Begin forwarded message:
From: "Claudio Gutierrez" <claudio.gutierrez.m@gmail.com>
Date: October 21, 2008 9:11:54 PM EDT
To: dave@farber.net
Cc: dpreed@reed.com
Subject: Re: [IP] Credit Default Swap (CDS) question and answer
No one has declared that the laws of finance are empirically validated. Fischer Black (the Black in Black-Scholes formula for the valuation of stocks options) wrote: "In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct and relevant" . Thomas Wilson, chief insurance risk officer of the ING Group, wrote: "A model is always wrong, but not useless."
Additionally, to say that quants are failed physicists is like saying that Electrical Engineers fail when we don't work developing circuits. Many quants are PhD in physics but they are also mathematicians and computer scientists who have migrated to financial sector because better salaries and working conditions. A very good account of being first an successful physicist and then a quant is found on the book "My life as a Quant" by Emanuel Derman.
Regards
Claudio
On Mon, Oct 20, 2008 at 9:01 PM, David Farber <dave@farber.net> wrote:
Begin forwarded message:
From: "David P. Reed" <dpreed@reed.com>
Date: October 20, 2008 3:45:25 PM EDT
To: Jon Urdan <jon@lambeaucap.com>
Cc: "'Savage, Christopher'" <ChrisSavage@dwt.com>, dave@farber.net
Subject: Re: [IP] Credit Default Swap (CDS) question and answer
Isn't it true that you can't hedge against Black Swans, by definition?
There is no "black swan" here, I think. I think the problem is that the modelers decided that their models were true, regardless of data. That is, they were mathematically true, but not empirically true.
There's a reason that experimental physicists continually re-test such things as the idea that the cosmological constant is zero or that inertial and gravitational mass are equivalent. That reason is that even the "laws of physics" are contingent on what we *think* we know.
The "laws of finance" are far from physics in their quality of validation, and quants are largely *failed* physicists - ones who studied the texts but had little participation in the actual culture of physics.
(of course, the physics subculture of "string theorists" has many problems, too, since they have been shown to habitually avoid creating hypotheses that are falsifiable).
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