Quants and wall street
Leave it to a technology magazine to publish the best financial-reporting story of the year. Bryant Urstadt’s report (“The Blow-Up,” November/December 2007) is the first and only truly penetrating piece of reporting and analysis on the role that quantitative hedge funds played in a tempest-tossed summer on Wall Street. Kudos.
Isn’t it ironic? Statistical quant models made billions of dollars for hedge funds from random stock-market movements. But when success expanded those hedge funds to make up a large part of that market, those quant models ended up modeling their own results, which were anything but random. The feedback loop from models trying to model themselves had all the hallmarks of a bad episode of Star Trek. It’s just too bad investors had to lose $2.1 trillion in market valuation in order to see it come to life.
Carl D. Howe
Your piece states that quants want a unified theory of finance. But even if they have one, it will not help them, any more than a unified theory in physics will improve long-range weather forecasting. Major gains in weather forecasting have come from denser sensor networks and, especially, vastly increased number-crunching capability. Still, the short-term forecasts in my city were significantly wrong last week.
And unlike meteorologists, the quants are within the system they are studying. They are the system, and when they employ new knowledge, they change the system and render their models incorrect.
Werner Heisenberg described the limits on the simultaneous knowability of a particle’s speed and position. Most technologists view this principle as revealed cosmic truth, with many analogues in what passes for our real world. The stock market is one such analogue. If stocks’ values could be predicted with certainty, then they would be. And stocks would take on all the entertaining dynamics of life insurance.
Probably sooner than later, a Heisenberg will emerge to judge the quants. And the result will be highly quantified. Meanwhile, and probably afterward, informed intuition will continue to dominate long-term (responsible) trading.
As a longtime participant in capital markets, I feel certain that the quants aren’t to blame for the August collapse; we are. For a variety of reasons, global availability of short-term debt instruments is at a low while demand is at an all-time high. Further, global interest rates look unattractive.
The problem is that there is no such thing as a free lunch, or free yield. Although the quants made the market possible and helped keep it working, it was global demand for a slightly shinier piggy bank in which to keep their cash that created the August collapse and its ongoing financial fallout.
On J. Robert Oppenheimer
In your most recent editor’s letter (“Oppenheimer’s Ghost,” November/December 2007), you state, incorrectly, that Oppenheimer “was chairman of the U.S. Atomic Energy Commission.” He was never AEC chair. He was chair of the General Advisory Committee (GAC) to the AEC from 1946 to 1952. Cutting his ties to the AEC and revoking his top-secret clearance was the objective of the infamous inquisition-style Oppenheimer trial in 1954.
William E. Murray
Palo Alto, CA
Expectations About Privacy
Mark Williams, in his review of Daniel Solove’s The Future of Reputation (“The Talk of the Town: You,” November/December 2007), writes that “in villages, everybody knew everybody else’s business; personal privacy and anonymity are social constructs that achieved their current legitimacy when increasing numbers of people started moving to cities in the 18th and 19th centuries.” That claim is inconsistent with the experience of anyone who has grown up in a rural setting. Farmers and their neighbors have traditionally spent long hours alone in the fields or traipsing through silent, desolate, and dangerous landscapes. (A good thing, too, since distance, not easy proximity, is the furnace of creativity and innovation.)
We should all value privacy. Once it’s gone, there’s little chance of its being recovered.
St. Louis, MO
You have had quite an impact on the Mars science community with your wonderful graphic story (“Mission to Mars,” November/December 2007). The story is circulating among all the teams that you wrote about, and of course, each believes that the story is about them. My children have (finally) decided that I must be famous, now that I’m in a comic. The well-written, exciting, and accurate story–together with the terrific art–brings back to all of us the days of struggle and reminds us, once again, to wish Peter Smith and the Phoenix team the best of luck.
Daniel J. McCleese
Chief scientist, Jet Propulsion Laboratory
How to contact us:
Write Technology Review, One Main Street,
7th Floor, Cambridge MA 02142
Please include your address, telephone number, and e-mail address. Letters may be edited for both clarity and length.