Viswanathan K's Thoughts

Theories that change the world rarely get accepted easily. But you knew that already. Here’s what is new: I used to think that this was a problem only in fields where you have an existing (and usually entrenched) theory. Surely the problem shouldn’t occur if a theory is creating a new field altogether? After all, who would be the old guard who would feel threatened or fight it, right? Wrong. Poor Louis Bachelier learnt that the hard way. He wrote his doctoral thesis in 1900 and his idea was to bring probability theory into the world of finance. The man had invented mathematical finance! So who was getting in the way? Wasn’t this a new field? His thesis evaluators! For 2 reasons: 1)       Maths was emerging from a period of crisis. Starting in 1860, many well-known theorems were shown to contain errors, which led mathematicians to fear that the foundation of their discipline was crumbling. So they chose to be conservative: did it make sense to say...

Thanks to the ongoing recession, it’s easy to find people today who say that formulas (and the associated maths) don’t work in finance. I don’t know if that’s becoming the widespread belief in finance today, but if it is, it would make it hard for the quants (the guys who apply the maths to finance and come up with the formulas) to find jobs. Then again, the same feeling persisted more than a decade back when a huge hedge fund, LTCM, failed and threatened to take down the system with it. Even back then, there was a comment in the book, When Genius Failed , by a guy who thought that quants picked a physics formula to “jam into finance”! Another quote which I liked questioned the accuracy of formulas in a very funny way: this one by Max Bublitz, a former investment banker: “You take Monica Lewinsky, who walks into Clinton’s office with a pizza. You have no idea where that’s going to go. Yet if you apply math to it, you come up with a thirty-eight percent chance she’s going to go down ...