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Paul Wilmott Says Wall Street Has Become Mathematical Playground Lacking Common Sense
“I just want people to
stop and think for once. There is too much mathematics in this business."
So says Paul Wilmott in a Bloomberg Radio interview when discussing the exclusive reliance on financial models that Wall Street seems to do nowadays, with little to no regard for common sense.
Financial markets have grown too
dependent on mathematicians who use models to anticipate price
moves and need to start injecting common sense into the
equation, said Paul Wilmott, a London-based author and
quantitative finance instructor.
mathematics to forecast how markets will behave can
overlook errors in the models, leading to flawed predictions.
“People don’t really question those assumptions enough,”
said Wilmott, who founded the Diploma in Mathematical Finance at
Oxford University, according to his Web site. “If the
assumptions are wrong, then obviously the models and what
follows can be wrong as well.”
A direct corollary: the caliber and qualifications of the people retained by Wall Street.
“You go back 20 years,
and people running finance, they were maybe history graduates,”
Wilmott said. Now, much of the industry is run by
mathematicians, he said. “A lot of mathematicians do not have
that common sense that the old guard had,” he said.
In essence we have a market of Art Cashins versus 19 year old reflex champions pumped to the brim with caffeine (and other stimulants). We would be happy to prove Paul's point by presenting the roster of professionals at a place like Rentec, however for privacy reasons we will withhold. However, we would like to point out that in its marketing book, the firm proudly indicates that of its research staff of 50, 49 have PhDs. Tangentially, so do Alan Greenspan and Ben Bernanke.
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High credit score homeowners are now "strategically" defaulting:
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep...
Debtor's Revolt!
I am Chumbawamba.
Debtors Revolt - Will turn into debtors prison in the coming years.
Fer real. Get out now while the getting is good. This administration, (I lump mostly worthless congress in as well), has already proven whose best interest they have in mind, and it sure as hell ain't the American people. Debtor's prison is already in the works. The threat of revolution is the only thing keeping them from going full out feudal-style on our sorry asses
If you don't know how to play then you should get out.
From the latimes article:
"A study shows that people who abruptly and intentionally abandon their mortgages often have high credit scores, in stark contrast with most financially distressed borrowers"
Does intelligence play a factor here, or a lack thereof when it comes to credit scores?
I had a pretty damn high credit score (almost 800) before I took my Obama Bailout. But then, I'm dumb, so I don't know if this datapoint is useful to your thesis.
I am Chumbawamba.
As an addendum, (from the latimes)
"Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts"
How dumb to you have to be before it comes time to realize that one needs to stop diggin a bigger hole?
So you are cheering these morally corrupt liars who broke their promise (Promissory Note being the name and all) to repay their debt? Cheer those people who bought a house they couldn't afford and either too greedy or too irresponsible to understand the consequences of their decision?
Nice. Great ethics to learn.
How is that any different than AIG's CDS? They sure as hell knew there would be no chance of them covering their "promise to pay"..and stick it to the tax payer in the end to boot
Great ethics to learn? you learn from the best...
There is equal culpability on the part of the banksters who set many up with financial products that would explode down the road. As someone who operates without a penny of debt (except for credit cards that are paid off each month) I am OK with it. Anything to fuck over the banksters who have so corrupted our country. Need to buy guns and ammo next before they set up the gulags.
It's a truism that smart people are always correct, right up to the point where they are proved tragically wrong.
How many times must we hear "It's different this time" before we understand up front that it isn't?
LTCM! ohhh, wait - they blew up too. Shoot.
Just another aspect of our country that has become a joke.
PhD: someone who learns more and more about less and less until he eventually learns everything there is to know about nothing ;-)
And the flip side to that is somone who learns less and less about more and more until they know nothing about everything.
A Liberal Arts major perhaps...as I slink off to secure cover.
Pete
Nope, I'm an Engineer and programmer. Doesn't mean that I don't have a sense of humor, or that I won't twist somebody's tail ;-)
Me too - just now adding the :-) for the possibly humor impaired.
My wife is an MeD? (Masters of Education) and actually I can only raise up an old somewhat lame BAS - Bachelor of Applied Science where said parchment long since turned to dust.
oh wait .... I (perhaps) wrongly assumed that your comment was a flame (which is cool too). If it was a literal definition of a B.A. or M.A., then I agree without reservation.
hahaha nice.
PoliSci and arts are joke degrees. Seriously, whats the point.
Finnawnsss is where its at.
If you want to have a look at this crazy world - just take a look at stocktwits.com, see how many are gunning up AIG to $50 today.
Mathematics? What you talking about? This market is simply 1 direction without math needed and that's UP! UP! UP! gee... And if you want to inject fundamental into this market? Dream on... until GS and Bermonkey and Obama and Geithner's pockets are full, this mrket ain't going down... And IF we do inject fundamental, this market will be down in the 200s on SPX...
True dat.
Maybe they only use absolute values?
I need a PhD too, that way I can get big bucks for doing shit that is f$cked to high heaven.
OT:
Is Edolphus Towns corrupt, or certifiably insane?
http://www.reuters.com/article/businessNews/idUSTRE58K3OL20090921
'Rep. Edolphus Towns, a Democrat who chairs the Government Reform Committee, told staff to take a look at a proposal from former AIG Chief Executive Officer Hank Greenberg that could make it easier for the insurer to repay federal obligations, a committee spokeswoman told Reuters on Monday.'
'The proposal would cut the government stake in AIG from the current 80 percent and trim interest rates on AIG's government loan. It also would extend the term of the loan, giving the company more time to repay, the spokeswoman said.'
And this is one of the guys 'going after' Ken Lewis? Puhllllease.
Added: AIG holds roughly a trillion dollars of CRE, and their stock shoots to the moon. This is utter and complete insanity.
Added: Guess who will soon own a trillion dollars of CRE crap? Bernanke, you and I will.
We already own all of Fanny and Freddie's book of loans, securities & swaps plus the approximate 1.5 the has been or will soon be purchased...
Fixed.
http://roflrazzi.com/2009/09/21/celebrity-pictures-lady-gaga-bucket-crazy/
according to the math on my 28 year old HP41cx calculator...it's time to sell my 'longs' today and go 'short'. wow..i almost forgot what it was like to hit the 'short' button in e-trade. hopefully the nasdaq will go down at least 5 points before it reverses and goes up for another month.
I am very angry with you. I too had an HP41cx. Mine got eaten by leaked batteries about 10 years ago. It was a very very sad day in my life.
sorry to hear that. it is a wonderful calculator. i still can't believe i've owned it since 1981. i'll never get rid of it.
Capitalism without failure is like Christianity without HELL. Thanks to our Government for enabling an entire nation of crooks and theives on the back of the taxpayer..
INSANE.
"However, we would like to point out that in its marketing book, the firm proudly indicates that of its research staff of 50, 49 have PhDs. Tangentially, so do Alan Greenspan and Ben Bernanke."
Yeah, but Greenspan and Bernanke don't know hwo to do basic math.
To be fair to Greenspan, stapling together a series of publications (hopefully in reviewed journals) is now widespread, even in science departments. Yet another way to process more students with less faculty (and student) effort with the side benefit that the research advisor no longer has to write his own papers.
thanks for every body whom were sharing the commons on the page....and made me laughhing as well as that I never have before. My questions for your guys is how is your guys pockets are full now? if you are and thanks GOD more!!!
Several months ago I had an email exchange with a physics professor from Harvard. He was fuming at the poor quality work that was being done on the financial models by many of his ex-students. It seems that the top of the class physicist would set of the parmaters of the models then turn it over the less qualified to finish.
The resulting models he said were bad math.
So we have a system where everyone depends on the models and the models are flawed.
His parting remarks were: "Don't get me started on quants"
Odd math related thing. Anyone know what made wilshire 5000 WFIVX and S&P 500 synch in july of 2008? It looks like previous to that time wilshire 5000 was a sort of delayed echo. I'm looking at google chart with a span of about six months.
Since when has common sense had anything to do with the decision making processes of those that are currently holding power? All this current wave has provided is the capacity to manipulate at a time when it was necessary for those that hold power to continue to do so while providing an index of excuse for when it all blows up.
"The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects."
read in the WSJ
Actually the problem in the financial industry seems to be immature mathematicians. Real mathematicians engage their minds on their abstract models and are aware that their models rarely describe any real phenomena. But quants people who populate the finance industry have no real understanding of the structure of mathematics and the and its relation to the 'real world', they are merely good at manipulating a few symbols and crunching a few numbers.
Finally considering the state of math education in America, every half brained idiot who can count is labeled a mathematician/genius. In the valley of the blind...
balding quants, white haired historians, 19-year olds and bloggers who claim the above are mathematicians - all have one thing in common - they are all failures in math, have no clue what math is and think they know. All may be perfectly honest people, but don't confuse mathematicians and scientists with folks making up models on wall-street and for trading - it only goes to show how poorly folks on financial blogs are shallow bunch of math failures.
some other folks on financial blogs enjoy the irony of groundless stereotyping more than anything
Sorry to burst your bubble, but giving someone a piece of paper does not increase their intelligence unless you are playing D&D. The similarity between the mathematicians and the scientists with the wall-street gang is that they all have degrees. If an institution will spit out qualified and unqualified degree holders, what does that say about your piece of paper? Or mine?
The truth is that statistics is really only good at modeling what has been, not what will be. The future is just to complex to reduce down to an algo. Even if you included enough variables to get a 90% success rate, you can still go bankrupt when that 10% hits all at once.
Wilmott is a dufuss. He is so smart with hindsight. Don't think he was printing enormous returns over past 36 months when all these dumb quants were blowing up -- the shorting opportunity of a lifetime capable of producing very high double digit returns missed by Wilmott. He is primarily interested in selling his quant accreditation program.........
++1
I had a quick flick through 'The Mathematics of Financial Derivatives' just to check. Nothing in there about value investing, not a sausage.
As an average, run-of-the-mill taxpayer, what would my personal credit rating be if I were to issue bonds like the big corporations? About 37 levels below junk, right? But the egg-headed quants rounded up a million losers like me, took our mortgages, stapled them together, tranched them off, and ran the data through their genius-level math models. The result: a bright, shiny triple-A rating. Unless my TI calculator is horribly off (it's not an HP, sorry) a million times zero is still a zero rating, right? So, how come nobody sat back, looked at the results, and realized that there were obvious flaws in the calculations?
When I was a young civil engineer, we worked with a gray-beard who sat in the corner office with his slide rule, who checked our work that we had done on an original IBM-PC (two floppys, no hard drive, slower than a congressman). We of course thought that we were the hottest thing in the construction world, but he would invariably sit back and point out our misconceptions and now-obvious errors with a wry little smile. He had a pet saying: "The computer always gives the correct answer. BUT, have we asked it the correct question?"
I think the blame is two-part:
1) The managers who make the hiring decisions. They cared more about the qualifications on paper than the person's judgement and maturity.
2) The practitioners of this superstitious scientism, whether they believed in it or not. They were using the trappings of science and mathematics to provide rationalizations for flawed business models.
The short term gains spurred greedy behavior at all levels and no one wanted to verify the assumptions or quality of data in the models too closely. Ignorance + Arrogance = train wreck.