Physics Envy

Physics Envy May Be Hazardous To Your Wealth correctly diagnoses a problem in Finance – how people take models aimed at capturing aspects of material reality, and apply them to complex emergent social phenomena (such as pricing multi-tiered wobbly derivatives on top of US sub-prime mortgages).

Their solution is to have more quants – in other words to have more people with the level of mathematical knowledge required to engage with the models. I am sceptical.

If you can’t explain an idea in mathematical finance clearly, using plain English, on one side of paper, then it’s hard to see how things will end well. Mathematical finance needs more people whose primary focus is on how the maths is put to practical use – the last thing the field needs is more specialists in maths. The more people are labelling themselves as quants, the sharper the divide, the more severe the disconnect, and the bigger the eventual problems.

Let’s Kick Off With A Classic

Evidence of heuristic traps in recreational avalanche accidents

“Even though people are capable of making decisions in a thorough and methodical way, it appears that most of the time they don’t. A growing body of research suggests that people unconsciously use simple rules of thumb, or heuristics, to navigate the routine complexities of modern life. In this paper, I examine evidence that four of these heuristics – familiarity, social proof, commitment and scarcity – have influenced the decisions of avalanche victims.”