The Economist: Greed and Fear, special report

[Vadim]

In Plato's Cave is an article within a special report on the future of finance by the Economist. The full version of the report - Greed and Fear - see in the Economist from Jaunuary 24th - 30th.

A special report on the future of finance: Fallible mathematical models | In Plato's cave | The Economist

The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants' tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.