Saturday, January 17, 2009
"Whirring away at the center of the mortgage meltdown that prompted the current crisis were those theoretical constructs known as financial models. ... What went wrong? As modelers, we see the fantasy of perfection as the fatal flaw seducing both developes and users. The invisble worm of financial modeling is a dark love of theoretical elegance and excessive precision. ... The growing options market created demand on Wall Street for 'rocket scientists,' as the quants were called (in the mistaken assumption that rocketry was the cutting edge of physics). ... Physics, because of its astonishing success at predicting the future behavior of material objects from their present state, has inspired most financial modeling. ... The method works. The discovered laws of atomic physics are accurate to more than 10 decimal places. ... There are no fundamental laws in finance. And even if there were, there is no way to run repeatable experiments to verify them. Financial theories written in mathematical notation--aka models--imply a false sense of precision. Good modelers know that. ... Financial markets are alive. A model, however beautiful, is an artifice. To confuse the model with the world is to embrace a future disaster in the belief that humans obey mathematical principles", Emanuel Derman & Paul Wilmott at Businessweek, 12 January 2009.
Yes. Derman is a professor at Columbia, Wilmott is an author. See also: