Tuesday, March 10, 2009

Black Swan Bait

This piece in the New York Times on the rise of quants on Wall Street seems a bit too kind. Of course, it contains the now obligatory Nassim Taleb quote - he never misses an opportunity to herald the dangers of financial models - but this sentence misses the point:
Another consequence is that when you need financial models the most - on days like Black Monday in 1987 when the Dow dropped 20 percent - they might break down.
No - they will break down. This is Taleb's point. Models only work when you don't need them. And, as we have seen, in the hands of unsophisticated traders, these models become the intellectual justification for taking on unknown risks. So to recap: financial models do not help traders anticipate future shocks, but they do give traders a false sense of confidence. Why exactly is Wall Street in a rush to hire ever more quants now?

No comments:

Post a Comment


Wikinvest Wire