Re: Credit Default Swap (CDS) question and answer

[David Farber <dave () farber net>]

Begin forwarded message:

From: "David P. Reed" <dpreed () reed com>
Date: October 22, 2008 8:23:09 AM EDT
To: Claudio Gutierrez <claudio.gutierrez.m () gmail com>
Cc: dave () farber net
Subject: Re: [IP] Credit Default Swap (CDS) question and answer

I don't withdraw my remarks.  They are harsh for the following  
reason.  It's a bit into the structure of the meaning we attach to  
Science, but it's crucially important.

My comment about "failed physicists" refers to the migration of people
  - who were trained to operate in a scientific culture, one where  
*experimentalists* hold considerable power over the theorists, forcing  
them to *test* their theories, because the culture demands it.

to:
  - a culture where a theory's "truth" need not be validated  
continually against experiment, where instead, the *very high pay*  
goes to people who can *convince* (con?) investors to believe untested  
claims, merely because mathematical standards are involved.  (the  
quote from Fischer Black merely proves my point...he is of that other  
culture - merely a mathematical thinker of another sort and "useful"  
clearly means something other than what a true physicist must care  
about).

Of *course* some mathematically proficient souls would move to a field  
where they need only convince others of something, *regardless of its  
truth,* in order to make money.  I make no judgement as to overall  
goodness of that, but I do judge them as physicists.  I also make no  
judgement as to their mathematical skill.

They have *failed* as physicists, therefore.  They have failed to  
preserve their cultural norms, one that *defines* physics.

Were "using convincing mathematized theory" a test for successful  
physics, we could claim that computational astrology is part of  
physics and also part of psychology.

String theorists who choose to eschew experimental testing *also* run  
the risk of becoming failed physicists.  To be a successful physicist  
is more than writing a pretty thesis with equations that follow  
mathematical rules and are consistent with some past observations  
(curve-fitting).  It is functioning in the cultural norms of physics.   
Testing one's theories is the *ante* for being any kind of success as  
a physicist - even when the theories prove false!

Claudio Gutierrez wrote:
> <David P. Reed wrote> I think the problem is that the modelers  
> decided that their models were true, regardless of data....The "laws  
> of finance" are far from physics in their quality of validation, and  
> quants are largely *failed* physicists
>
> 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 <mailto:dave () farber net 
> >> wrote:
>
>
>
>    Begin forwarded message:
>
>    From: "David P. Reed" <dpreed () reed com <mailto:dpreed () reed com>>
>    Date: October 20, 2008 3:45:25 PM EDT
>    To: Jon Urdan <jon () lambeaucap com <mailto:jon () lambeaucap com>>
>    Cc: "'Savage, Christopher'" <ChrisSavage () dwt com
>    <mailto:ChrisSavage () dwt com>>, dave () farber net
>    <mailto: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).
>
>
>
>    -------------------------------------------
>    Archives: https://www.listbox.com/member/archive/247/=now
>    RSS Feed: https://www.listbox.com/member/archive/rss/247/
>    Powered by Listbox: http://www.listbox.com




-------------------------------------------
Archives: https://www.listbox.com/member/archive/247/=now
RSS Feed: https://www.listbox.com/member/archive/rss/247/
Powered by Listbox: http://www.listbox.com