10 August 2007

Of Maths, Shares and Horoscopes

I have been a mathematician since the age of eight. As such, I tend to look at the world through the optics of mathematics. For this reason, I have never understood why people believe that they can model financial markets: they're clearly far too complex/chaotic to be reduced to any equation, and trying to extrapolate with computers - no matter how powerful - is just doomed to failure.

And so it seems:

I hear many Risk Arb players at big shops are getting creamed. It seemed like you make money for 3 years, then give it all back in a couple weeks. Classic mode-mean trade: mode is positive, mean is zero.

In fact, what is most surprising - nay, shocking - is that this apparently unshakeable belief in the existence of some formula/method that will one day allow such markets to be tracked accurately enough to make dosh consistently is equivalent to a belief in horoscopes. After all, horoscopes are all about "deep" correlations - between the stars and your life. Maybe financial markets should try casting a few - they'd be just as likely to succeed as the current methods. (Via TechDirt.)

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