What does /biz/ think of the mathematization of finance and economics?
Is it good and necessary, or will it lead to the downfall of the banking system as we know it?
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>>1218012
I am. Tell me, what's so stupid about my post?
>>1217900
Math is only bad if you don't know exactly what you're calculating and make bad assumptions.
In other words if something related to it goes wrong it isn't math's fault
>>1218107
A complete lack of understanding of finance and economics, and presumably mathematics as well.
>>1218444
No tell me exactly what's so dumb here, I study mathematics in university.
I've read 2 books on this and they both went on and on about how basically mathematicians in the finance industry destroyed our economy in 2006 by basing an imperfect world on perfect mathematical models.
>>1217900
Seeing as I'm starting a mathematical finance master in the fall, I obviously approve
I'm only partially in it for the dosh. It's probably my second biggest interest academically
>>1218166
I think OPs point was along the lines of Buffet's point "Be wary of nerds with formulas".
Trying to apply math techniques to the market can and has destabilized the market. See Taleb and Derman for elaboration on how
>>1219665
I've been thinking about doing this for a career, don't you have ethical problems with it?
>>1219694
Sometimes, but usually only when I'm talking to people who are doing something good for the world
My skillset, personality, interests, and ambitions have always pointed me ethically gray areas
In the words of Aaron Eckhart's character in Thank You for Smoking, I have a moral flexibility most people aren't comfortable with
>>1219672
Because people place their faith in math without knowing what the assumptions are. Would you prefer everyone go back to staring at the news and being too late anyway?
>>1219661
It wasn't the mathematicians. It was faulty ratings of sub prime debt that actually held to their ratings because of the bailouts. The economic collapse was due to clueless and Greedy loan originators and borrowers who thought they could make a quick profit off this situation. The only faulty assumption that led to this boom was that housing prices could never go down.
>>1217900
It's numerology.
Not joking. Not shitposting. The vast majority of the "math" you see being peddled in finance is straight up numerology. Basic shit wrong. Units wrong. Variables tossed in for no reason. Yeah, the guys don't don't actually take the 3rd digit of the stock price and compare it to pi, but they might as well for all the other garbage they're throwing in there.
Call them out on it, and you've challenged the bullshitting nerd to the very core of his entire (foundation-less) geek identity. He'll sperg out something fierce, but the nonsense he's written speaks for itself.
This isn't an obscure phenomenon. Pic related.
>>1219830
Isn't some math useful in pricing options or hedging portfolios? Or is it just all a big imaginery system?
>>1220035
Black and Scholes model underprices events that are deemed "improbable" (that is, events 20 or 30 stdevs away from the mean) by assuming a normal distribution on prices, while prices exhibit a fat tail distribution.
This in turn creates interlocking fragility (that is, it takes just one blow to make the entire financial system go boom).
Non normal distribution is rooted in psychology,that is, investors often underestimate or overestimate risk due to natural biases of human psychology. This means they often make irrational decision.
Throw in the fact that mathematical models describing the underlying end up influencing the underlying sooner or later.
The above poster is essentially correct. Which is why the whole global financial system is just a huge Ponzi scheme, perpetually on the verge of collapse
>>1219672
Buildings have fallen before, but we didn't stop using math in engineering
>>1220077
When is it going to collapse? What will happen next?
>>1220077
B-Sch is not as bad as you claim and can be adapted to a variable volatility without too much trouble. It's usually not a bad assumption to assume a Gaussian distribution. I place the problem completely on humans and the unrelenting greed and the ignorance about what is actually productive and what is a circlejerk. No one goes to a casino and expects any more than games, but the will happily squander fortunes to buy into whatever stupid bullshit they think that they can pawn off on someone else. They refuse to consider that they may be the bagholder.
>>1217900
Blind faith is always wrong in the long run
Math can give you good insights nobody else sees because nobody else did the math on that particular combination of feedback loops and combined hedges and whatever
the problem is that sometimes one guy is so much smarter than the rest of the math whizzes that he factors in their whole formula and uses it as just another equation within his system
tldr if you aren't the best one around you ain't shit cause you're counting on the other guy's ignorance
>>1217900
It's total and utter bullshit. Economics is very simple. You produce and you consume. And the degree to which it has been complicated has almost pushed us into the abyss. Look at our deficits, the 20 trillion in debt, and these asinine concepts like "quantitative easing." We are taking out 3rd and 4th mortgages to pay for the 1st and 2nd. You can not successfully get rid of debt by borrowing to pay for it. It doesn't work on any level but it's perfectly fine for the highest command? The assumption that a major civilization can't fall "cuz it's too big" is retarded. The lifespans of all civilizations max out at about 250 years.
Now, how could this happen? Well, let's look at Weimar Germany. They had an astounding amount of debt following WW1 and then proceeded to borrow from their own government, ultimately, just printing money. And that led to the hyper-inflation in which a loaf of bread costed billions.
That's exactly what's going on now. Why haven't we seen that shitstorm yet? Because the dollar is the global reserve and the majority of the currency resides outside the US. And that's why you have all these controversial decisions in regards to foreign policy.
>>1217900
It is good, but it needes tempering. Mathematics is a tool, a very useful tool, but if you apply a tool incorrectly you will be fucked.
Also, serious issues with the lack of credible data sets still exist in Econ. and Finance.
Mathematics and Physics are both incredibly useful for Finance and Econ. It's a good direction.
>>1221282
>Now, how could this happen? Well, let's look at Weimar Germany. They had an astounding amount of debt following WW1 and then proceeded to borrow from their own government, ultimately, just printing money. And that led to the hyper-inflation in which a loaf of bread costed billions.
>Calls something out for being simple.
>Oversimplifies complex system by explaining what happened in a single sentence.
Economics does have aspects which are overly complex/complicated. You are not doing your point of contention any favors though.
>>1221494
A lot of monetary theory -IS- overly complex. The monetary system is needlessly complicated (probably intentionally so).
Summing up an economic collapse as:
"They proceeded to borrow from their own government, ultimately just printing money"
..is just nonsense.
It ignores their balance of trade. Ignores their real productivity. Their financial system. Etc.
>>1221243
>airy fairy investors
I'm talking about official government formulas direct from the British Treasury. A porus place where quants and partners revolve between the City and Whitehall like kids going from bumpercars to the tea-cups in a fairground. If there's a firewall for stupidity in the middle of all this, I haven't seen evidence of it.
>>1219661
Math degree working in finance here. It wasn't math nerds, what happened specifically was STATS nerds fuckingn it up, by not having robust enough tests to detect the heavy tails of the distributions they were working with
>>1221657
You got a MSc or BSc? How did you get in the finance industry? What's the work like? Do you like it?
>>1220684
that's completely different.
I'm in engineering and I understand what's going on behind stress engineering and stafety margins. Even stress engineering based on probability dispersion models is understood as a hard science.
Financial market maths, however?
Don't fucking make me laugh. How can you take "market panic" and "unpredictible" events into account?
The worst part about it is it can become a religion-like Dogma, where people invest based on a formula, without understanding what the fuck is going on, and eventually the whole thing falls appart and everyone's caught with their pants down (think like every market bubble so far).
>>1221674
The best economists never work for governments (they can make higher rewards in the market.)
Government has a tendency to distort the truth, to shift perceptions, to rig the game (academia) in their favor, and to only pay people who tow the line and say what they want.
You can absolutely take irrational behavior into account in models. It's what many market speculators look for.
On the religion-like dogma, I agree. More fool them though: apply the wrong formula to a problem and watch the guys with the right formula win.
That's the beauty of markets (no matter how scummy or greasy it gets), in a relatively free market, wealth accumulates in the hands of the sharpest people.
>>1220684
Literally not what I was referring to.
I don't have the space to explain in a post on 4chan, look up the books I mentioned or don't. I'm not your nanny. There are systemic problems with trying to apply mathematical rigor to finance that pose dangers to the economic system and you need a thorough explanation to understand why.
I am not saying that all of math is bad for finance or that math and finance should be decoupled. Mathematics, computer science, and finance being combined creates a new set of problems that have risks we do not understand yet and have had disastrous consequences most people are not aware of.
The subprime mortgage crisis was not the end-all-be-all event in finance that led to the recession. I get that a lot of you just read/saw the big short, but seriously pick up some more books. A lot of the smaller disasters were not covered by Michael Lewis and are not exactly secrets, just less public knowledge
