How to Make Methods of Hard Sciences Work Well in Finance?

[xoxqun]

Emanuel Derman in article titled The Great Pretender (Derivatives Strategy, January 2001) asks the question: "So why do the methods of hard science work less well in finance?" http://www.ederman.com/new/docs/ds-the_great_pretender.html

Anyone with interest in quant finance sees that most quant job ads ask for 'hard sciences' background. Is the 'hard science' background ideal / sufficient / suitable for financial markets even when "methods of hard sciences work less well in finance"?

:tiphat:

 

[bigbadwolf]

What can an aspiring quant with background in 'hard sciences' do to make sure one's methods better work well in finance?

Probably nothing. There are reasons why mathematical methods don't work well in finance, and these are well-known.

 

[xoxqun]

Reasons why mathematical methods don't work well in finance

Thank you bigbadwolf for noting that "There are reasons why mathematical methods don't work well in finance, and these are well-known."

Is it possible to know any references, research pointers, for those new to quant finance to understand what those well-known reasons are? :tiphat:

 

[IlyaKEightSix]

Because humans are irrational creatures. There's an article I recently read on the economist that when you give something to someone, they are less likely to give it up in exchange for something they'd usually prefer over what they currently have, if they were asked to pick between the two without being given one or the other to begin with.

And that's just one example. If your model assumes rationality, you already are going to run into trouble.

 

[doug reich]

Thank you bigbadwolf for noting that "There are reasons why mathematical methods don't work well in finance, and these are well-known."

Is it possible to know any references, research pointers, for those new to quant finance to understand what those well-known reasons are? :tiphat:

The famous researchers Kahnemann, Amos, and Taversky, I believe. One pop science book in this genre is "Predictably Irrational" by Daniel Ariely. Ilya refers to research covered in this and other books.

 

[xoxqun]

The Area is Behavioral Finance

Doug and IlyaKEightSix, thank you for pointing out the area of Behavioral Finance. Yes, indeed, there are several works on these topics in pop and non-technical domains.

Are you familiar with statistical / stochastic modeling of these themes in the context of financial market events / financial market research. If you know any please share.:tiphat: