Piercing the mystique of the quant
Continuing our focus on the sudden and poorly considered thrust towards excessively quantitative approaches to analytical tradecraft, we note the following fascinating Economist story of the tumultuous effects this trend within the hedge fund industry. The financial markets are a fascinating leading edge indicator when looking at pure analysis issues, as they are a microcosm of some of the problems and the potential solutions that the intelligence community faces. They also react faster, and provide more learning cases as a result, than the community ever will.
The fact that reliance on these quantitative models appears to be driving losses at Goldman Sachs, Renaissance, and other firms on the Street is fascinating example of both what quant analysis does right and where it goes terribly wrong. Quant models, done well, can generate predictive insights by reacting faster and scanning more comprehensively through very large volumes of raw incoming data – a critical thing in markets which shift profoundly within minutes based on extremely complex conditions and a very diffuse range of information flows. But when the underlying assumptions of these models are breach– usually related to the way in which they were constructed to view the markets – they become dangerously less accurate than human driven analysis.
Note that this occurs within the relatively bounded confines of the market exchange, where inherently quantitative data is readily available – valuation, trading volume, momentum, and velocity. These are hard numbers based on economic events, and it is no surprise therefore that cryptanalysts have made a home working with them.
How much more dangerous then are these models when the underlying numbers are arbitrarily derived as a polite fiction attempting to describe with false precision the difficult shades of uncertainty, confidence, and complexity within the shadowed world of intelligence accounts?
As Zenpundit warns, we must be distinctly wary of “…the hasty selection of particular, reductionist analytical tools that a priori blind us to the nature of the emergent unknown that we are trying to understand.” We must deliberately penetrate the veils which both SME’s and methodologists alike have attempted to draw around their work, and look with clear eyes upon what is we are “as we may think”, and as we face a world without the shield of mystique.
The fact that reliance on these quantitative models appears to be driving losses at Goldman Sachs, Renaissance, and other firms on the Street is fascinating example of both what quant analysis does right and where it goes terribly wrong. Quant models, done well, can generate predictive insights by reacting faster and scanning more comprehensively through very large volumes of raw incoming data – a critical thing in markets which shift profoundly within minutes based on extremely complex conditions and a very diffuse range of information flows. But when the underlying assumptions of these models are breach– usually related to the way in which they were constructed to view the markets – they become dangerously less accurate than human driven analysis.
Note that this occurs within the relatively bounded confines of the market exchange, where inherently quantitative data is readily available – valuation, trading volume, momentum, and velocity. These are hard numbers based on economic events, and it is no surprise therefore that cryptanalysts have made a home working with them.
How much more dangerous then are these models when the underlying numbers are arbitrarily derived as a polite fiction attempting to describe with false precision the difficult shades of uncertainty, confidence, and complexity within the shadowed world of intelligence accounts?
As Zenpundit warns, we must be distinctly wary of “…the hasty selection of particular, reductionist analytical tools that a priori blind us to the nature of the emergent unknown that we are trying to understand.” We must deliberately penetrate the veils which both SME’s and methodologists alike have attempted to draw around their work, and look with clear eyes upon what is we are “as we may think”, and as we face a world without the shield of mystique.
posted by Kent's Imperative at 00:31
<< Home