Financial Modeler's Manifesto

[Dave Haan]

Wilmott & Derman issue a joint statement

excerpt:

Our experience in the financial arena has taught us to be very humble in applying mathematics to markets, and to be extremely wary of ambitious theories, which are in the end trying to model human behavior. We like simplicity, but we like to remember that it is our models that are simple, not the world.

Unfortunately, the teachers of finance haven't learned these lessons. You have only to glance at business school textbooks on finance to discover stilts of mathematical axioms supporting a house of numbered theorems, lemmas and results. Who would think that the textbook is at bottom dealing with people and money? It should be obvious to anyone with common sense that every financial axiom is wrong, and that finance can never in its wildest dreams be Euclid. Different endeavors, as Aristotle wrote, require different degrees of precision. Finance is not one of the natural sciences, and its invisible worm is its dark secret love of mathematical elegance and too much exactitude.

We do need models and mathematics - you cannot think about finance and economics without them - but one must never forget that models are not the world. Whenever we make a model of something involving human beings, we are trying to force the ugly stepsister's foot into Cinderella's pretty glass slipper. It doesn't fit without cutting off some essential parts. And in cutting off parts for the sake of beauty and precision, models inevitably mask the true risk rather than exposing it. The most important question about any financial model is how wrong it is likely to be, and how useful it is despite its assumptions. You must start with models and then overlay them with common sense and experience.

Read the whole thang.

 

[emil]

Another excerpt:

"Simple clear models with explicit assumptions about small numbers of variables are ... the best
way to leverage your intuition without deluding yourself."

 

[IlyaKEightSix]

I do not understand why in all his brilliance, Emanuel Derman lets some book-peddling academic use his rightfully vaunted name to add credibility where none exists.

The market has a great way of exposing the imitators and the frauds and the charlatans and the fools. It doesn't matter what you ascribe to do--the market will reveal you for who you are. Only when the tide recedes do you realize who was swimming naked.

There is a way to do it right. This is evidenced by Renaissance and D.E. Shaw (most of the time in the case of the latter).

 

[Sanket Patel]

What's wrong with Wilmott and what makes him a lowly 'book-peddling academic?'

I do not understand why in all his brilliance, Emanuel Derman lets some book-peddling academic use his rightfully vaunted name to add credibility where none exists.

The market has a great way of exposing the imitators and the frauds and the charlatans and the fools. It doesn't matter what you ascribe to do--the market will reveal you for who you are. Only when the tide recedes do you realize who was swimming naked.

There is a way to do it right. This is evidenced by Renaissance and D.E. Shaw (most of the time in the case of the latter).

 

[alain]

I do not understand why in all his brilliance, Emanuel Derman lets some book-peddling academic use his rightfully vaunted name to add credibility where none exists.

I don't think you know what you are talking about.

Comments like this will come back and hunt you one day.

 

[bigbadwolf]

Wilmott and Derman are correct but they'd better stay out of the clutches of the measure theory police, who will promptly lop off their heads for thoughtcrime.

 

[Andy Nguyen]

I do not understand why in all his brilliance, Emanuel Derman lets some book-peddling academic use his rightfully vaunted name to add credibility where none exists.

There is a perfect medium for comment like this and it's called Nuclear Phynance.
For every fan of Wilmott, Taleb or any other well known figure in finance, there is another one over at NP that will have a dimissive, unkind view.
Quantnet is pretty much free of the kind of personal bashing. We each have our own personal views but will keep it to ourselves.
Just like Alain said, you don't want to the comments to come back and harm you. I can tell you that a lot of well known people visit Quantnet. Even my boss has an account on Quantnet.

 

[IlyaKEightSix]

The thing about Paul Wilmott is this: I don't care at all for "gurus" that can write volumes on a subject they can't actually use successfully. In terms of Real Estate, John T. Reed is huge on this, and has bashed many such gurus.

I too, am extremely skeptical of such people. I tried googling up articles about Wilmott but could find relatively little. If someone could make a case for Paul Wilmott, I would honestly be highly appreciative, since I'd love to find out more about successful FEs.

 

[guestnine]

Dear Andy:

What's the point of quantnet.com if members are asked to keep their personal views to themselves? Where do you or quantnet.com draw the line on the discrimination of an individual's evaluation on a subject? Is there a FAQ for new users that I'm unaware of at this forum? Public figures and their respectful convictions are understandably subject to criticism and conflicting ideas. This country tolerates different opinions and only the members get to decide the entitlement and what's appropriate. Furthermore, what are you implying about the participants at the other forum, Nuclear Phynance? Ignorant, maybe?

 

[alain]

I think you can express your opinions without calling names. There is always a respectful way to express your opinions and that's what I think we should do when we disagree with the views of others.

I understand Ilya. He seems impulsive and sometimes immature, but he will learn with time.

 

[Andy Nguyen]

What's the point of quantnet.com if members are asked to keep their personal views to themselves? Where do you or quantnet.com draw the line on the discrimination of an individual's evaluation on a subject?

Every community has its own unique identity and attracts a certain type of members. A large number of Quantnet members actually know each other personally and professionally. You can see that by the way most of us here using real names, real LinkedIn profiles instead of some internet moniker. This would set a certain standard of credibility and respectability among us.
We invite people to express their opinions respectfully of one another. We welcome everyone to discuss why they think W's point of view is absurd, not why they think W is an idiot. Attack the argument, not the person. When someone crosses the line, we will gently remind them that there exists some other place where such postings are better received.

Furthermore, what are you implying about the participants at the other forum, Nuclear Phynance? Ignorant, maybe?

I really can't answer this on their behalf. They certainly have their own view

 

[Stefan Zota]

The thing about Paul Wilmott is this: I don't care at all for "gurus" that can write volumes on a subject they can't actually use successfully. In terms of Real Estate, John T. Reed is huge on this, and has bashed many such gurus.

I too, am extremely skeptical of such people. I tried googling up articles about Wilmott but could find relatively little. If someone could make a case for Paul Wilmott, I would honestly be highly appreciative, since I'd love to find out more about successful FEs.

Be very careful Ilya. It is good that you are active on this forum, excited to learn and to keep up2date. However some restraint is always needed especially in a professional environment. This is not a chat room.

As for data on Wilmott, try first 3 links on google with key 'wilmott'. If you still are in dismissive state of mind, then browse this site:
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