Saturday, December 6, 2008

The Rise of the Machines & another look at the role of "quants" in the current financial downturn.

I came across an article on-line from the New York Times, written by Op-Ed Contributor Richard Dooling, "The Rise of the Machines",

Dooling mentions at the beginning of the article that Warren Buffett called derivatives "weapons of mass destruction". I guess time will tell. The article was published on October 11, 2008. Nearly two months later, things continue to combust.

"Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal." '

Richard Dooling is the author of "Rapture of the Geeks: When AI Outsmarts IQ"

I've assembled a few related articles that focus on the role of the quant and some additional information that might assist in our understanding of what has been unfolding during the current economic recession:

Quants Gone Wild - The Subprime Crisis (3/27/08; A.W. Bodine and C.J. Nagel)
"The “best & brightest” quantitative analysts on Wall Street became so technologically advanced that many of the principals running investment firms simply didn’t understand the arcane risk models their “quants” developed – and sadly neither did the quants. We recall the comment made during a recent presentation at Concordia College by Don Gogel, President and CEO of Clayton, Dubilier and Rice. He noted that this “toxic cocktail” was something that even the “mixologists themselves didn’t understand” let alone those trading in them. Bryant Urstadt writing in MIT’s Technology Review in December 2007 also notes, “The more quants learn, the farther away a unified theory of finance seems. Human behavior, as manifest in financial markets, simply resists quantification, at least for now.” We should here also do homage to the investing approach of the sage Warren Buffet—that he does not invest in anything he doesn’t understand. Investment houses should note this simple truth."

On Becoming a Quant (pdf) May 2008; Mark Joshi

Hiring the Next Generation of Quants, Finance Tech, 3/31/2006; Ivy Schmerken

""An MBA does not cut it because operating in today's markets requires more quantitative skills than a typical MBA can offer," contends Linda Kreitzman, director of the Masters in Financial Engineering (MFE) program at the Haas School of Business at the University of California at Berkeley. "Trading is getting more complex, especially in structured products," she adds, citing as examples fixed income, mortgage-backed securities and asset-backed securities, as well as credit and equity derivatives and volatility trading. ""

Here is an article, written by Tom Davenport, in the Discussion Leader, Havard Business Publishing, that offers a a few ideas for solutions:

10 Principles of the New Business Intelligence

"I've argued for a while that organizations need to increase their focus on decision-making. In particular, they need to think again about the relationship between information and decision-making."

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