One 'Quant' Sees Shakeout For the Ages -- '10,000 Years'
>>>This thread has been kicking Taleb around a bit. I posted this article snippet because Taleb writes that whenever the quants/statisticians (whom Taleb holds in the lowest possible regard) by neglecting the "tails," blow up their hedge funds they say....'well this can only happen once in 10,000 years...or...this event is beyond 10 sigma.' Well here we have it. I am highly amused. I don't think that Taleb walks on water, but he does have some very useful, powerful and unconventional insights.<<<
By KAJA WHITEHOUSE
August 11, 2007; Page B3
Matthew Rothman is used to working with people who pride themselves on their rationality. He's a "quant," after all, one of a legion of Ph.D.s on Wall Street who use the emotionless rules of mathematics to pick trading positions. But this week, he caught a whiff of panic.
The trouble started Aug. 3, when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected. Equally troubling, the moves were far more volatile than models based on decades of testing assumed were likely. Those relatively minor anomalies escalated quickly this week, exploding into a global rout for quantitative funds by Wednesday.
As the global head of quantitative equity strategies for Lehman Brothers Holdings Inc., Mr. Rothman has an inside view into what went wrong. His story paints a situation that quickly snowballed out of control, as events damaged fund managers' confidence in their models and led them to take steps that made matters worse. By Thursday, Mr. Rothman was so concerned that he wrote an extraordinary plea to the industry to remain calm.
"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."
more..........
online.wsj.com |
