Trillion Dollar Bet - Essay Example

Quantitative finance is still a huge part of institutional investing, but despite that fact there are still those traders who feel that it is used too much. This in the end creates a certain amount of hostility between the "rocket scientists" or "quants" and the "intuitive" traders who depend only minimally on mathematics. What is interesting, and also unfortunate about this tension, is that no one has really conducted a study that would shed light on which approach is more optimal in terms of making money for either individual investors or financial institutions.

Such a study would be fascinating, and would give much needed and incredibly valuable information on trading strategies. The viewer is given the opportunity to learn of the attempts that have been made to find a mathematical formula for risk, which after some decades of research has finally been achieved by Myron Scholes and Fisher Black, with important contributions as well from Robert Merton. The 'Black-Scholes equation' is now ubiquitous in financial engineering, and as the program mentions, is greatly used in trading pits to estimate the price of an option.

This part of the program is actually very interesting, for it discusses the historical origins of quantitative finance, in looking at the thesis of Louis Bechalier. . For example, the factors which lead LTCM to go into liquidation are not immediately known. The viewer is also led to believe that the LTCM organization, through its vast positioning, aggravated the financial turmoil at that time. With the unknown reasoning behind the ultimate liquidation, any such conclusions or statements first should go through serious research before any final decision is made.

No evidence for this is given in the program, and also many of the guests reflect a certain bias against quantitative finance. Bias on any topic can lead to an unfortunate sense of crucial facts being potentially ignored in favor of siding with a popular idea(s). For starters, one of the guests on the program, Stan Jonas of FINAT Brothers, makes reference to a collection of people who a consumer would want to "manage their money." In the end, who are these people and what justifies imputing to them this rare ability Also what is their track record in investment Do they consistently make money, and is this consistency verifiable to an external observer It is these questions which are truly important, and is imperative to ask in order to have a fully well rounded understanding of the subject matter that is being assessed.

Sadly, Jonas does not give any names or examples unfortunately, and his statements do reflect to an already mentioned degree of bias against the practice of mathematical modeling in finance. Such a bias in and of itself is not necessarily bad, but a reader who is really interested in studying the difference in efficacious between trading strategies, i.e. maybe between those that exploit complex mathematics and those that do not, will not gain anything from Jonas' statements. Such