Re: Credit Default Swap (CDS) question and answer

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Claudio Gutierrez" <claudio.gutierrez.m () gmail com>
Date: October 21, 2008 9:11:54 PM EDT
To: dave () farber net
Cc: dpreed () reed com
Subject: Re: [IP] Credit Default Swap (CDS) question and answer

<David P. Reed wrote> I think the problem is that the modelers decided  
that their models were true, regardless of data....The "laws of  
finance" are far from physics in their quality of validation, and  
quants are largely *failed* physicists

No one has declared that the laws of finance are empirically  
validated. Fischer Black (the Black in Black-Scholes formula for the  
valuation of stocks options) wrote: "In the end, a theory is accepted  
not because it is confirmed by conventional empirical tests, but  
because researchers persuade one another that the theory is correct  
and relevant" . Thomas Wilson, chief insurance risk officer of the ING  
Group, wrote: "A model is always wrong, but not useless."

Additionally, to say that quants are failed physicists is like saying  
that Electrical Engineers fail when we don't work developing circuits.  
Many quants are PhD in physics but they are also mathematicians and  
computer scientists who have migrated to financial sector because  
better salaries and working conditions. A very good account of being  
first an successful physicist and then a quant is found on the book  
"My life as a Quant" by Emanuel Derman.

Regards
Claudio

On Mon, Oct 20, 2008 at 9:01 PM, David Farber <dave () farber net> wrote:


Begin forwarded message:

From: "David P. Reed" <dpreed () reed com>
Date: October 20, 2008 3:45:25 PM EDT
To: Jon Urdan <jon () lambeaucap com>
Cc: "'Savage, Christopher'" <ChrisSavage () dwt com>, dave () farber net
Subject: Re: [IP] Credit Default Swap (CDS) question and answer

Isn't it true that you can't hedge against Black Swans, by definition?

There is no "black swan" here, I think.  I think the problem is that  
the modelers decided that their models were true, regardless of data.   
That is, they were mathematically true, but not empirically true.

There's a reason that experimental physicists continually re-test such  
things as the idea that the cosmological constant is zero or that  
inertial and gravitational mass are equivalent.   That reason is that  
even the "laws of physics" are contingent on what we *think* we know.

The "laws of finance" are far from physics in their quality of  
validation, and quants are largely *failed* physicists - ones who  
studied the texts but had little participation in the actual culture  
of physics.

(of course, the physics subculture of "string theorists" has many  
problems, too, since they have been shown to habitually avoid creating  
hypotheses that are falsifiable).



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