Saturday, March 14, 2009

The Classic Case Against the Quants

Today the Captain conducts his job search kind of half heartedly.

He sees little reason to earn more than what he makes on book sales, DVD sales, online classes and rental income in that if he were to get a full time job the majority of that money would be taxed away and sent to bribe the parasitic masses who voted for Obama via social program, government jobs, etc., etc. In other words, does the Captain commit to waking up at 7AM every morning, work all day, teach dance at night, and then somewhere in there continue managing this awesome blog, only to have 50% of that money taken away, or does he just cut back on spending and live the ole college life, keep the majority of his money and sleep till 11AM every morning and keep the majority of his money?

It's a real tough choice.

But, still, out of habit I apply for jobs and look for speaking gigs whenever I can get them.

This being the case I came across a job that perked my interest, not because it looked like an interesting job, but because I had interviewed at the company many times before for similar jobs and it's one you and I and everybody else all knows;

GMAC.

And the reason it perked my interest is that it's a "senior model validation analyst."

Now let me tell you why it should not only pique my interest, but also yours. You see, GMAC received a $6 billion bailout from you, the taxpayer. The reason they received the bailout is because they got in head over heels on the sub prime mortgage debacle.

Now where this gets interesting is that while I applied for many of GMAC's analyst/statistician/modeler type jobs, I was summarily shot down for all of them. And presumably these jobs were given to people who were better qualified. You know, people who are better qualified enough to predict and shield GMAC from, oh, I don't know, A HOUSING CRASH?

Yet, despite these presumed better qualifications, could they have potentially screwed up any more? I mean, come on, these are "big time PhD's and masters degrees economists and statisticians. Why, we're so smart, we have incredibly powerful models that will predict the next time you'll have flatulence."

Yet despite all these genius quants and econometricians, they failed to predict something as easy as the sun rising; the housing crash.

Now I know quants like to brag about their models. Yes, you managed to use all the letters in the Greek alphabet in your model. Congratulations. Wonderful, that will impress the girls and allow you to brag in front of other nerds. Sadly though, these models, no matter how complex are finite and will inevitably fail in the fact the market is dynamic. Just ask the geniuses at Long Term Capital Management.

In the meantime, do you think maybe, just maybe, like girls you should approach the problem with a little bit less math and a little more common sense? A little bit of independent thinking? You know, like how girls like the individual guy, not the droves of Amber Crombie and Fitch wearing drones, maybe your "model" should include only half the letters of the Greek alphabet and maybe a little more "gut instinct?"

Never mind, large multi-billion dollar corporation that just received a $6 billion bailout? Right, try righting that ship. Who am I kidding?

I'll just continue to sleep in till 11AM.

11 comments:

Anonymous said...

Your comment on sleeping till 11AM reminds me of a very easy way to increase productivity and thereby GDP: let working days begin at 10AM.

I cannot understand why is the whole world still working from 8 to 4, or 9 to 5? There have been so many academic experiments showing that most people would be in better mental and physical shape if they could sleep past 8, or even 9AM.

Yet almost nobody in the business world is interested in this issue. How about gaining a competitive advantage for free?

Anonymous said...

re: dtrum's 11:58 AM comment -

While the late start is one idea, I'd really like the opportunity for an after lunch nap of 30 minutes.

I could use the later start too. I typically start work around 8:30 to 9AM and usually stop at 8PM. Once everybody else leaves, I can actually concentrate without the chaos of the rest of the day.

Anonymous said...

"There have been so many academic experiments showing that most people would be in better mental and physical shape if they could sleep past 8, or even 9AM."

Just curious, but in those experiments are they having people increase the amount of sleep that they're getting, or just move the hours a little later?

We all know that many people don't get enough sleep. In my experience it doesn't matter when I'm sleeping, so long as I get enough. I adjust to most any sleep schedule pretty well.

Anonymous said...

Can you really hold your current level of living standard by selling DVDs and teaching dancing classes? I mean, that sounds like a big step down from working in banking.

Anonymous said...

NO. DO NOT LET THE COMMIES WIN.

Anonymous said...

Capital: Great comment on the quants. Worked for several years in research, creating and using models of physical processes. Was really impressed with myself and peers for our knowledge until one day one of my workers, PhD Engineering, came in with fluid flow from a low pressure region to the high pressure region with no outside energy sources - wrong water can't flow up hill(he had a sign wrong in his model). Left for a real job shortly thereafter (yes it was connected). Use your head when reviewing output from these models, these are useful "what-if" tools but do not truly model all factors that drive the market or physical processes.

Hot Sam said...

The same type of clueless quants are making models of climate change from which multi-trillion dollar policies are being made.

Those models are falling apart because of faulty assumptions which were used to drive predetermined conclusions. Sound familiar?

Same tragic results.

Captain Capitalism said...

Dtrum,

Yes, that is a brilliant idea. No only would productivity go up, but health costs would come down, not to mention rush hour would be eased considerably. It's along the lines of me mandating when I am president all office jobs be telecommute jobs if possible. solve rush hour right quickly then.

As for getting by on DVD sales and dance classes, oh heck yes. I lived off of $12,000 on year in college and had money to spare. And if it means not having to answer to some middle aged, corrupt boomer schlep with his head up his ass, then hell yes I can get by. I don't make much, but then again, why would I want to? To shell out the majority of it in taxes to Obama supporters?

Forget it, the Captain doesn't do slavery.

Hot Sam said...

$12-15 thousand per year were some of the happiest days of my life. Carefree, debt free, lived frugally, everything I owned would fit in my car, including my furniture. I was finished with work by 2pm. Filed 1040 EZ.

I'm pretty happy now, but life is heavy with burdens, responsibilities and commitments. I pay more in taxes now than I used to make back then. Changes now are like turning an aircraft carrier around.

Anonymous said...

Blaming the quants strikes me as very wrong.

It is yet to be told whether CDSs hurt or helped. The best analyses I've seen so far -- via Felix Salmon -- suggest they helped. Same for quants. The quants modeled a lot of stuff and that made new kinds of financial tools usable. They are trained in models and knew a lot about the limits and assumptions of those models.

The problem was that the vast majority of people in finance are not quants (not that they should be). They picked and chose and used models when they weren't applicable. That's not the quants' bad. People didn't understand what they were looking at and said (and you know, you do this too a LOT) that whatever the math was, this is what's obvious to my gut and so this is what the fundamentals are and how they work. And you know what? That doesn't work for these insanely complicated instruments.

Dick Fuld isn't a quant!

The problem wasn't the quants, it was the decision makers who misused them. Look at Goldman and Morgan, the two firms that jumped most eagerly into bringing physics and engineering guys on board. They're standing taller than everyone, took TARP money only when forced to (and are trying to give it back), and are doing AMAZING stuff. Goldman basically stood up a new holding company and fundamentally changed itself into a deposit bank in a weekend, which has to be one of the most impressive things ever in finance. Morgan is scarfing up small companies.

You read a lot of finance guys trying to blame this mess on quants. That's just because quants are smart and know a hell of a lot of math and the finance guys don't. It's trying to shift blame. A quant looks at a graph, tells you what it means and what it's mathematically valid to say. A financier, though, "knows" what it really means and thinks the quant is goofy -- and the financier makes the buy/sell decision and decides to leverage 40 times. Not the modeler.

Prediction: twenty years from now when this is being analyzed the consensus will be that the quants helped.

Anonymous said...

"They are trained in models and knew a lot about the limits and assumptions of those models."

Used car salesmen know a lot about the limits of used cars, but that doesn't mean they don't have an incentive to push one on you whether you need one or not, whether it's any good or not.

The quants made models based on past housing price performance, which gave a gross underestimation of the risk involved once everyone and their freaking dog starts buying houses as an investment.