Tuesday, March 10, 2009

Money geeks

The Times has a long piece on quants by Dennis Overbye. The usual suspects are interviewed, but Overbye doesn't really engage with the details of the financial crisis. No mention of CDOs, CDS or securitization; no mention of where quant careers are headed in the wake of the disaster. I agree with Andy Lo's sentiments at the end of the article, but it remains to be seen what portion of blame consensus will apportion to the geeks, and what degree of "math-risk-premia" will be assigned to complicated trading activities in the future.

They Tried to Outsmart Wall Street

...They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

This flood seems to be continuing, unabated by the ongoing economic collapse in this country and abroad. Last fall students filled a giant classroom at M.I.T. to overflowing for an evening workshop called “So You Want to Be a Quant.” Some quants analyze the stock market. Others churn out the computer models that analyze otherwise unmeasurable risks and profits of arcane deals, or run their own hedge funds and sift through vast universes of data for the slight disparities that can give them an edge.

Still others have opened an academic front, using complexity theory or artificial intelligence to better understand the behavior of humans in markets. In December the physics Web site arXiv.org, where physicists post their papers, added a section for papers on finance. Submissions on subjects like “the superstatistics of labor productivity” and “stochastic volatility models” have been streaming in.

Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science.

As Dr. Derman put it in his book “My Life as a Quant: Reflections on Physics and Finance,” “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a useable theory of anything.”

...Physicists began to follow the jobs from academia to Wall Street in the late 1970s, when the post-Sputnik boom in science spending had tapered off and the college teaching ranks had been filled with graduates from the 1960s. The result, as Dr. Derman said, was a pipeline with no jobs at the end. Things got even worse after the cold war ended and Congress canceled the Superconducting Supercollider, which would have been the world’s biggest particle accelerator, in 1993.

...Dr. Derman said, “Nobody ever took these models as playing chess with God.”

Do some people take the models too seriously? “Not the smart people,” he said.

Quants say that they should not be blamed for the actions of traders. They say they have been in the forefront of pointing out the models’ shortcomings.

“I regard quants to be the good guys,” said Eric R. Weinstein, a mathematical physicist who helps run the Natron Group, a hedge fund in Manhattan. “We did try to warn people,” he said. “This is a crisis caused by business decisions. This isn’t the result of pointy-headed guys from fancy schools who didn’t understand volatility or correlation.”

...The recent debacle has only increased the hunger for scientists on Wall Street, according to Andrew Lo, an M.I.T. professor of financial engineering who organized the workshop there, with a panel of veteran quants.

The problem is not that there are too many physicists on Wall Street, he said, but that there are not enough. A graduate, he told the young recruits, can make $75,000 to $250,000 a year as a quant but can also be fired if things go sour. He said an investment banker had told him that Wall Street was not looking for Ph.D.’s, but what he called “P.S.D.s — poor, smart and a deep desire to get rich.”

He ended his presentation with a joke that has been told around M.I.T. for a long time, but seemed newly relevant; “What do you call a nerd in 10 years? Boss.”


anon said...

"The recent debacle has only increased the hunger for scientists on Wall Street"

Not believable.

I read something similar in an English newspaper. "Any hard science graduates can find jobs in the City."


P said...

$75K to $250K??? I hope that's supposed to be starting salary...

gs said...

“What do you call a nerd in 10 years? Boss.”

During a discussion of de Tocqueville more years ago than I'll admit, my humanities professor barked (I paraphrase): You think you're going to be running things. That's garbage! You'll get out of here and end up working for somebody who went to law school.

STS said...

The Overbye article was pretty lame. Just "look, here are some quotes from people who seem to be 'quants'" along with the usual spooky cliches about "hard stuff that's over your head." Stale journalistic mad-scientist cliches.

The crack about nerd bosses was a lame advertisement for Lo's classes really. Quants with real intellectual curiosity work for 'poker player' bosses who play the game (or dance the dance, per Chuck Prince) and "know when to hold 'em, know when to fold 'em, know when to walk away, know when to run." Thus we have the spectacle of Citi earning a 'profit' courtesy of the most forgiving Fed Funds rate in the Fed's entire 95 year history and Citi's newest business segment: bailout money ... er ... 'sovereign policy arbitrage'.

The poker game continues, and know this: the bankers are better at it than your government is.

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