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Message: <blockquote data-quote="Aaron Brown" data-source="post: 92223" data-attributes="member: 4189">I meant "rigorous" in the sense of deep questioning of assumptions and insistence on logical consistency. There are rigorous physicists, but most of physics—and all of engineering and applied mathematics—is about getting the answer right. Pure mathematics and philosophy are more rigorous fields.The reason rigor is more important in finance than engineering is that finance is competitive. If my theory of aerodynamics allows me to build good airplanes, it doesn’t matter much if it’s built on fuzzy or incorrect assumptions. At worst, some new design or circumstance will reveal the error. That will impose some cost, but the state of knowledge will improve.Contrast that with a derivative pricing model or structured finance product that seems to work for a while. If there is any flaw, someone will exploit it for profit. The result can be a blow up that causes large economic damage and destroys the professional niche that might have learned from the error.There aren’t a lot of people with credentials and past successes insisting on bad airplane designs, and it’s easy to tell if an airplane will not fly. There are a lot of people with credentials and apparent successes insisting on poor financial models that allow them to book profits while doing no work, or perhaps get paid for dispensing bad advice. There are many more of these people than genuine quants, and it takes insistence on rigor to identify them. If you judge by credentials or paper success, you will be fatally misled.We trust airplanes because people have been building and flying them for a long time and the frequency of disasters is acceptable. We trust financial models only when we validate them rigorously every day versus independent market prices. We make precise objective predictions daily or more frequently and we check constantly that the predictions are correct. We challenge the assumptions. We expend effort to learn who is losing the money we’re making, and to monitor that they’re continuing to act the same way. We have independent back-up models. We know our models change the markets in ways that will eventually destroy them. We do not make excuses when the market deviates from our predictions; we immediately fix our models, shutting down businesses if necessary or prudent.There are quants who do not understand the necessity for this discipline. They trust financial models because people have been building and using them for a long time and the frequency of disasters is acceptable. Also everyone says they work and someone must be checking them. This attitude leads to disaster. Unfortunately it’s an attitude easily picked up in courses where getting the right answer is valued over independent rigorous thinking (even worse is a course where getting the answer that agrees with the professor or text is valued over getting the right answer, and both are valued over rigor).</blockquote>

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