Thursday, August 23, 2007

Alchemists At Work

"They are the powerful, cerebral and offstage actors of Wall Street, but the recent turmoil in the financial markets has yanked them into the light. They are the math geniuses of the quant funds. ... The allure of a unifying, perfect mathematical formula is powerful: it is alchemy for the enlightened age. ... In the frequently irrational financial markets, mathematic models offer the hope of cool reason and certitude, a sort of godlike wisdom", Washington Post, 21 August.

I have often called the quants alchemists. However, today they do not try to turn lead into gold, but try to turn 200-variable computer models into gold.

"In 1920, the Austrian economist Ludwig von Mises offered a proof of the impossibility of socialist calculation. The proof was based upon the idea that without information produced by market operations, central planners would not be able to establish prices at an equilibrium point that would adequately balance supply and demand. ... The essence of the 'new' socialist argument is based on the idea that computers make economic calculation possible, providing both the necessary number crunching as well as data gathering", Vox Day at worldnetdaily.com, 20 August. What? The quants are really socialists, but instead of modeling the real economy, they model financial markets? Say it ain't so Joe. Vassily Leontief won a Nobel Prize in economics for "imput-output" analysis for this type of computer modeling. It's never worked and is not likely ever to work.

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