The Quants will be published on Feb. 2 by Crown Business. The book, told through the eyes of several leaders in quantitative finance, is a deep-dive look at the history of this field as well as the destruction it wrought during the last few years.
My hope for this site is that it becomes a forum for thoughts about the role of quantitative finance in the markets, its risks and how it can be improved. I am by no means against quantitative finance in general. That would be futile, if not just plain stupid…like being against the air. Quants are a vital cog in today’s financial markets and have many extraordinary qualities. Yet their track record, sadly, is littered with wreckage.
Black Monday in October 1987. Long-Term Capital Management in 1998. And myriad blowups and near-disasters in between.
But those events pale beside the devastation of the last few years. Indeed, the pain has been so vast and so widespread that pinning blame on any single group may seem pointless. The Federal Reserve, which left rates too low for too long. Overextended homeowners. Fannie Mae. The Chinese…. The list of those accused is nearly endless.
Yet I believe that much responsibility should be borne by those who crafted the extraordinarily complex system that has become our modern-day financial marketplace, a world of mind-bending derivatives, computers linked around the world shifting billions in the blink of an eye, a theory about market efficiency that is blind to bubbles: the quants.
Securitization. The carry trade. Lightning-fast trading algorithms. Mind-boggling leverage. The quants for years claimed to have created a financial architecture that is more efficient, more robust than any that had been seen in history. And yet today, after a financial tsunami, the architects sit amid the ruins and place the blame elsewhere. They blame the tsunami. I blame the architects.
Absolutely, blame is to be shared. But unless we think carefully about the true causes of this most recent meltdown in the heart of our financial capital, Wall Street, we are surely doomed to repeat it.