Monday, January 31, 2011

A model, however beautiful, is an artifice

To confuse the model with the world is to embrace a future disaster in the belief that humans obey mathematical principles.--Emanuel Derman and Paul Wilmott

There are no fundamental laws of finance, there are no axioms of finance, only conjectures and beliefs of finance. And in that difference lies the problem. A system which is only based on probabilities (of any kind) is unable to produce true statements about itself, only valid statements, which validity needs always to be tested and questioned by observing empirical phenomena that underlay it's most basic assumptions. We can not blindly rely on mathematical models to measure risk in financial world. There is no proof theory devoted to finance, there is no logic devoted to finance, only computations. In conclusion, the state of financial markets is in no better shape today, than it was before the emergence of this crisis. Most of the basic assumptions are still considered true, most of basic modeling techniques are still used same as before.--Cheeky B

Statistics are like a bikini. What they present is suggestive, but what they conceal is vital--Aaron Levenstein
Previous BS installment here. Photo link here.

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