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Tilted Cat Head
Administrator
Location: Manhattan, NY
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Quote:
Originally Posted by Willravel
The fix would have been tighter regulation after the deregulation-related failures of the 80s. It should have been abundantly clear that there is a direct correlation between deregulation and market-side corruption. And yet here we are again.
BTW, is anyone else thinking that economics needs to be less guesswork and more science? I keep trying to study references about what's going on only to find astrology-level science at best.
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Mathematicians have been wooed by Wall Street for many years now.
The first two articles go over the current bust, the last one from 1994 talks about the uncertainty but ability to try to predict the market. The biggest problem is that you can't predict people.
Quote:
http://www.nytimes.com/2009/03/10/science/10quant.html
Emanuel Derman expected to feel a letdown when he left particle physics for a job on Wall Street in 1985.
After all, for almost 20 years, as a graduate student at Columbia and a postdoctoral fellow at institutions like Oxford and the University of Colorado, he had been a spear carrier in the quest to unify the forces of nature and establish the elusive and Einsteinian “theory of everything,” hobnobbing with Nobel laureates and other distinguished thinkers. How could managing money compare?
But the letdown never happened. Instead he fell in love with a corner of finance that dealt with stock options.
“Options theory is kind of deep in some way. It was very elegant; it had the quality of physics,” Dr. Derman explained recently with a tinge of wistfulness, sitting in his office at Columbia, where he is now a professor of finance and a risk management consultant with Prisma Capital Partners.
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Quote:
Recipe for Disaster: The Formula That Killed Wall Street
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
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Quote:
Wired 2.07: Cracking Wall Street
In the subsequent years, as the stock market rebounded, the increasing computerization of financial trading was ignored. More and more of the everyday tide of money flowed in digital bits, and more and more sophisticated games could be played with them. The traditional financial gamble of derivatives is the latest to be computerized.
A derivative is sort of a bet on a bet, or a speculation squared. Really complex derivatives may give you, say, the option of buying milk at a certain price in New Zealand while simultaneously selling oil in Taiwan. Third- and fourth-order derivatives -- those betting on an option based on a bet that hinges on another gamble -- up the complexity and incomprehensibility of these financial instruments.
Derivatives are only made possible by the immense number-crunching power of 1990s desktop computers. Yet exotic bets form an increasingly major part of the world economy. The bulk of the approximately US$14 trillion that is entangled in derivatives is three times as much money as is tied up in the ordinary stocks and bonds that these esoteric gambles are derived from. When the stock market shuddered in early 1994, computerized derivatives were blamed.
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