Financial Rigor

ByHeather

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.

Similar Posts

  • Contracts, Contracts, Everywhere

    ByHeather

    Long term contracts and petty fees are everwhere.

    When we moved to Princeton last year we signed up for Poland Springs water delivery. (Poland Springs is owned by that bottled water juggernaut, Nestle Waters.) They offered an inflexible monthly service plan of 4 bottles per month for $32.96, which was the best deal in their array of undesirable options. You can skip a delivery, but not a payment.

    When the first bill arrived I was surprised to find a $2.00 fee for an Oil Surcharge. What? This is nothing more than a price hike disguised as a fee, hiding behind rising fuel prices. They are in the delivery business. Fuel charges are integral to their cost of doing business and should therefore be integrated into the price.

    My biggest disappointment came when I set out to cancel the service due to a pending move to North Carolina. …

  • Dear United: It Didn’t Have To Be This Way

    ByHeather

    Last summer I had a Delta flight out of La Guardia bound for Detroit. It was a Saturday morning and the airport was swarming with passengers, the gate area for my flight was like a mosh pit. As we approached the time to board, a gate agent announced that the flight was oversold by seven passengers. An audible groan rippled through the waiting area as we all clutched our boarding passes and jockeyed further for position in the boarding process. This was not going to be easy.

    The Delta / traveler negotiation process began when the agent offered the usual $400 travel voucher for anyone willing to take a later flight. In a delightful New York accent, a lady standing beside me smirked, “They’ll pay more.” Sure enough, moments later they announced that a $500 voucher was now available to any travelers with flexible travel plans. I smiled as I acknowledged the prophetic power of my fellow traveler. As my plans did not feel flexible, I gratefully made my way onto the plane.

    After the plane was fully loaded, with the last few passengers jamming bags into the overhead bins, a voice rang out over the airplane announcement system that Delta still needed one more passenger to give up their seat. This time, however, they had upped the ante.

  • What is the purpose of an economy anyway?

    ByHeather

    I heard a reporter on a recent Economist podcast say that, in light of the growing UK economy, creating jobs is a good thing.

    It seems to me that creating jobs is not only a good thing, creating jobs is the thing. What other purpose is there for an economy?

    Here’s what I mean. An ‘economy’ is kind of a meta-thing that emerges whenever two or more people get together and decide that working together to meet everybody’s needs is more efficient than everyone trying to each meet 100% of their own needs (like, say, some kind of off-the-grid survivalist). Economies emerge in all kinds of places: prison economies, school-yard economies, national economies, global economies.

  • Growth

    ByHeather

    Growth for the sake of growth is the ideology of the cancer cell.

    — Edward Abbey

    Perhaps it is my natural temperament to do things deliberately and with purpose (after all, it is the tortoise who wins the race). Maybe it is my persistent skepticism. Quite possibly it is an outgrowth of my intuitive personality type (INTJ). Whatever the reason, I have always been resistant to Wall Street’s incessant demand for growth from public companies.

  • “The Market” vs “The Economy”

    ByHeather

    With all the volatility in the stock market lately it is a good time to remind ourselves that “the market” is not the same as “the economy.” The best that I can tell — at least as of the last few years — “the market” has contracted to a relatively small group of:

    • professional traders
    • automated computer programs
    • institutional investors
    • hedge fund managers

    This tight-knit circle trades amongst itself with very little relevance to what we think of as “the economy.” In contrast to this closed group, the economy is the vast sum of the creation and delivery of the goods and services we want and need.

    It seems to me that the Dow Jones Industrial Average and S&P 500 bears little connection to these things these days.

    Don’t be afraid. Now is the time to be bold. If you don’t like the economy, let’s go out and make one of our own.

One Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.