MiB: Paul Wilmott on Trouble with Quants

When you create a quadrillion dollars out of thin air, and then blow it up, you have a problem. So says Paul Wilmott, a quantitative finance expert and author of various academic and practitioner texts on risk and derivatives. He is also the author of numerous books, most recently The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets 

He is quite the interesting character: Paul Wilmott says he never had a boss, and thinks people will one day pay to hear him play the ukulele on stage; in the spirit of trading, I offered to bet against it. But what he really wants you to know are his feelings about quantitative models –he calls them the “engine room of both the global economy and its most recent meltdown.”

Wilmott says that quantitative investment models, as currently deployed are a “pseudo-science.” Quant have “misled generations of economists and investors” — and despite the recent turmoil, neither appear to have learned from the experience.  Financial models have made traders and managers over-confident, leading to outcomes that have been bad or worse. The financial crisis was one of those bad outcomes, and to hear Wilmott describe it, no one has learned anything since. Incentives remain misaligned, no one went to prison last crisis. Another quant driven crash is inevitable he says.

Some of his favorite books are found here.

You can stream/download the full conversation, including the podcast extras, on BloombergiTunesOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

Next week, we speak with Jim Ross, Chairman of State Street’s SSGA and know as the father of the Spyders (SPY).