Financial Rigor

One of the things you learn in engineering is to be rigorous. If you build a bridge that falls down on a windy day, there’s going to be hell to pay. Financial markets are not like that; they are very noisy. It’s hard to tell who’s skillful and who’s just lucky. And a lot of analyses are done in extremely haphazard, primitive ways, but the investing public doesn’t know any better.

— Dan diBartolomeo, From the Feb 23, 2009 issue ofWired.

Dan diBartolomeo is the head of Northfield Information Services, a Boston financial analysis firm. He has a long history of analyzing investment strategies and complex securities. His comparison of financial markets to the rigors of engineering is noteworthy.

The “quants” of Wall Street, with their Ph.D.’s in advanced science and mathematics, have been painted in the press as geniuses who created financial products of such astounding complexity that mere mortals could not hope to comprehend them. I can’t help but wonder if they weren’t more akin to wizards and alchemists who used their formulas and models as a screen for the ultimate confidence game.

People who are smart look ahead to anticipate the implications of their actions. People who are smart create holistic systems rather than piecemeal schemes. People who are smart apply rigor and discipline to their ideas. It seems to me that the quants of Wall Street were more like pawns in a sea of opportunists than true geniuses.