Interesting Article

[alain]

http://www.economist.com/finance/displaystory.cfm?story_id=11897037

 

[bigbadwolf]

Interesting article. My ever-so-humble opinion: the author focuses exclusively on technical aspects of risk analysis and management. Why does he not at least allude to macroeconomic phenomena outside financial risk analysis -- these phenomena are ultimately the fundamental drivers. Thus the downgrade of GM bonds to junk status is tied to what's happening in the US -- and global -- economy. Or that subprime loans would eventually have come to haunt the market regardless of what precautionary measures were taken. As one reader comments:

For several years, we have known that people with little means and brains were entering into adjustable rate mortagages at at time when interest rates were at historic lows. It has been obvious that this was happening on a large enough scale to be a financial bubble. This author's claim that the crisis was a surprise and could not have been anticipated is a gross lie. His employer was trying to make as much money as fast as possible while the bubble lasted. End of story.

My question is: Are quants so myopically focused on technical and mathematical issues that they simpy cannot qualitatively understand what is happening in the real economy? And so, when the real economy makes its impact felt on financial markets, it invariably comes as a surprise? Is this quantitative hubris?

 

[alain]

Here is a commentary in Bloomberg about the same article:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aaUGVhIB65gs&refer=home

 

[swindler]

My question is: Are quants so myopically focused on technical and mathematical issues that they simpy cannot qualitatively understand what is happening in the real economy? And so, when the real economy makes its impact felt on financial markets, it invariably comes as a surprise? Is this quantitative hubris?

According to the other article posted a couple days ago (an interview with a hedge fund manager) yes quants are far more myopic in their views. It was in reference to the man who traded subprime and kept stating that the area was incredible and nothing bad would happen. Even though a few of the higher ups were saying that the area was due for a fall, they let him continue since they thought referring to the "expert" in the area was the right thing to do.

 

[IlyaKEightSix]

Lemmings. Imbeciles. The whole lot of them. Models in science aren't based off of numbers taken from thin air. They're based on qualitative observations and are simply used to explain and predict, not create black magic (though I think it'd be fun to wield black magic!). In the same way should the quants work. If the fundamentalists say their guts tell them the thing STINKS, then you go with the fundamentalists! The numbers are only as good as the underlying non-quantitative logic!

Sheesh, haven't these quants ever heard of a sanity check?

This is why I think the most important aspect of a quant team is someone to check if the models make sense. Because if they don't, you can 180 your position and take the lemmings to the cleaners.