What the Quants did next

Hey Bento, remember these guys? Interesting article here on the “new realms of science” the Quants are apparently pushing into in order to make a fast buck in stocks without looking at balance sheets or in fact doing any actual work. Mean-reverting Gaussians no more, apparently all the people who survived the Quant blowups of last August (this is what Baruch wrote about them at the time) have now moved on things like “machine learning”, “mathematical linguistics” and “agent simulations”. At least one of them is still working on a grand unified theory of finance! Good luck with that, I say.

I do think some of these ideas sound like they could be amusingly dangerous – “reinforcement” strategies sound well dodgy, for one; is it that you keep throwing more and more money into a winning trade as it keeps on winning? A signed copy of the Ethics to the first commentor who can say why that may not be a good idea!

Of all the strategies in the article I think those that use some degree of behavioural finance sound the most interesting, especially if coupled with what one Dmitri Sogoloff is talking about:

Sogoloff is wary of quants who believe the real world is obliged to conform to a mathematical model. He acknowledges the difficulty of applying scientific disciplines like genetics or chaos theory — which purports to find patterns in seemingly random data — to finance. “Quantitative work will be much more rewarding to the scientist if one concentrates on those theories or areas that attempt to describe nonstable relationships,” he says.

Sogoloff sees promise in disciplines that deal with causal relationships rather than historical ones — like mathematical linguistics, which uses models to analyze the structure of language. “These sciences did not exist five or ten years ago,” he says. “They became possible because of humongous computational improvements.”

But it does all sound dreadfully difficult. A lot of what the Quants seem to be trying now is simply tinkering around to try and find something which makes pots of money guaranteed with no risk, and unsurprisingly they haven’t found it yet. So they apply the old strategies to new markets, like commodities. Let’s see how long that works. Lots of them seem to think running different strategies simultaneously is an end in itself, much like Captain Picard found that if he timed his phasers to fire at the Borg using random frequencies it took the collective mind time to adjust the defenses to block all similar attacks, and you could generally nobble a few of them in the interim. Almost all of them (the Quants, not the Borg), however, seem to accept lower returns from their new strategies than they were used to getting with the old Gaussian ones plus leverage. Worryingly, the article never addresses the topic of leverage at all.

The thing though that all of them seem to be trying to escape from is the essentially unquantifiable nature of the market, unquantifiable in the sense that the data changes on observation. This would be true of even insights gained by behavioural finance, I imagine. Put simply, the moment I come up with the Grand Unified Finance Theory I invalidate it – my understanding of the theory, trying to make money off it by gaming the system, creates the conditions whereby I myself act in violation of its laws by becoming aware of them. And if the great unwashed (or rather, the scrubbed-clean white teeth brigade of the hedge fund hoi polloi) ever get hold of the formula it would be back to the drawing board for sure.


Quants are weird


Came upon the most delightfully batshit website, that of Dr Espen Haug, Dolph Lundgren impersonator the co-author with Taleb of the assault on Black-Scholes-Merton option pricing I linked to in my recent history lecture.

I had imagined a tweedy academic with leather patches on his sleeves, someone not at all as interesting as Taleb. Instead Dr. Haug is a rock and roll  — maybe more Kraftwerk — trader-type, who seems to wear sunglasses indoors, and probably at night too. He calls himself “The Collector”, and has been dubbed Derivativens Konge in his native Norway, and seems something of a celebrity. He is a talented cartoonist as well, though his subject matter makes it unlikely he will achieve syndication in, say USA Today. A sample of his work is above, I hope he doesn’t mind. I would not like to see the demise of Quants who are this interesting, but as an avowed non-Gaussian, he should have a longer life expectancy.

Anyway, he linked to us, which shows admirable generosity, if possibly a lack of discernment. I have to say I was not able to follow much of the more abstruse 3D modelling of options “landscapes” on the site, my thinking sort of fuzzed up at that point. It struck me you might appreciate it more, Bento.

When used in a hospital setting, can Spinoza be sterilized?

Ha ha, luckily they are only talking about a cuddly bear robot for sick kids. This is what you get when you google “Spinoza”. But we go straight from entries for Wikipedia and philosophic encyclopediae to the cuddly bear. Where are the other sites like ours? This one, where if you look hard enough you can find some limited exposure to Spinoza from a nice-looking, beardy professor at a community college in California, looks very interesting indeed, but unlike ours is not constantly updated. It doesn’t treat Spinozan thought as real and alive. I never heard of the Friesian school before. Of course, you haven’t either, Bento you ignoramus.

We are number ONE in a field of er, one! We are huge winners, Bento, we have found a gap in the market! Riches and academic recognition are sure to start flowing any minute.