An interesting question on Slashdot: What is the future for Financial Mathematics?

[Spartacus]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

There are not many so-called Scientists complaining about or even talking about this. Hard to believe it is because of ignorance of the issue.

first, not many working scientists seek the spotlight.

second, With some exceptions, what I've found is that

when you get a scientist outside their area of specialization they are the worst of all people about claiming knowledge or having a strong opinion.

And when they do speak on outside-their-field issues, it's often with mounds of qualification and hemming and hawing.

Economists IMHO seem to be the "best" (at claiming expertise on everything).

This is one reason I think that the likes of Randi (though he's not a scientist, this may have rubbef off on him) mostly stay out of this arena, and a couple of others like global warming except for when things like astrology and just plain consumer fraud like Madoff butt their heads into this field.

[WildspitzE]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Coming down from the Ivy Tower of Theory, there is the Practicality. Heard on the radio station this morning was a Joe Blow Accountant declaiming on the Science behind portfolio management. No challenge, of course, from the Bingo Caller. This is exactly what Nassim Taleb talks about:the corrupted Science behind Portfolio Management.

The often overlooked variable in Portfolio Theory is the amount of systemic leverage. As leverage in the system approaches infinity (to exaggerate), correlation amongst assets approaches one.

After all, securitization modeling is based on portfolio theory. They created all kinds of variable strats to demonstrate diversification, but forgot to account for this little tidbit. They also forgot to model a recovery assumption that is based on an increased amount of systemic leverage (vis a vis historicals) -- meaning, when everybody is running out the door due to a de-leveraging process, ones recovery assumption should approach zero.

[allenjs]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

when you get a scientist outside their area of specialization they are the worst of all people about claiming knowledge or having a strong opinion.

Economists IMHO seem to be the "best" (at claiming expertise on everything).

This is an interesting insight, and rings true to what I've observed. The best (as in, most accomplished) scientists I know are extraordinarily humble and open-minded in general (except when competing with other scientists in academia, but that's another story).

Personally, I think that "moral hazard" is a big part of the problem for economists and financial wizards. Economics, even since Adam Smith, has been about setting policies -- about temporal power. And obviously, the financial models the quants use are all about getting rich, not about discovering some objective truth.

Even without the overt corrupting influence of money and power, "it's hard to make a man see the truth when his livelihood depends on him not seeing it".

[petertribo]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

first, not many working scientists seek the spotlight.

second, With some exceptions, what I've found is that

when you get a scientist outside their area of specialization they are the worst of all people about claiming knowledge or having a strong opinion.

And when they do speak on outside-their-field issues, it's often with mounds of qualification and hemming and hawing.

Economists IMHO seem to be the "best" (at claiming expertise on everything).

This is one reason I think that the likes of Randi (though he's not a scientist, this may have rubbef off on him) mostly stay out of this arena, and a couple of others like global warming except for when things like astrology and just plain consumer fraud like Madoff butt their heads into this field.

Science is expanding and becoming more dangerous. (Read Bill Joy.) So, if Scientists will not control the Fraud, Corruption and Malice in their Discipline, then who will? This is an extremely important question. As we have seen in Finance the failure to control the fraud and corruption in Mathematics has brought the Economy to its knees. The failure to control Science overall has the potential to destroy Humanity.

If Science does not regulate itself, then what will? If there is not regulation, it seems logical then that we will have Scientific Anarchy.

[mcgurme]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Science is expanding and becoming more dangerous. (Read Bill Joy.) So, if Scientists will not control the Fraud, Corruption and Malice in their Discipline, then who will? This is an extremely important question. As we have seen in Finance the failure to control the fraud and corruption in Mathematics has brought the Economy to its knees. The failure to control Science overall has the potential to destroy Humanity.

If Science does not regulate itself, then what will? If there is not regulation, it seems logical then that we will have Scientific Anarchy.

You keep painting with a very broad brush stroke, naming "scientists" as people promoting unregulated fraud.

Based on what evidence, exactly?

Finance is not science, and science is not finance. The question at the top of this thread was about whether Chris should do applied math.

So why is it that you sit here and throw darts, in post after post, at scientists, with no evidence?

You read one article by one guy who was scared about a dystopian future, Bill Joy, and you use that to label all scientists as promoting fraud. That is some sound logic there.

There is a level of fraud that goes with any human activity. Finance, science, medicine, cab driving, or running websites. It happens that the levels in some fields are higher than others. And science is NOT one of the fields with the most fraud, it is business/finance.

Now you may argue that some scientists may create bad things that will do us harm. Maybe they will*. That is not fraud. That is incompetence, lack of vision, lack of oversight - but not fraud, corruption, and malice.

*(or, maybe they'll create some good things that will help us)

If you doubt it, then I ask one simple question: was it scientists that have caused millions of people to loose their jobs in this recession? Nope.

Was it scientists who caused auto companies to collapse? Nope.

Was it scientists that caused the Iraq war, war in afghanistan, or any related wars in that area? Nope.

Is it scientists that have heavily promoted GMO crops? Nope (that's big companies like Cargille and their marketing deptartment).

Is it scientists that polluted our lakes and rivers? Nope.

You may argue that scientific discovery enabled some of these things. But that's like arguing that the invention of the wheel enabled war, and hence to prevent wars, we should label the inventor as a fraud, and un-invent the wheel. That's silly. Humans thirst for knowledge. Unless we fall back into a repressive time where knowledge is forbidden, such as the dark ages, then advances are going to be made - whether called "science" or something else. The only question then is how society will deal with this knowledge.

Scientists create tools, society chooses how to use them. Labeling this fraud (or worse, taking the approach that the Unabomer did) does nothing productive. If you are concerned, the productive thing to do is FIRST stop calling names and pointing fingers, SECOND calm down, and THIRD, try to promote sensible public policy about what developments need to be regulated.

[mcgurme]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Chris,
To answer your original question: as someone who does modeling in the biological sciences, I'd say "it depends."

The big trouble I see with many applied math departments is that they think that you can sum up a complex system with a few equations representing "bulk" behavior of the system. In other words, it is a reductionist viewpoint that somehow, the complexity of the world we see can be simply represented by mathematical language.

If you look at modeling in the financial, social, and biological sciences, it has been mostly a flop. That's because it starts from the wrong premise.

It is clear that many behaviors of complex systems are "emergent." A classic example of "emergent" behavior is bird flocking. There is not a differential equation for bird flocking (at least nobody has found one). Instead, the behavior derives from a few simple rules/behaviors that are implemented by individual birds, that result in the emergent flocking. These rules can readily be modeled, and hence flocking behavior modeled - but not by traditional mathematical modeling. Instead, it requires models that respect heterogeneity, spatial relationships, and emergence - things like agent based models.

Those kind of models can be used to examine the behavior of complex systems like finance. However, the people using them are in the minority. That's because they are new, and also because many people are steeped in the paradigm that there is "one equation to rule them all," and so keep looking for that holy grail, instead of looking for a practical solution that works.

And that's why the financial models have been so disastrous: the tendency to try to distill complex, emergent behavior down into one or a few representative equations. Ultimately, those equations may be good estimates within narrow ranges of system behavior, but as soon as the system goes outside those ranges, they tend to become wildly inaccurate. That's what Taleb was getting at.

Many, but not all, applied math departments are steeped in this "top down" paradigm. Personally, I would steer far clear of any such department. Eventually, it will become clear that they are on the wrong track - it might take ten to twenty years more (before the old die hards retire or die), but it will likely happen. In the meantime, they will continue to force the younger folks to learn all these outdated ways of seeing and modeling the world.

There are probably a few applied math departments that aren't like that. If you are going this route, I'd strongly suggest you find one of those.

As for whether to do financial modeling, now is probably a great time to be a part of getting things moving in a new and better direction. I think models can be useful, but it takes the right combination of tools and humility. Given that combination, it seems like a great time to enter the field - when nobody else wants to.

| Future of Financial Mathematics? |
| from the it-has-none-get-over-it dept. |
| posted by kdawson on Saturday April 25, @17:19 (The Almighty Buck|
| http://news.slashdot.org/article.pl?sid=09/04/25/1858223 |
+--------------------------------------------------------------------+
An anonymous reader writes "[0]Nassim Nicholas Taleb, a famous '[1]Quant,' has long been a strong critic of the use of mathematics and statistics in the financial markets. He has been very vocal in his books [2]The Black Swan and [3]Fooled by Randomness. In [4]his article on edge.org, he says 'My outrage is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to iatrogenics, the study of the doctor putting the patient at risk.' After the recent financial crisis, wired.com ran an article titled 'Recipe for Disaster: The Formula That Killed Wall Street' in which the quant David Li and his [5]Gaussian Copula were crucified b we [6]discussed it at the time. Now, I've recently been admitted to a graduate program of good repute in Computational & Applied Mathematics. There is a wide range of subjects in which you can pursue your PhD, one of them being Financial Mathematics. I had a passing interest in it for quite some time. In the current scenario, how advisable it is to pursue a PhD in this topic? What would my options be five years down the line? Will the so-called 'quants' still be wanted by the banks and other financial institutions, or will they turn to more 'non-math' approaches? Would I be better off specializing in less volatile areas of Applied Mathematics? In short, what is the future of Financial Mathematics in light of the current financial crisis?"
Discuss this story at:
http://news.slashdot.org/comments.pl?sid=09/04/25/1858223
Links:
0. http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb
1. http://en.wikipedia.org/wiki/Quantitative_analyst
2. http://en.wikipedia.org/wiki/The_Black_Swan_(Taleb_book)
3. http://en.wikipedia.org/wiki/Fooled_by_randomness
4. http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
5. http://en.wikipedia.org/wiki/Gaussian_copula#Gaussian_copula
6. http://news.slashdot.org/article.pl?sid=09/03/03/036223&tid=98

[Scott4139]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

"A gun is a tool, Marian; no better or no worse than any other tool: an axe, a shovel or anything. A gun is as good or as bad as the man using it. Remember that." --- Shane

[petertribo]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Labeling this fraud (or worse, taking the approach that the Unabomer did) does nothing productive. If you are concerned, the productive thing to do is

If you wish to attack me personally "taking the approach that the Unabomer did" ( that is spelled Unabomber, by the way), that is your choice. It shows the depth of your knowledge of the subject and the poverty of your discussion and unsolicited advice.

You reduce yourself to attacking and slandering me as a criminal. I stand with Bill Joy, ex-chief scientist of Sun Microsystems, Einstein and many other eminent thinkers and philosphers on this subject. I have read many of them as you have apparently not. If they are criminals as you slur them, then so too am I.

On the other hand, you sit in the attack gutter. Joe McCarthy would be proud of you.

[petertribo]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

More material the Science Inquisition does not want the Public to read. Please note the paragraph specifically referring to the corruption of Mathematics:

Scientific fraud and the power structure of science

Brian Martin

Published in Prometheus, Vol. 10, No. 1, June 1992, pp. 83-98.

ABSTRACT: In the routine practice of scientific research, there are many types of misrepresentation and bias which could be considered dubious. However, only a few narrowly defined behaviours are singled out and castigated as scientific fraud. A narrow definition of scientific fraud is convenient to the groups in society -- scientific elites, and powerful government and corporate interests -- that have the dominant influence on priorities in science. Several prominent Australian cases illustrate how the denunciation of fraud helps to paint the rest of scientific behaviour as blameless....

Ask most scientists about scientific fraud and they will readily tell you what it is. The most extreme cases are obvious: manufacturing data and altering experimental results. Then there is plagiarism: using someone else's text or data without acknowledgement. More difficult are the borderline cases: minor fudging of data, reporting only the good results and not citing other people's work that should be given credit. Because obvious fraud is thought to be both rare and extremely serious, the normal idea is that it warrants serious penalties.

That is the usual picture, anyway, for public consumption. Probe a bit more deeply into scientific activities, and you will find that fraud is neither clear-cut nor rare. Stories abound of the stealing of credit for ideas. They range from the PhD supervisor who published his student's work under his own name, to the top scientist who, as a referee, delayed publication of a rival's work in order to obtain full credit for it himself -- including a Nobel Prize. There are also stories of various other forms of cheating.

The actual practice of science is a complex business. There are intricate experiments, with continual changes of equipment, protocols and procedural details. There are all sorts of measurements, with much more potential data thrown away than saved. There are pages of theoretical calculations thrown away for every equation published. There are stacks of insufficiently documented data sheets and computer outputs. Next to the desks on which scientific papers are prepared are books, journals, preprints, correspondence and notes. In the heads of scientists are various half-formed ideas, long-held desires, prejudices, and the vague recollections of articles read, seminars attended, conversations with colleagues and discussions with collaborators....

Mathematician Alexandre Grothendiek, a professor at Montpelier University, wrote in a letter declining to receive the Crafoord prize that "... during the past two decades, the ethics of the scientific profession (at least among mathematicians) has declined to such a degree that pure and simple plundering among colleagues (especially at the expense of those who are not in a position to defend themselves) has almost become the rule, and in any case is tolerated by all, even in the most flagrant and iniquitous cases."[12].
[my bold]

http://www.uow.edu.au/arts/sts/bmartin/pubs/92prom.html

Just like the Bankster and the FIRE crowd, the so-called Scientists love to deny there is a problem by attacking anyone who wishes even to discuss the subject. Denial, coverup, attack, the same characteristics of a corrupt Wall Street. Personally, I do not want to put my Future in the hands of Scientific Fraudsters.

Please note also that this directly applies to any discussion of the fraudulent Mathematics which have produced the current Depression.

[mcgurme]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Though doth protest too much. I made no personal attack, and if you thought I was implying you were like the Unabomber*, then you mistook me. I referred to the Unabomber because he took it upon himself to kill others to try to stop technology, which fit well with my point, in relation to your point. I did attack your view that most scientists practice fraud. I attacked your view because it is factually incorrect.

The funniest thing about your post is that you attack me personally with multiple insults, in the same paragraph that you accuse me of doing it to you. Yet you didn't address a single point I made, you just lobbed verbal grenades. Arguing with people that are acting so irrationally wastes my time, so I'll not be wasting any more on this particular thread.

* yes, sometimes I make typos

If you wish to attack me personally "taking the approach that the Unabomer did" ( that is spelled Unabomber, by the way), that is your choice. It shows the depth of your knowledge of the subject and the poverty of your discussion and unsolicited advice.

You reduce yourself to attacking and slandering me as a criminal. I stand with Bill Joy, ex-chief scientist of Sun Microsystems, Einstein and many other eminent thinkers and philosphers on this subject. I have read many of them as you have apparently not. If they are criminals as you slur them, then so too am I.

On the other hand, you sit in the attack gutter. Joe McCarthy would be proud of you.

[Munger]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

My blanket assertions are expanding and becoming more ignorant. (See my previous posts.) So, if I do not accuse everyone of Fraud, Corruption and Malice, and their entire Discipline, then who will? This is an extremely important question. As you have seen demonstrated by my Posts, the ability to wildly Bloviate with Endless Hyperbole and Dramatic Capitalization at the Fraud and Corruption that Everyone Else has wrought is of Utmost Import. Your failure to recognize the Profundity of this Truth has the potential to destroy Humanity.

Fixed your post.

[metalman]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

Fixed your post.

like your version better.

[petertribo]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

More bad news for the Science Inquisition. Big PHARMA MERCK creates fraudulent Peer Review Journal:

It's a safe guess that somewhere at Merck today someone is going through the meeting minutes of the day that the hair-brained scheme for the Australasian Journal of Bone and Joint Medicine was launched, and that everyone who was in the room is now going to be fired.

The Scientist has reported that, yes, it's true, Merck cooked up a phony, but real sounding, peer reviewed journal and published favorably looking data for its products in them. Merck paid Elsevier to publish such a tome, which neither appears in MEDLINE or has a website, according to The Scientist.

What's wrong with this is so obvious it doesn't have to be argued for. What's sad is that I'm sure many a primary care physician was given literature from Merck that said, "As published in Australasian Journal of Bone and Joint Medicine, Fosamax outperforms all other medications...." Said doctor, or even the average researcher wouldn't know that the journal is bogus. In fact, knowing that the journal is published by Elsevier gives it credibility!

http://blog.bioethics.net/2009/05/me...eview-journal/

Of course these Peers in the Science Fraud business are well paid just like the Wall Street Fraudsters. Ethics are incompatible with Profit and Greed.

[cmalbatros]

Re: An interesting question on Slashdot: What is the future for Financial Mathematics?

To me "economics" should sure be the "Science of Psychology" as most market movements are controlled by emotions and human interactions/behavior and propaganda, if one can combine statics to behavior modeling then surely it should be easier to make money, or stop other people doing so, in what is undoubtedly a rigged casino (wall st).