Monday, April 4, 2011

Physics Envy - Andrew Lo

  • Lo's example of nano technology is not a very good example of the uncertainty and the huge premia (premiums?) one gets for taking on such uncertainty as it implies one must create new models in order to get such a premia. However he redeems himself and clarifies his point in his response to the first Q&A question. Indeed you can take old well known models and as long as you bring them to new context where there is "uncertainty" can you reap the huge premia reward. 
  • Yes quants don't have all the answers but that certainly does not completely negate their use. Though the idea of testing theory and models, something akin to applying the central limit theorem, will take a long long time in actual business/financial/economics practice. Further more, then what amount of testing and time is needed for a theory to be deemed true? Apparently a few decades isn't enough as we seen in modern economic/financial history. 
  • I also rather enjoy the chart of Lo's five levels of risk and the related fields of study associated to each risk level. This clearly shows that economics and history can be said to be far more difficult fields of study than physics and harder sciences in that the level of uncertainty is much higher in academic development or practice. 

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