Finance Student to Forex Trader

[grantx]

RW,

(I’ve corrected my spelling of ‘Markowitz’.)

I wasn’t suggesting for one moment you were critical of Markowitz, but making a general observation re critics.

Naivety in understanding Markowitz. Are you saying his work is flawed and the naivety is failure to recognise and convey (teach) the flaws?

Are these flaws attributable to a misinterpretation of abstract notions of reality rather than something less abstract or closer to everyday experience, eg the markets, trading, laws of economics?

Mr Gecko,

“it is the language that is key”. And many crack-pot theories aspire to legitimacy through the inclusion of science/mathematics, eg sun spots.

“There are no "why's" in... science” only “what’s”. An interesting distinction.

Gooseman,

“models work under certain assumptions...the reality is ...merely a deviation. from the assumptions. having studied engineering...i can adjust these guidelines to real work situations”.

This also reflects my attitude with regard to such questions as, is it important to understand the underlying maths/rationale of Black-Scholes (or alternatives) to be a good options trader? It isn’t necessary but it may help to clarify objectives, eg a trading/profit expectation may be unrealistic given the underlying assumptions, perhaps with regard to pdf’s.

“to be a trader what is more important is to 'fool' the risk guys with your delta and gamma. hiding vega is easier i find”. You’re not French by any chance?

Grant.

 

[gooseman]

No! Certainly not.

Sincerely
JK

 

[r.w.]

RW,
Naivety in understanding Markowitz. Are you saying his work is flawed and the naivety is failure to recognise and convey (teach) the flaws?

The work isn't flawed as such, but like all models it's imperfect, relies on assumptions, and one needs to be aware of and manage the deviations. And the naivety alluded to was referring to the failure to recognise and teach those flaws.

Are these flaws attributable to a misinterpretation of abstract notions of reality rather than something less abstract or closer to everyday experience, eg the markets, trading, laws of economics?

I think these flaws are of a generic nature rather than subject-matter specific. It's about understanding that the model is not reality, and to be able to handle the difference. And it's about recognising that one cannot get from 'is' to 'ought' as Hume said.

Students of science/maths typically get good training in this due to the nature of scientific method, which usually isn't taught in biz schools. And there are different levels to the confusion. On the one hand the naive teaching of the basics, as discussed. On the other, for example, the countless papers produced in finance and economics using some form of data analysis or regression with little reflection on the methodological aspects. Many of those papers are not worth the paper they're written on, but they get published and people make careers out of it. A recent example that passed my eyes was one where the author spent considerable effort analysising market data to examine a relationship that actually can be exhaustively analysed deductively, so all he was doing was measuring market noise. Now imagine the author of that paper preparing your kids for life in the City. See what I mean?

 

[grantx]

RW,

That should have said, "Are you saying his work isn't flawed..."

"I think these flaws..."

I'm having problems as to what is, and thus where, differentiation lies here. I'll use maths as an example. Are you saying the differences arise because we are (generally) incapable of recognising and thus separating two aspects with a common root, eg as in pure maths and applied maths?

Grant

 

[r.w.]

RW,

That should have said, "Are you saying his work isn't flawed..."

"I think these flaws..."

I'm having problems as to what is, and thus where, differentiation lies here. I'll use maths as an example. Are you saying the differences arise because we are (generally) incapable of recognising and thus separating two aspects with a common root, eg as in pure maths and applied maths?

Grant

Grant,

I am not sure I understand your question, but a possible further clarifification would be to say that it's a question of what constitutes proper method in economic sciences. The natural sciences have a few centuries of development on that front, whereas the situation is entirely different in economics. Foundational and methodology questions aren't given as much attention, but are in some ways more difficult. On the one hand, methods from the 'exact' sciences are imported and interpretations of applications are not clearcut. Is economics an exact science now, or are the results questionable? On the other hand, as opposed to e.g. physics, finance and economics are asked to provide guidance for questions of practical, pocket-book or political, importance - which makes for further methodological difficulties.