As tenure disappeared and research jobs became harder financial markets became a a fertile job market for newly minted Ph.D physicists who equipped with very powerful mathematical toolboxes set about conquering the market.
This piece by SCiAM is more a fluff piece rather than anything concrete but it does give these blokes some good PR.
Can mathematical models beat markets?
They haven’t yet. Science is about empirical fact. There is no question that optimistic people think they can beat the market, but they don’t do it consistently with mathematical models. No model can consistently predict the future. It can’t possibly be.
So what can math predict?
What you can do is predict the risk of a given event. The risk just means the chance that something bad will happen, for example. That you can do with increasing accuracy because we have more and more data. It’s like insurance companies: they cannot tell you when you are going to die, but they can predict the risk that you will die given the right information. You can do the same thing with stocks. If you lose less, you get ahead of those who lose more.
Why do economists and “quants”—those who use quantitative analysis to make financial trades—have such faith in their mathematical modelsthen?
If they’re just to reduce risk, then they’re very valuable. If you’re worried, for example, about the segment of the Chinese economy that deals with steel, you make a model of what that whole market is all about and then you see if we did this what would likely happen. They’re right some of the time. It’s better than nothing.
PS : It it should be noted that it was actually quants that played a hand in the GFC – it was their ability to work out ways of commoditising debt that helped package much of the rubbish that circulated around the worlds financial system.
PPS : The notion that you need to be a quant to beat the market is somewhat erroneous we currently have a generic system designed by our mentor program that has consistently beaten the local market. When the results have been audited they will go on the website.