3 results back to index

pages: 240 words: 60,660

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Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life
** by
Emanuel Derman

Albert Einstein, Asian financial crisis, Augustin-Louis Cauchy, Black-Scholes formula, British Empire, Brownian motion, capital asset pricing model, Cepheid variable, creative destruction, crony capitalism, diversified portfolio, Douglas Hofstadter, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Henri Poincaré, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Isaac Newton, Johannes Kepler, law of one price, Mikhail Gorbachev, Myron Scholes, quantitative trading / quantitative ﬁnance, random walk, Richard Feynman, riskless arbitrage, savings glut, Schrödinger's Cat, Sharpe ratio, stochastic volatility, the scientific method, washing machines reduced drudgery, yield curve

In physics there may one day be a Theory of Everything; in finance and the social sciences, you have to work hard to have a usable model of anything. THE FINANCIAL MODELERS’ MANIFESTO On January 7, 2009, in response to the financial crisis, Paul Wilmott and I published The Financial Modelers’ Manifesto, an ethical declaration for scientists applying their skills to finance. Here is an excerpt: The Modelers’ Hippocratic Oath I will remember that I didn’t make the world, and it doesn’t satisfy my equations. Though I will use the models I or others create to boldly estimate value, I will always look over my shoulder and never forget that the model is not the world. I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining to its end users why I have done so. I will not give the people who use my models false comfort about their accuracy.

pages: 252 words: 72,473

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Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy
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Cathy O'Neil

Affordable Care Act / Obamacare, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Emanuel Derman, housing crisis, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, illegal immigration, Internet of things, late fees, mass incarceration, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, recommendation engine, Rubik’s Cube, Sharpe ratio, statistical model, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor

How do we start to regulate the mathematical models that run more and more of our lives? I would suggest that the process begin with the modelers themselves. Like doctors, data scientists should pledge a Hippocratic Oath, one that focuses on the possible misuses and misinterpretations of their models. Following the market crash of 2008, two financial engineers, Emanuel Derman and Paul Wilmott, drew up such an oath. It reads: ~ I will remember that I didn’t make the world, and it doesn’t satisfy my equations. ~ Though I will use models boldly to estimate value, I will not be overly impressed by mathematics. ~ I will never sacrifice reality for elegance without explaining why I have done so. ~ Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights. ~ I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

pages: 374 words: 114,600

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The Quants
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Scott Patterson

Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative ﬁnance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

In other words, there is no single truth in the chaotic world of finance, where panics, manias, and chaotic crowd behavior can overwhelm all expectations of rationality. Models designed on the premise that the market is predictable and rational are doomed to fail. When hundreds of billions of highly leveraged dollars are riding on those models, catastrophe is looming. To ensure that the quant-driven meltdown that began in August 2007 would never happen again, the two über-quants developed a “modelers’ Hippocratic Oath”: I will remember that I didn’t make the world, and it doesn’t satisfy my equations. Though I will use models boldly to estimate value, I will not be overly impressed by mathematics. I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights. I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.