Mathematical analysis has become more commonplace in both business and finance. The “quants” on Wall Street and at hedge funds have transformed investment worldwide. In the first video below, interviews with different quants both attack and defend the reliance on mathematical models. Quantitative finance is in general using complex mathematics to model economic and financial relationships. In the second video, James Mirrlees talks about the role of developing models in economics and the use of it as a tool. There is an inherent danger in relying on mathematics because of the assumptions that we make in our models, and the inability of many of these people to realize that their assumptions have real repercussions if they do not hold true. Wilmott and Derman (featured in the first video) have released a “Modelers Hippocratic Oath” which is meant to keep quants from causing harm.
Questions to think about
- Do you believe that economics and quantitative finance need to think more deeply about this “Hippocratic Oath” for economics and finance? Or do you believe that explanations of economic/financial models are understood to be approximations to reality?
- The role of uncertainty in general is a fundamental problem in the “science” of finance and economics which cannot (as of today) be tamed. I want you to think about the role of assumptions in economics and how mathematics formalizes those assumptions. Do you believe that there needs to be a better way of transmitting these theories to reality, or do you believe that we should keep mathematical modeling to a minimum in economics and finance?
- Paul Krugman argues against necessarily relying on “elegant” mathematics and focusing more on “dirtier” math in thinking about the real world. Do you think that there is overreliance on the elegant math in many cases? Or do you see solid and elegant mathematics as a necessary foundation for economic research.