The value of uncertainty

June 4, 2010 | By | 3 Replies More

At Edge.com, John Brockman recently had a fascinating conversion with  Emanuel Derman, who noted that “many physicists and other scientists . . . have flooded Wall Street in recent years.”  Derman  described their work as follows:

They are known as “quants” because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

Derman then quoted particle physicist Heinz Pagels on the importance of maintaining uncertainty on Wall Street:

Mathematicians and others are endeavoring to apply insights gleaned from the sciences of complexity to the seemingly intractable problem of understanding the world economy. I have a guess, however, that if this problem can be solved (and that is unlikely in the near future), then it will not be possible to use this knowledge to make money on financial markets. One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk.

This quote fuels my suspicions regarding the unnecessarily complex nature of modern financial instruments.

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Category: Fraud, snake oil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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