Mathematicians' role in market mayhem

Interesting article about how quants are behind the chaos in the financial markets.Paul Wilmott is a leading authority and well respected figurehead in the field of quantitative finance with several widely used textbooks to his name

Here is an excerpt

"Paul Wilmott is someone with privileged access to the usually secretive world of the quants.

He runs a website where quants discuss mathematical problems and can watch lectures on quantitative finance 24 hours a day. He talks regularly to those working in a wide range of banks and hedge funds.

He believes the accusation that many banks use the same models is true: "The way in which quants are compensated encourages them to use the same strategies as everyone else."

He claims that many quants calculate that if they lose money as a result of following a novel strategy they will be fired.

However, if they lose money as a result of following the same strategy as everyone else, they will not get the blame.

"The problem with this," says Mr Wilmott, "is that if something bad happens, it happens across the board."

Consumer benefits

Another problem, according to Mr Wilmott, is that academically trained mathematicians are more used to modelling sound physical principles than difficult-to-predict financial markets:

With finance you are essentially modelling human beings which is much more tricky."

Here is the link to the entire article

Using the Graham-Dodd-Buffett framework,one gets a clear perspective into the psychology of financial markets and human behaviour.Instead of relying on overpaid quants, Buffett in a gist gives us all we need to succeed as successful investors.

Amazingly,Buffett reveals this priceless piece of wisdom when he was just 21 years old while lecturing a group of students at night time classes

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Timeless piece of advice...

Cheers,
Manpreet