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Future of Financial Mathematics?
An anonymous reader writes "Nassim Nicholas Taleb, a famous 'Quant,' has long been a strong critic of the use of mathematics and statistics in the financial markets. He has been very vocal in his books The Black Swan and Fooled by Randomness. In his article on edge.org, he says 'My outrage is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to iatrogenics, the study of the doctor putting the patient at risk.' After the recent financial crisis, wired.com ran an article titled 'Recipe for Disaster: The Formula That Killed Wall Street' in which the quant David Li and his Gaussian Copula were crucified — we discussed it at the time. Now, I've recently been admitted to a graduate program of good repute in Computational & Applied Mathematics. There is a wide range of subjects in which you can pursue your PhD, one of them being Financial Mathematics. I had a passing interest in it for quite some time. In the current scenario, how advisable it is to pursue a PhD in this topic? What would my options be five years down the line? Will the so-called 'quants' still be wanted by the banks and other financial institutions, or will they turn to more 'non-math' approaches? Would I be better off specializing in less volatile areas of Applied Mathematics? In short, what is the future of Financial Mathematics in light of the current financial crisis?"
Don't pick your research area based on profitability or popularity. There are always "hot" areas of research but these things are usually cyclic. Pick something interesting that excites you, and that you can spend the next 4 (or 5 or 6 or 7) years working on.
chillax137
As a former Wall Street trader turned academic, I can agree that the demand will continue to grow for financial mathematicians. The "old school" trader is a former ivy-league athlete who is good at networking and teamwork, but can't do a lick of math. The D.E. Shaw's and hedge funds are crushing the "old school" traders as trading becomes more about speed (esp. algorithmic trading) and liquidity and less about connections. The large banks still have plenty that follow the old mindset, but they are slowly being replaced by the more successful "quant" traders. Granted, the current crisis was caused by over-reliance on models, but that happened because most traders and managers did not understand the models and their limitations. To rectify that, there will be an even greater need for those trained in financial mathematics.
Actually markets are very predictable. every 10 years they go boom. Which part goes boom is varies but every ten years since Nixon they go boom.
The trick is that wall street likes unlimited growth. if you don't expand your business by 10% every year then you are a failure and your company should be punished. After 10 years at 10% growth you have over saturated the market by 100% and every company that got there with unstable books and balances collapses.
I forget exactly who and when but a walmart exec once stated. If we stop building new Walmarts we will go bankrupt. As they leveraged one walmart to build the next in a terrible endless pyramid scheme. Once the bottom bursts there is nothing holding up the top.
Indeed if you look closely to all the news reports on what happened to the banks that is exactly what happened. 5% failure of loans should be expected. However a handful of banks ended up holding that entire 5% as their portfolio. As they collapsed the rest of the banks were suddenly forced to cover them, and since they over extended themselves by laying off bad loans on a small group the rest of the banks couldn't take the weight.
the housing market the past 8 years was the same way. You can't have massive growth without massive contraction.
The dot com burst. was the same. unparalleled growth but questionable accounting.
Oh and I saw the housing market ready to burst 18 months ahead of time. Just look for massive growth over 5 years in any given market. a Seller's market for a long enough time leads to collapse. timing exactly when is the trick.
i thought once I was found, but it was only a dream.
And for god's sake, smoke weed.
Everything is better with a bag of weed.
You are welcome on my lawn.
WTF? How did you get from studying mathematics to nuking North Korea? That was beautiful old-skool trolling, man :)
I would suggest reading The Black Swan. His basic thesis is that the gaussian methods used to calculate risk in financial markets underestimate the risk by several orders of magnitude. Crashes that happen every couple of decades are considered to be once in a million year occurrences by these methods. He made his money in the crash by betting against this. He assumes that he has no clue when a crash will happen, only that the risk is much greater than the vast majority of the market thinks. Everybody else thinks it will never happen, overextend themselves, and when the crash comes he takes their money. He did it in the 80's too.