
Wall Street’s Math Wizards Forgot a Few Variables - peter123
http://www.nytimes.com/2009/09/13/business/13unboxed.html
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Dilpil
"Quantitative analysis has been getting more common in the past 10 years. We
had a major crash recently. Therefore Quants caused the crash."

This is a very popular sentiment, yet utterly false. The companies that failed
hardest- Lehman, Sterns, Fannie/Freddie, rating agencies- are (were)
notoriously non quantitative. They are frequently made fun of in Quant circles
in fact. Were any of these companies run by Math Wizards? No. Most of them
have (once again, had) zero Quants in their upper management. You cannot blame
the failure of such institutions on Quants.

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nazgulnarsil
i have yet to meet a quant who understands what curve fitting is and why it's
bad.

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bdr
Alright, alright, how many quants have you met, and did you quiz them?

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nazgulnarsil
I don't know, more than 5. Yes, I always quiz them.

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asdlfj2sd33
Accidentally bad math or intentionally bad math? I recall the great article
posted here, written by the self identified godfather of the software to slice
and repackage risk. And I always wondered, did he understand the difference
between correlated and uncorrelated probabilities?

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jhancock
Good call. There is plenty of blame to go around. The models the quants used
served their purpose of recording "profits" "right now". I think being short
sighted was intentional or at least "unconsciously intentional".

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chasingsparks
Thought experiment:

You find an algorithm that is very reliable for forecasting the near-term
prices of an asset. Your algorithm only works in contemporary, or at least
recent, markets. You notice that by building a basket of many assets, you can
increase your leverage as you have a reduced the volatility of returns. You DO
UNDERSTAND that there is a possibility of major failure, but you assign it a
low probability and decide to let it ride for the time being. After all, after
a certain level of profit, you can scale back the risk. The profits are too
good, so you never scale back. Thus, you are the one standing when the music
stops.

The end.

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joe_the_user
Ah, but you don't have to even be that clever...

If you just come up with an algorithm that mostly says 'buy', then you can
look good for as long as a secular bull market lasts. And if your algorithm
_sounds_ amazing, then you can get lots of leverage without otherwise doing
anything.

Of course, this story ends the same way, you're left standing when the music
stops (along with most of Wall Street) - but with luck, the Fed will buy your
toxic assets...

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IgorCarron
Left standing ? I am not sure.

[http://www.nakedcapitalism.com/2009/09/ny-times-lehman-
post-...](http://www.nakedcapitalism.com/2009/09/ny-times-lehman-post-mortem-
the-power-of-denial.html)

~~~
joe_the_user
Not sure what you mean but while Lehman might indeed have been the most
clueless Wall Street house and thus the obvious one to fail, we have to
remember the whole edifice would have collapsed if not for the Fed. IE,
Goldman would be bankrupt too if AIG hadn't been supported by the Fed but the
sequence "Kill Lehman, prop up AIG" just happened to make Goldman look good.
Coincidence? Who can say but while all the houses had influence, the Treasury
Secretary just happened to be...

Remember, "Left standing when the music stops" is an expression from musical
chairs. It means the opposite - you will not be left standing...

