As the night rolled on, the quants fared well. Muller chalked up victories against Gowen and Cloutier in the early rounds. Weinstein was knocked out early, but Muller and Asness kept dominating their opponents. Griffin made it into the final ten before running out of luck and chips, as did Einhorn. The action got more intense as the hour grew late. Around 1:30 a.m., only three players were left: Muller, Asness, and Andrei Paraschivescu, a portfolio manager who worked for Griffin at Citadel.
Asness didn't like his first two cards on the next deal and quickly folded, happy to wait for a better draw, leaving the pot to Muller and Paraschivescu. The crowd fell quiet. The incessant honking city whir of Fifth Avenue penetrated the suddenly hushed room.
Breaking the silence, Griffin shouted a warning to his underling: "Andrei, don't bother coming into work next week if you don't knock Pete out." Some in the crowd wondered if he meant it. With Griffin, you never knew.
The room went quiet again. Paraschivescu lifted a corner of the two cards facedown on the table before him. Pair of fours. Not bad. Muller bent the corner of his two cards and eyed a pair of kings. He decided to go all in, sweeping his chips into the pot. Suspecting a bluff, Paraschivescu pushed his mound of chips forward and called, flipping over his pair of fours. Muller showed his kings, his only show of emotion a winsome glint in his blue eyes. A groan went up from the crowd, the loudest from Griffin. The other cards dealt in the hand couldn't help Paraschivescu, and he was out.
It was down to Muller and Asness, quant versus quant. Asness was at a huge disadvantage. Muller outchipped him eight to one after having taken Paraschivescu to the cleaners. Asness would have to win several hands in a row to even have a chance. He was at Muller's mercy.
Griffin, still smarting from his ace trader's loss, promised to donate $10,000 to Asness's favorite charity if he beat Muller. "Aren't you a billionaire?" Asness chortled. "That's a little chintzy, Ken."
After the deal, Muller had a king and a seven. Not bad, but not great. He decided to go all in anyway. He had plenty of chips. It looked like a bad move: Asness had a better hand, an ace and a ten. As each successive card was dealt, it looked as though Asness was sure to take the pot. But on the final card, Muller drew another king. Odds were against it, but he won anyway. The real world works like that sometimes.
The crowd applauded as Griffin rained catcalls on Muller. Afterward Muller and Asness posed for photos with their silver trophies and with Clonie Gowen flashing a million-dollar smile between them. The biggest grin belonged to Muller.
As the well-heeled crowd of millionaires and billionaires fanned into the streets of Manhattan that night, they were on top of the world. The stock market was in the midst of one of the longest bull runs in history. The housing market was booming. Economists were full of talk of a Goldilocks economy—not too hot, not too cold—in which steady growth would continue as far as the eye could see.
A brilliant Princeton economist, Ben Bernanke, had just taken over the helm of the Federal Reserve from Alan Greenspan. In February 2004, Bernanke had given a speech in Washington, D.C., that captured the buoyant mood of the times. Called "The Great Moderation," the speech told of a bold new economic era in which volatility—the jarring jolts and spasms that wreaked havoc on people's lives and their pocketbooks—was permanently eradicated. One of the primary forces behind this economic Shangri-la, he said, was an "increased depth and sophistication of financial markets."
In other words, quants, such as Griffin, Asness, Muller, Weinstein, Simons, and the rest of the math wizards who had taken over Wall Street, had helped tame the market's volatility. Out of chaos they had created order through their ever-increasing knowledge of the Truth. Every time the market lurched too far out of equilibrium, their supercomputers raced to the rescue, gobbling up the mispriced securities and restoring stability to the troubled kingdom. The financial system had become a finely tuned machine, humming blissfully along in the crystalline mathematical universe of the quants.
For providing this service to society, the quants were paid handsomely. But who could complain? Average workers were seeing their 401(k)s rise with the market, housing prices kept ticking ever upward, banks had plenty of money to lend, prognosticators imagined a Dow Jones Industrial Average that rose without fail, year after year. And much of the thanks went to the quants. It was a great time to be alive and rich and brilliant on Wall Street.
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13 Comments
Add CommentNo, the author fails to understand anything really about Quants or the nature of predictive modeling, which is essentially what they do.
Reply | Report Abuse | Link to thisThis is what is important to understand. Predictive modeling is all about finding correlations in data that can be used to predict the future, AS LONG AS the future acts like the past.
Predictive models are VERY POWERFUL tools, BUT, the use of predictive models IS A SUBSTITUTE for understanding economics. In fact, you don't have to know ANYTHING about economics to build a predictive economic model or to use one, and the fact is that these people didn't in fact really know anything about economics.
Think of a predictive model as being like a GPS. It is a piece of technology that makes it easier and more accurate to find your way from pint A to point B, and its very likely that an idiot with a GPS could find their way from point A to point B on the ocean efficiently than someone who is very skilled at navigation using maps and the stars, a compass, and dead reckoning.
That doesn't mean that the GPS user has a better understanding of navigation or geography, indeed they can easily have less understanding that the sailor skilled in older forms of navigation. And, if the GPS malfunctions they would likely have no means of correcting their course. So even if we are talking about a "genius" who (in theory) designed and built a GPS system, they may themselves be a horrible navigator.
This is what the Quants were. People who had no understanding of economics because they didn't need it, they built a tool that was able to simply find patterns and make predictions without having any need for understanding of how or why things worked the way they did. That's why they didn't see it coming, because they never understood economics, they weren't even actually exercising much intelligence. Building predictive models isn't rocket science, it mostly requires access to mountains of data and a knowledge of applied statistics that can be learned by millions of people. Yeah you have to be good at math, but really, that's about it. It was more about access to data really and taking advantage of a time when other people weren't yet using such methods. They were first movers into a high data driven statistical approach, that's it, and they were like people who could only navigate by staring at a GPS, with no knowledge of what to do with the GPS malfunctioned or to even be able to tell when they were going off course.
Read it awhile ago. Author is trying to glorify nerds who are little in themselves, who merely provided excuses for frauds to defraud and thieves to steal.
Reply | Report Abuse | Link to thisSome of these people had studied economics. Unfortunately they believed in the Neo-classical, mathematics based models instead of other more valid approaches. You know, the one in which the 'market' is always in equilibrium and prices contain all information etc, etc. Pushed by Reagan's economic advisor, Milton Friedman (who Bernanke thinks is the best mind ever and whose prescription for the Depression Bernanke is following)It was those economists who led the trapse off the cliff....lemmings. And every time some one talks about this wonderful nonexistant market they should be pointed to more recent, more relevant studies. AND BTW, all their models followed a normal distribution......gag...........
Reply | Report Abuse | Link to thisWhat all failed to understand is that mathematics is not True (big-T), though perhaps true (little-t).
Reply | Report Abuse | Link to thisLittle-t only means that given the assumptions and axioms, the math is consistent.
Big-T means that the mathematical theory accurately models the real world.
The quants' mathematics never achieved the Big-T.
Newton had it right - unless you can quantify fear and greed, the standard market view is only a partial model of reality and it won't get you far.
Reply | Report Abuse | Link to thisAn economic equivalent of the kinetic theory of gases (or Azimov's fictional Psychohistory) would be a useful model, but don't hold your breath.
These quants should loose their PhDs. They should be stripped off their degrees for failing to understand the problem at hand. After all, it is partly their "wrong theories" that lead to this meltdown (ofcourse together with deregulations and stuff ).
Reply | Report Abuse | Link to thisIt's the question, as the famous line goes on The Matrix. And that question is, how is stock market trading different from poker odds with a deck of cards?
Reply | Report Abuse | Link to thisThe answer: Assuming it's not a rigged game, assuming each hand is dealt consistently and honestly, a deck of poker cards remains constant. Cards do not change. It would take a magician to turn a Queen into a King.
However, even if the stock market is traded completely above board, consistently and honestly, the very nature of stocks can transform Queens into Kings overnight. For if a trader "corners the market," the market is mysteriously yet mathematically no longer "cornered." Odds change like a chameleon. That is what Newton was likely alluding to.
I dare say the so-called "Quants" should have been less greedy and taken what the market can "afford" to give. For example, if you could possess literally all the money in the world, that money would become instantaneously worthless. The distribution of wealth is the basis of personal wealth.
I have found that some of the stupidest people are also cunning, they use their rat-cunning (my apologies to rats) to hide their stupidity. Conversely, an intelligent person may not be cunning, and thus be hoodwinked by someone who is cunning, like Newton was. Thus, you can get someone who is stupid and cunning is also rich. It is really a matter of attitude, a dishonest attitude.
Reply | Report Abuse | Link to thisI truly appreciated rationalrevolution's comments:
Reply | Report Abuse | Link to this"This is what is important to understand. Predictive modeling is all about finding correlations in data that can be used to predict the future. AS LONG AS the future behaves like the past. Predictive models are VERY POWERFUL tools,BUT the use of predictive models IS A SUBSTITUTE for understanding economics
Now change that last word from economics to climate and think about this whole article again
DUM-de-dum-de-dum. Solution to problem:
Reply | Report Abuse | Link to this1. Make public trading of stocks, etc., 'real' by forcing buyers to hold what they buy for a given period of time; an hour, a day, a week, whatever. That'll put an end to arbitragers, buy-and-flippers and all of that sort. It'll also free mathematically-gifted individuals to the labour market and palliate America's shortage of 'intellectual labourers'.
2. To provide market liquidity, nationalize 'liquidization' by making it a low-cost (self-funding?) government service. If it makes enough money, then lower taxes.
All right, the above is KIND of tongue-in-cheek, but has anyone ever even DISCUSSED liquidity management by government?
"What went wrong?"
Reply | Report Abuse | Link to thisWrong? Wrong for whom?! Aren't the quants still 'filthy rich'? So perhaps they lost some from the top, but it's others who still pay for it..
The world is still smarting from the exorbitant gambling excesses, because the banks & governments gave free rein to those 'daring young men', who were in reality, testosterone-fuelled would-be alpha males let loose, trying to outdo each other in the mad pursuit of risking other people's money, whether real or only virtual. The Sub-prime fiasco had its roots in Clinton's empty promises to make every American, solvent or not, capable to 'own' their own house. In reality,even blind Eddy could see that where there's no work there's no money! The bankers' empty wheelings and dealings with 'rotten-apple' mortgages did the rest. As Australians put it: Finally Sh-it hit the fan.., So we were grounded with an unwanted reality shock, the 'Global Financial Crisis'.
Reply | Report Abuse | Link to thisBailing out the weakest economies with newly printed money, just to keep the banks solvent won't help; they do not deserve being saved - after what they did to the world economy with their roguish behaviour in the first place!
We do not need a Ph.D to see that any chain is only as strong as its weakest link,
what goes up must come down,
and let's watch out for that domino effect!
Many humans are clever, very few are intelligent. The difference is subtle but significant. The clever ones will be the end of us.
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