“Some New Ideas in Financial Mathematics”

David Harding writes:

I believe the innovations of the 1970s and ’80s such as CAPM, alpha and beta–which started off being such useful intellectual tools–are now in danger of becoming obstacles to further innovation in financial mathematics. I would argue that too much current research effort, both academic and commercial, in this field has become–to paraphrase John Maynard Keynes–enslaved to some defunct, or not even defunct, economist.

Harding is also in my new book The Little Book of Trading.

3 thoughts on ““Some New Ideas in Financial Mathematics”

  1. There is one major reason why I disliked economics when I studied it (majored in it, actually) at university: most economic theory and mathematical models are simply that — models and theory. Mathematics is a way to describe and model past events. Mathematics does not, and cannot, encompass all information (especially prejucices, fear, ambition, thought-processing skills, etc) into a model and predict anything. The one big problem with economists (and others) applying ‘scientific thought’ to economics, finance, or other social sciences is that there are no underlying universal laws that apply, and it is seemingly these laws that people are always in search of (there is no e=mc2 in economics, finance, trading, etc). If A then B happens 999 times in a row, your prediction of it occurring on the 1000th time is simply based on what you think you know of the circumstances surrounding If A then B. As Michael has asked several times, the real world question is, how much do you bet? I tend to resist all economic theory, because for other than intellectual enjoyment, I find it generally just that — academic. David Harding is much more brilliant than I am, but as a serious question: what, ever, is new in financial mathematics (other than new beliefs and theories [which probably are self-fulfilling prophecies in that they affect how people trade, like Fibbonaci waves and other nonsense])?

  2. @Rob,

    True…tell most traders and economists that they’re premise is bunk and they’ll proceed to show you iron-clad “proof” that their theories are sound.

    It’s what humans do…we search for patterns that form the heuristic basis on which we rely; they are our reality. To attack a person’s pattern is to explode his Matrix (like the movie). Show an individual the math that his theories are bunk, and he’ll respond by saying your math is bunk.

    I think here of George Soros. He has all these complex theories about macro-economics and he’s one of the most successful traders in history. I couldn’t figure out why until I read all his books, where he says over and over again that he lets his winners run and cuts his losses without hesitation. In other words, all the intellectualism is bunk, a rationalization of his true methodology. At his essence, he’s a trend follower who bets heavy when he knows he’s got a strong trend.

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