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Are the quants to blame?

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The quantitative community has certainly taken its lumps recently. They were blamed for the woefully correlated performance of hedge funds, among other things, as the crisis unfolded. Now there's more thrashing from an interesting source: Scientific American. "These lapsed physicists and mathematical virtuosos were the ones who ... invented these oblique securities ..." The article then offers some advice: "The quant community needs to undertake a search for better models--perhaps seeking help from behavioral economics, which studies irrationality of investors' decision making, and from virtual market tools that use 'intelligent agents' to mimic more faithfully the ups and downs of the activities of buyers and sellers." If only it were that simple.

For more:
- here's the article

Related Article:
Glossy quant magazine wields influence

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Let me get this right. The quants induced millions of borrowers to borrow more than they could afford? The quants induced thousands of lenders to lend to deadbeats and ignore credict quality and loan affordability?

Yes, many quants made mistakes by underestimating correlations and tail risk. Good quants understand the limitations of our models and bad ones don't.

But there is still plenty of blame to go around outside quant land. In particular, the rating agencies did a sloppy job of rating structure products. The government sponsored enterprises, Fannie Mae and Freddie Mac, poured gasoline on the fire in 2005+ by purchasing boatloads of subprime-backed paper. And the U.S. Congress failed to heed warnings that our fragmented financial regulatory system was badly in need of reform.

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