As I former student of Scholes, Merton, etc., and having picked up some of the ethos, I am fairly sure that they would not refer to something as a 25 standard deviation event. Most likely, they would say that statistically-based representations are based on the past and there is always uncertainty that the future will be like the past, either in the structural or parametric aspects of the model.
The belief that they are doing good? This would be explained as a natural result of improving the efficiency of the capital markets. Peter Hollings -----Original Message----- From: PEN-L list [mailto:[EMAIL PROTECTED] On Behalf Of Sabri Oncu Sent: Friday, August 24, 2007 6:44 PM To: [email protected] Subject: Re: [PEN-L] the glories of financial engineering Raghu: > I believe there are two distinct attitudes on Wall Street. The first > is exemplified by the principals of LTCM who appear to have sincerely > believed in the infallibility of their models and the 25 standard > deviations theory. First of all, I happen to know one or two of high profile quants of LTCM, too, like David Modest, for example. Not that he is someone I know closely, but I socialized with him a few times way back when, and know that he knows enough to know that this 25-standard deviations theory is garbage. No self-respecting and sane quant believes that his models are infallable, and would come up with such an explanation to anything: a 25-standard deviation event in any continuous probability distribution means impossibility for all practical purposes, which is much worse than Gene's lottery ticket buying activity: by the way, good luck Gene! The owner of this 25-standard deviation explanation must be a non-quant boss and if he pretends that he is a quant, I hereby expell him. > These are people of unquestioned analytical ability, but ultimately > extremely naive about how the world really works. I don't think this is the case either. Their naivite is not about how the world really works but is about their belief that what they are doing is good for all, not just for themselves. But, this is what they are taught at the graduate school. And, as you said, there are those who are not naive and know what they are doing quite well. But such evil-doers are hardly ever quants. Most quants do not have the ability to screw others intentionally to my experience, for otherwise, they would not have been quants. Sabri ________________________________________________________________________ ____________Ready for the edge of your seat? Check out tonight's top picks on Yahoo! TV. http://tv.yahoo.com/
