Quants: The Alchemists Of Wall Street – VPRO Documentary

Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall Street. The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behaviour. Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.

What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster? A story about greed, fear and randomness from the insides of Wall Street.

Quants – The Alchemists of Wall Street – VPRO documentary

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Transcript

If you're close to the money you know like our oyster farmer I eat 100 oysters every week. How many people eat 100 oysters a week. Well I am because they're there. If you touch if you're in the business of making money and moving money around and counting money it's in the units of trillions. Of course you're going to make more money. And then you become so isolated from the real working world of the average person who doesn't have this ability and is struggling to make it to keep his job to pay his mortgage to feed his kids and send him to school.

Its the best part of my job. See the white shell, there is no disease.

Making a lot of money is like taking a drug. You feel good. Head to toe. It's like it is very similar to a drug when somebody hands you a million dollar check or a five million dollar check. You want more. Yes. Oh I'm making five million I should be making 50. Because I'm a genius. No question in your mind that you are a genius and that the rest of the world owes you know you're just so much better than everybody else.

A bottle of beer is a pound. But you're having a party. So you need to have 100 bottles of beer. So how much is one hundred bottles of beer. One bottle is a pound. Tell me how much is one hundred bottles of beer. And. NO. NO NO NO NO NO NO NO.

Paul Wilmott...often described as the smartest quant in the world. Mathematician and author of a large number of textbooks. A quant guru that has been warning us about the danger of a mathematician-led market meltdown for years.

You go to the shop and you try and buy a hundred bottles of beer. You may get a discount. They may say okay. For bulk. So one bottle of beer is one pound one hundred bottles is not going to be 100 pounds. It might be 80 pounds and that's the example of non linearity. Does and you don't just multiply the one by hundred. Or it could be that the the shop that you're buying the the beer from. It's late at night it's the only shop that's open. They know that you need 100 bottles and they say I'm sorry we're only allowed to sell one bottle of beer but if you give me 200 pounds. Then okay you can have 100 bottles. So it might be 80. It might be 200 but it's not going to be a hundred and that's and that's the real world. But that's not in ninety nine point nine percent of finance models.

Acquainted somebody who uses quantitative techniques mathematics statistics computer science to try to model the value of financial securities and how to how to structure them how to hedge them.

Emanuel Derman, also know as the Einstein of Wall Street. A quant pioneer that left the world of theoretical physics for a job at Goldman Sachs. Nowadays he educates a new generation of quants at Columbia University in New York.

I moved to this field in 1985 when there really weren't a lot of them and it was sort of a freeform business. We were all amateurs. Now you can be a professional quant but in those days quite a sort of a derogatory word. Was a bit like geek sort of him which is like a slang for a sort of computer nerds or computer geeks.

There's a lot more respect for quants now in a decade or so ago. They were seen as these very geeky types who didn't really understand the business well they are the business now.

Manhattan, New York. A beautiful and powerful place. Where I have a tremendous history and roots. But also a city where money places a heavy hand on daily life. Now more than ever. I used to be a computer programmer at a major player on Wall Street. That is no longer among us for obvious reasons. I was creating the plumbing of finance. I would write not the models themselves but the infrastructure surrounding the models. I could do it sleeping. Some of my co-workers were self-satisfied complacent with a lazy state of mind.




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver