrossed in his talk to be able to take notes properly. He draws you in very well. He focused mainly on his new paper related to Physics Envy and uncertainty. He is a big supporter of engineers transferring onto finance as engineers are best and identifying and fixing problems. His words not mind. ;)
Here are some of the things he talked about:
  • Fischer Black worked at Goldman
  • Banks looks much more efficient from the Hudson than from the charts
  • Paul Samuelson’s dissertation in 1947 is a great read
Risk vs Uncertainty Games
- Here is a game:
  • 50 red and 50 black balls in an urn.
  • Pick a color
  • If you draw your color you will get $10,000
  • What color would you prefer?
  • How much would you pay for this game?
Game 2:
  • There are 100 balls. Red or Black (no proportion)
  • Everything else is same as above.
  • Now how much would you pay? And what would you prefer?
I will tell you the answers, but post it on the comments section and I will tell you what Andrew Lo said are the true answers.
  • There are two types of randomness – Risk and Uncertainty
  • The deepest fear is the fear of the unknown
  • The profits of risks are normal
  • The profits of uncertainty are unknown
  • Why does a nanotech lab need lots of space? (Joke)
  • Extension of Knights Dichotomy model
1) Complete uncertainty
e.g Hookes Law F=-Kx Guaranteed certainty of Force.
Statistical Arbitrage
2) Risk without Uncertainty
e.g Stochastic Processes
3) Fully Reducible Uncertainty
e.g Econometric Estimators
4) Partially Reducible Uncertainty
e.g Two State markow switching process
Two regimes keep switching constantly.
Applying FFT depending on the regime can sort of tell which ones are the spring related to Hooke’s Law. The uncertainty is reducible with calibration.
Fear Greed, regulation
5) Irreducible Risk Uncertainty
e.g. Aliasing and Identification problems.
Data errors, Government Interaction, etc.
- Taxonomy of Uncertainty
- We mistakenly apply separate levels of Risk.
- Uncertainty checklist
  • Assuming incorrect levels of uncertainty is common in the industry.
  • Multiples of uncertainty may apply simultaneous.
  • As knowledge accrues uncertainty decreases
  • As expertise departs, uncertainty increases.
I am busy at another conference right now, but I will add John Hull’s stuff and Richard Roll’s speeches later. Also, for those who felt like that the above information and bits were horrible do not worry ;) , I have already talked to IAFE and the speakers to get their presentation copies. I will post them here soon. Also, I have a good 30 minute in person interview with Dr. Richard Roll who won the Financial Engineer of the Year award.
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Interesting post. I had another take on it. As you start your career as a risk manager, don't let your critical mind be subdued by any orator no matter who he is...