The Money Formula

CHAPTER 8No Laws, Only Toys

“The forecast,” said Mr. Oliver, turning the pages till he found it, “says: Variable winds; fair average temperature; rain at times.”… There was a fecklessness, a lack of symmetry and order in the clouds, as they thinned and thickened. Was it their own law, or no law, they obeyed?

—Virginia Woolf, Between the Acts

“For every expert there is an equal and opposite expert.”

—Arthur C. Clarke

Mathematical models in the real sciences are based on fundamental physical laws and principles. Mass and energy are conserved, to name two obvious examples. But there are no such laws in finance. Financial models are necessarily more qualitative than quantitative. But this doesn't stop the quant thinking he's a scientist. After all, he's more than likely had a scientific education, so it's tempting to think that in going from physics to finance he has merely changed from denim and sneakers to suit and oxfords. He sees an idea like the efficient markets hypothesis and thinks he's back in the quadrangle with Dirac. Sometimes his belief in the models is simple naiveté, sometimes it is physics envy. Either way, it's dangerous to have too much faith in the models. But does the field need less physics – or more?

One great skill in life is to be able to distinguish between problems and opportunities. Going further, surely every motivational speaker tells us that there are opportunities within every problem? “In the middle of difficulty lies opportunity,” said Albert ...