Perelman, Michael wrote:
> The New York Times discusses the growth of trading financial assets by
> mathematical formulae. This type of trading can potentially overwhelm
> markets -- something the article does not mention.
later on in the article:
“Investment firms fall over themselves advertising their latest,
most esoteric systems,” said Mr. Lo of M.I.T., who was asked by a
$20 billion pension fund to design a neural network. He declined
after discovering the investors had no real idea how such networks
work.
“There are some pretty substantial misconceptions about what these
things can and cannot do,” he said. “As with any black box, if you
don’t know why it works, you won’t realize when it’s stopped
working. Even a broken watch is right twice a day.”
last spring someone who develops programs for options pricing -- and who
knew i was a physics and computer guy -- approached me and asked if i
would be interested in implementing in code some new "techniques" from
quantum field theory that supposedly handled stochastic volatility
better than existing models.
so i had several 2 hour sessions with him, while he taught me some about
how current codes were used in the financial world. at one point he was
giving me an example of a transaction, and then tapped a key on my
laptop and said within those few seconds i would have made $10,000.
so i am sitting there trying to figure out what all this had to do with
random walks, financial Hamiltonians, path integrals, all that stuff,
staring off into physics space. this guy turns to me and says again
"les, did you hear what i just said? you just made $10,000."
i glance over at him with that "you want to figure out if this stuff
makes any sense, or do you want to talk about making money" look. never
heard from him again.
i talked to some others in financial securities in NYC. one told me the
primary use of options pricing in financial circles was to figure out
the best way to deliver Christmas bonuses to employees. don't know how
true that is. others told me it was useful for brokers in order to
cherry pick buyers and sellers for a particular option. i can't remember
if this was to maximize sales commission, or something else.
Les
