Comment by koheripbal
4 years ago
What most people don't understand about finance is that there are fundamental rules that you really cannot break without consequences.
Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science.
Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance.
Talking to people who are looking to just tear down modern finance are no different than climate change deniers, antivax, or flat earthers... and yes, they even exist in crypto (and on HN).
> Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science.
Your comment makes no sense. Just because there's modeling involved that does not make it a hard science. A hard science requires stuff like the ability to perform controlled experiments and replicability, in order to arrive at a high degree of accuracy in predictions.
Throwing around partial differential equations does not turn something into a hard science. You need to meet way more requirements before you're in a position to claim that.
It doesn't necessarily invalidate your point, but I would say astrophysics is a hard science, and yet a ton of it is based on observation and modeling of events we can't control or reproduce.
Some part of physics are not hard science at the moment as long as we can't perform observations/experiments to validate or invalidate theory (for example string theory). Some part of astrophysics are clearly not hard science at the moment.
I don’t think astrophysics is a hard science anymore.
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The controlled experiments are in the trading. The market validates the model, not the peers.
The scientific mindset is there, but not the publishing because the publishing destroys the value of the model. Once your model is known, others trade against your model and it becomes invalid.
> It really is a science.
Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds.
> Recipe for Disaster: The Formula That Killed Wall Street
> And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
> Nassim Nicholas Taleb is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."
https://www.wired.com/2009/02/wp-quant/
> Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds.
If you follow the scientific method, it's science. If you write an observational essay, it's not. You can build theories around falsifiable, replicable experiments pertaining to the madness of crowds. The error bars are longer. But they are not infinite.
If you generate a process using a Cauchy distribution, you can observe finite error bars, but actually the variance of the generating process is infinite.
No matter how hard you model you won’t be able to predict processes that are fundamentally unpredictable. And you would get fooled because you only observe finite amount of data.
It is surprising how complicated the math gets even if you try to model very simple processes (eg think of the n-body problem and how complexity increases with every addition of a body). It is not a given that complicated models mean you’re modelling a complicated process.
You are correct.
But when people say "finance is science" what they usually mean is "here is the complicated math that proves you can't lose money on this, we've modeled everything".
As the joke goes, 6 sigma events happen in finance every week.
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Re: "The error bars are not infinite."
I feel like they are infinite? Because, for example, in hyperinflation, there's no upper bound on how long someone is going to keep printing money.
Any given instance will stop at a finite number, but you can't bank of that being the high water mark.
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> If you follow the scientific method, it's science.
OP's claim was that quantitative finance was *hard science*. Requirements regarding predictability are way more stringent than merely observing stuff and seeing how it responds to an input.
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Math is not science. Arithmetic and geometry were two of the original liberal arts (defined by Plato). Math doesn’t follow the scientific method. Math is a foundation for much of science and social science, but it is distinct from them.
I always tell people, Maths isn't a science. It's theoretical philosophy.
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> Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance.
Just because quantitative analysis has solid grounding doesn't mean that its use is unrelated to ethics. The finance establishment is an organized power structure whose decisions are political.
If you want an analogy, I'm pretty sure that you'll find plenty of people who used ballistics to achieve goals that you would find pretty unethical.
That can also be said for nearly all specializations/ventures of us humans, right? Physics (nukes), chemistry (explosives and refined sugars), electronics engineering ("engagement optimization"), biology (human experiments maybe), philosophy (started many wars), etc. There doesn't seem to be many things where we haven't corrupted in some way. Everything is about ethics and politics(?)
Everything is political, and everything has ethical considerations, yes.
Refusing to take a side _is_ a side, it means you're fine with how things are going on their own.
This isn't corruption, it's just recognition that life has choices, and those choices have consequences, for yourself and others.
Using math does not make something scientific. Math is a language based on logic, physics is a science using that language. Economics is Scholasticism that uses math as a language.
This comment is why the humanities should be a prerequisite for all academical endeavors...
The maths used in economics is widely known to be wrong.
When informed the maths in economics is wrong, the economists don't go and fix their maths either.
Economics is more like sociology with some random incorrect formulas written on the black board as set dressing.
Economics might in self loathing claim they are the "dismal science", but the cold hard truth is they simply speaking are not doing their jobs properly. It's a broken research field.
You're not talking about the same "economics". Quantitative analysis, as the person wrote, is pretty good at predicting things.
> There was no politics, no opinions, no ethics involved. It really is a science.
Except that there are humans involved. How do you boil arbitrary human action down to a HARD science?
> social media ... organized political power structure
It's not just social media and it is somewhat disingenuous to dismiss the idea that finance, specially specially international finance, does not have (some form of) power [that actually trumps and transcends political power].
This is a somewhat interesting film that I was watching the other day. It's mere existence addresses the first bit -- that perception is certainly not limited to "social media". And of course the film itself is about a super secret gathering of G8 ministers where they struggle with the decision to put in place some (undisclosed) policy change that they all know will have very drastic consequences for the global average joe.
The Confessions (2016): https://www.imdb.com/title/tt4647784
As a single actor you can bend, but never break the rules. So you can achieve way better returns than the market as a whole does. Over time 10 - 200 x returns is achievable, don't think it comes cheap though, you need to dedicate large chunks of your life to it, and nothing is a guarantee.
However, the math approach to finance works because in its essence it is quantifying human reactions and or emotions, which in large crowds turns out to be more predictable. In the short run, still, software holds its edge with its probability approach but its not smart so that it is basically a rent seeker.
If finance is a HARD science, where are replicated experiments? How did they account for alternative hypothesis?
Will understanding the math make me rich? :)
It won't make you rich but it'll at the very least keep you from making yourself more poor.
Work at a HFT firm in Amsterdam. That type of finance knowledge will make you rich.
So you can guarantee 20% returns? We're back where started.
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It's really striking how in recent years the Godwin point has been replaced from "everybody who disagrees is Hitler" to "everybody who disagrees is a anti-climate flat-vax earth-denier". It's really not helping getting any point across. In a way it is self-realizing polarization: because you are casting any criticism of "modern finance" into this "bundle of badness" this is likely to reinforce their position.
I think you have the point, and it makes me worried to see your comment downvoted to oblivion.
It is worrying to see that people tend to just click thumbs down when they don't agree rather than to pick the towel and build a strong argument against what they don't agree with.
its the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, not a Nobel Prize.
Is the math meaningful though?
> Is the math meaningful though?
"Meaningful" is squishy. Is it strongly predictive, and in some cases, definitive? Yes.
If we could all get a stable (guaranteed) 15% per year, everyone would invest. But the world economy doesn’t grow at 15%.
The US economy doesn’t grow at 7% a year but that’s what the s&p is expected to do
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To the same extent that money is meaningful.