QuantNet
Staff member
- Joined
- 10/23/03
- Messages
- 43
- Points
- 28
The recent financial crisis combined with a confused press regarding who is at fault has, in recent meetings of Financial Engineering/Mathematics programs across the US, raised the urgency to better define how we are educating our students for the Masters degree in Financial Engineering. The need to brand financial engineering is being discussed by the IAFE. This has presented an opportunity to effectively collaborate when challenged externally by a public duped in believing that financial engineers were a major contributor that led to the crisis. In these discussions, a challenge on defining the nature of the financial engineering profession has been revealed. In particular, are financial engineers Quants or is Quant only a means (albeit important) but increasingly of lesser importance.
This is a dilemma, “are we engineers or Quants?” This question has plagued "Science" and "Technology" as well. Science makes discoveries by seeking an internally consistent theoretical framework. Technology is challenged by the need to reconcile what we know and the manifestations of a complex reality that inserts doubts into everything we encounter. Quants however, seek to maximize an implied rationality, while financial engineers recognize that these rationalities are bounded and they seek an understanding that satisfices (a word attributed to Herbert Simon) our needs.
The danger to our programs is that Quant Finance may “hijack” the brand of “financial engineering”, and thereby isolate financial engineering into an academic ivory tower, increasingly disconnected from the real and business needs of financial professions. Practice points to the fact that “markets are incomplete”, that they are “unpredictable, that financial information is inadequate as well as non-transparent, that financial services are thriving on arbitrage rather than investing, and that financial ethics are violated often by the few at the expense of the many etc. These elements tend to render Quants ineffective. Financial engineers, far more sensitive to real practice and more aware of theoretical quant model failings, are more apt to confront them. Practice has pointed to the fact that Quant Finance can at times mislead far more than lead. Nassim Taleb seminal The Black Swan: The Impact of the Highly Improbable, were based on an extensive theoretical and practical experience as a trader, that recognized that “predicted future state preferences” so dear to Quant Finance for the theories it is based on, can in fact be unpredictable. Numerous studies point to the effects of skewness (thereby-non normality of data) and fat tails (kurtosis) that are far more evident than Quant finance would let us believe. While state preference theory, “Martingale Finance” or “Risk Neutral Pricing” are most appealing and represent a master stroke of rational thinking, it is only a model—and therefore by its definition it is only a partial image of a limited reality.
The branding of financial engineering as “engineering rather than a Quant profession” is thus essential if it is to survive and prosper. In our program at NYU-Polytechnic Institute, financial engineering is at the kernel of an interdisciplinary profession. It seeks to bridge theory and practice; integrate in a coherent educational framework the theories and the environment of finance and economics; points out that finance is fueled and fed by information (and therefore, any beginning financial engineer must first be confronted with data and how to reduce its complexity into statistical and meaningful pronouncements); that financial engineering technology is an essential part of its entrepreneurial business and of course Quant. Quant in this framework is a means to reduce the complexity of financial constructs and understand their complexity. It is not however its dominant factor. For a Quant, finance will be “virtual” embedded in rational expectations, for financial engineers, virtuality is a means to manipulate “reality”. A Quant will seek comfort in numbers and constructs that have removed financial risks ex-ante; for a financial engineer, however risk may be mitigated but not removed.
In a global financial world, financial engineering is “about the world”, its politics, its upheavals, its opportunities and the many challenges it confronts, as everything that happens impacts finance, while everything that requires “financial actions” requires financial engineering.
Charles S. Tapiero is the Topfer Chair Distinguished Professor of Financial Engineering and Technology Management and Head of Department of Finance and Risk Engineering Dept, NYU-Poly. Charles S. Tapiero has just published Risk Finance and Asset Pricing: Value, Measurements, and Markets.
This is a dilemma, “are we engineers or Quants?” This question has plagued "Science" and "Technology" as well. Science makes discoveries by seeking an internally consistent theoretical framework. Technology is challenged by the need to reconcile what we know and the manifestations of a complex reality that inserts doubts into everything we encounter. Quants however, seek to maximize an implied rationality, while financial engineers recognize that these rationalities are bounded and they seek an understanding that satisfices (a word attributed to Herbert Simon) our needs.
The danger to our programs is that Quant Finance may “hijack” the brand of “financial engineering”, and thereby isolate financial engineering into an academic ivory tower, increasingly disconnected from the real and business needs of financial professions. Practice points to the fact that “markets are incomplete”, that they are “unpredictable, that financial information is inadequate as well as non-transparent, that financial services are thriving on arbitrage rather than investing, and that financial ethics are violated often by the few at the expense of the many etc. These elements tend to render Quants ineffective. Financial engineers, far more sensitive to real practice and more aware of theoretical quant model failings, are more apt to confront them. Practice has pointed to the fact that Quant Finance can at times mislead far more than lead. Nassim Taleb seminal The Black Swan: The Impact of the Highly Improbable, were based on an extensive theoretical and practical experience as a trader, that recognized that “predicted future state preferences” so dear to Quant Finance for the theories it is based on, can in fact be unpredictable. Numerous studies point to the effects of skewness (thereby-non normality of data) and fat tails (kurtosis) that are far more evident than Quant finance would let us believe. While state preference theory, “Martingale Finance” or “Risk Neutral Pricing” are most appealing and represent a master stroke of rational thinking, it is only a model—and therefore by its definition it is only a partial image of a limited reality.
The branding of financial engineering as “engineering rather than a Quant profession” is thus essential if it is to survive and prosper. In our program at NYU-Polytechnic Institute, financial engineering is at the kernel of an interdisciplinary profession. It seeks to bridge theory and practice; integrate in a coherent educational framework the theories and the environment of finance and economics; points out that finance is fueled and fed by information (and therefore, any beginning financial engineer must first be confronted with data and how to reduce its complexity into statistical and meaningful pronouncements); that financial engineering technology is an essential part of its entrepreneurial business and of course Quant. Quant in this framework is a means to reduce the complexity of financial constructs and understand their complexity. It is not however its dominant factor. For a Quant, finance will be “virtual” embedded in rational expectations, for financial engineers, virtuality is a means to manipulate “reality”. A Quant will seek comfort in numbers and constructs that have removed financial risks ex-ante; for a financial engineer, however risk may be mitigated but not removed.
In a global financial world, financial engineering is “about the world”, its politics, its upheavals, its opportunities and the many challenges it confronts, as everything that happens impacts finance, while everything that requires “financial actions” requires financial engineering.