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What most people don't understand about finance is that there are fundamental rules that you really cannot break without consequences. Anyone who has studied q

What most people don't understand about finance is that there are fundamental rules that you really cannot break without consequences. Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science. Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance. Talking to people who are looking to just tear down modern finance are no different than climate change deniers, antivax, or flat earthers... and yes, they even exist in crypto (and on HN).

throwk8s 4y ago
Is the math meaningful though?
- JumpCrisscross 4y ago
  > Is the math meaningful though? "Meaningful" is squishy. Is it strongly predictive, and in some cases, definitive? Yes.
- state_less 4y ago
  If we could all get a stable (guaranteed) 15% per year, everyone would invest. But the world economy doesn’t grow at 15%.
  - tjs8rj 4y ago
    The US economy doesn’t grow at 7% a year but that’s what the s&p is expected to do
    - hrunt 4y ago
      Well, the S&P (assuming the S&P 500) doesn't represent the entire US economy, but 500 companies that represent, arguably, the "winners" of the US economy, so expecting them to grow 7% while the entire economy as a whole grows less is not unexpected.
      - majormajor 4y ago
        How much of that is inflation? If, historically, GDP growth is about 3% and inflation is about 3%, and you're trying to invest in the strongest companies, is that how you get to 7%+?
        abakker 4y ago
        how many companies lose money for a few years and fold? if the S&P is winners, then it is counterbalanced by all the bad investments, pre revenue startups, and other businesses which are losing money. balancing out to 3% is not impossible.
    - deleted 4y ago
      [deleted]
    - vkou 4y ago
      Population growth + inflation + transfer of wealth from workers to capital owners + productivity gains has over the long run been pretty close to 7%.
- simonh 4y ago
  To the same extent that money is meaningful.
monkey26 4y ago
Will understanding the math make me rich? :)
- CuriousCosmic 4y ago
  It won't make you rich but it'll at the very least keep you from making yourself more poor.
- mettamage 4y ago
  Work at a HFT firm in Amsterdam. That type of finance knowledge will make you rich.
  - djenendik 4y ago
    So you can guarantee 20% returns? We're back where started.
    - abakker 4y ago
      look - there are companies out there - Renaissance for one - who do make very good returns consistently. The difference is that not all returns are infinite. in fact, most good investments are finite - the market eventually catches on and then prices equilibrate. saying that there are no guaranteed 20% returns does not mean that with hard work and good strategy there are not 20% returns to be made on some arbitrary amount of principal at any given time. put another way, its easy to earn 20% on a dollar. its hard to earn 20% on a billion dollars.
      - formerkrogemp 4y ago
        What the fuck are you talking about? The Renaissance medallion fund isn't open to the public and is no longer generating double digit returns as of 2020 or 2021. Much of their performance can be attributed to the fact that they just didn't pay their taxes. A $6.8 billion fine just doesn't cut it in the face how much money they were making. The Medallion fund saw $11 billion in net outflows due to low returns in 2021. Their funds that are open to the public regularly offer negative and low single digit returns annually. Please do tell us more about how efficient this market. https://www.pionline.com/hedge-funds/renaissance-technologies-settles-irs-over-options-use-medallion-fund https://www.pionline.com/hedge-funds/renaissance-technologie...
pyrale 4y ago
> Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance. Just because quantitative analysis has solid grounding doesn't mean that its use is unrelated to ethics. The finance establishment is an organized power structure whose decisions are political. If you want an analogy, I'm pretty sure that you'll find plenty of people who used ballistics to achieve goals that you would find pretty unethical.
- picture 4y ago
  That can also be said for nearly all specializations/ventures of us humans, right? Physics (nukes), chemistry (explosives and refined sugars), electronics engineering ("engagement optimization"), biology (human experiments maybe), philosophy (started many wars), etc. There doesn't seem to be many things where we haven't corrupted in some way. Everything is about ethics and politics(?)
  - kadoban 4y ago
    Everything is political, and everything has ethical considerations, yes. Refusing to take a side _is_ a side, it means you're fine with how things are going on their own. This isn't corruption, it's just recognition that life has choices, and those choices have consequences, for yourself and others.
lolscience 4y ago
> There was no politics, no opinions, no ethics involved. It really is a science. Except that there are humans involved. How do you boil arbitrary human action down to a HARD science?
Seanambers 4y ago
As a single actor you can bend, but never break the rules. So you can achieve way better returns than the market as a whole does. Over time 10 - 200 x returns is achievable, don't think it comes cheap though, you need to dedicate large chunks of your life to it, and nothing is a guarantee. However, the math approach to finance works because in its essence it is quantifying human reactions and or emotions, which in large crowds turns out to be more predictable. In the short run, still, software holds its edge with its probability approach but its not smart so that it is basically a rent seeker.
- deleted 4y ago
  [deleted]
323 4y ago
> It really is a science. Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds. > Recipe for Disaster: The Formula That Killed Wall Street > And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. > Nassim Nicholas Taleb is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism." https://www.wired.com/2009/02/wp-quant/ https://www.wired.com/2009/02/wp-quant/
- JumpCrisscross 4y ago
  > Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds. If you follow the scientific method, it's science. If you write an observational essay, it's not. You can build theories around falsifiable, replicable experiments pertaining to the madness of crowds. The error bars are longer. But they are not infinite.
  - 323 4y ago
    You are correct. But when people say "finance is science" what they usually mean is "here is the complicated math that proves you can't lose money on this, we've modeled everything". As the joke goes, 6 sigma events happen in finance every week.
    - JumpCrisscross 4y ago
      > when people say "finance is science" what they usually mean is "here is the complicated math that proves you can't lose money on this, we've modeled everything" 100% agree. When I was an algorithmic derivatives trader, we joked that the math was there to scare up investors and scare off compliance. Little did we know...
    - Ygg2 4y ago
eternalban 4y ago
> social media ... organized political power structure It's not just social media and it is somewhat disingenuous to dismiss the idea that finance, specially specially international finance, does not have (some form of) power [that actually trumps and transcends political power]. This is a somewhat interesting film that I was watching the other day. It's mere existence addresses the first bit -- that perception is certainly not limited to "social media". And of course the film itself is about a super secret gathering of G8 ministers where they struggle with the decision to put in place some (undisclosed) policy change that they all know will have very drastic consequences for the global average joe. The Confessions (2016): https://www.imdb.com/title/tt4647784 https://www.imdb.com/title/tt4647784
deleted 4y ago
[deleted]
Ygg2 4y ago
If finance is a HARD science, where are replicated experiments? How did they account for alternative hypothesis?
arinlen 4y ago
> Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science. Your comment makes no sense. Just because there's modeling involved that does not make it a hard science. A hard science requires stuff like the ability to perform controlled experiments and replicability, in order to arrive at a high degree of accuracy in predictions. Throwing around partial differential equations does not turn something into a hard science. You need to meet way more requirements before you're in a position to claim that.
- vt85 4y ago
- ramchip 4y ago
  It doesn't necessarily invalidate your point, but I would say astrophysics is a hard science, and yet a ton of it is based on observation and modeling of events we can't control or reproduce.
  - progrus 4y ago
    I don’t think astrophysics is a hard science anymore.
    - platz 4y ago
      what about fundamental physics
      - progrus 4y ago
        https://youtu.be/DHR-ggwafO8 https://youtu.be/DHR-ggwafO8
  - Rexxar 4y ago
    Some part of physics are not hard science at the moment as long as we can't perform observations/experiments to validate or invalidate theory (for example string theory). Some part of astrophysics are clearly not hard science at the moment.
ReflectedImage 4y ago
The maths used in economics is widely known to be wrong. When informed the maths in economics is wrong, the economists don't go and fix their maths either. Economics is more like sociology with some random incorrect formulas written on the black board as set dressing. Economics might in self loathing claim they are the "dismal science", but the cold hard truth is they simply speaking are not doing their jobs properly. It's a broken research field.
- pyrale 4y ago
  You're not talking about the same "economics". Quantitative analysis, as the person wrote, is pretty good at predicting things.
mola 4y ago
Using math does not make something scientific. Math is a language based on logic, physics is a science using that language. Economics is Scholasticism that uses math as a language. This comment is why the humanities should be a prerequisite for all academical endeavors...
woolion 4y ago
It's really striking how in recent years the Godwin point has been replaced from "everybody who disagrees is Hitler" to "everybody who disagrees is a anti-climate flat-vax earth-denier". It's really not helping getting any point across. In a way it is self-realizing polarization: because you are casting any criticism of "modern finance" into this "bundle of badness" this is likely to reinforce their position.
- gwnywg 4y ago
  I think you have the point, and it makes me worried to see your comment downvoted to oblivion. It is worrying to see that people tend to just click thumbs down when they don't agree rather than to pick the towel and build a strong argument against what they don't agree with.
athrowaway3z 4y ago
its the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, not a Nobel Prize.

throwk8s 4y ago

Is the math meaningful though?

JumpCrisscross 4y ago
> Is the math meaningful though? "Meaningful" is squishy. Is it strongly predictive, and in some cases, definitive? Yes.
state_less 4y ago
If we could all get a stable (guaranteed) 15% per year, everyone would invest. But the world economy doesn’t grow at 15%.
- tjs8rj 4y ago
  The US economy doesn’t grow at 7% a year but that’s what the s&p is expected to do
  - hrunt 4y ago
    Well, the S&P (assuming the S&P 500) doesn't represent the entire US economy, but 500 companies that represent, arguably, the "winners" of the US economy, so expecting them to grow 7% while the entire economy as a whole grows less is not unexpected.
    - majormajor 4y ago
      How much of that is inflation? If, historically, GDP growth is about 3% and inflation is about 3%, and you're trying to invest in the strongest companies, is that how you get to 7%+?
      - abakker 4y ago
        how many companies lose money for a few years and fold? if the S&P is winners, then it is counterbalanced by all the bad investments, pre revenue startups, and other businesses which are losing money. balancing out to 3% is not impossible.
  - deleted 4y ago
    [deleted]
  - vkou 4y ago
    Population growth + inflation + transfer of wealth from workers to capital owners + productivity gains has over the long run been pretty close to 7%.
simonh 4y ago
To the same extent that money is meaningful.

monkey26 4y ago

Will understanding the math make me rich? :)

CuriousCosmic 4y ago
It won't make you rich but it'll at the very least keep you from making yourself more poor.
mettamage 4y ago
Work at a HFT firm in Amsterdam. That type of finance knowledge will make you rich.
- djenendik 4y ago
  So you can guarantee 20% returns? We're back where started.
  - abakker 4y ago
    look - there are companies out there - Renaissance for one - who do make very good returns consistently. The difference is that not all returns are infinite. in fact, most good investments are finite - the market eventually catches on and then prices equilibrate. saying that there are no guaranteed 20% returns does not mean that with hard work and good strategy there are not 20% returns to be made on some arbitrary amount of principal at any given time. put another way, its easy to earn 20% on a dollar. its hard to earn 20% on a billion dollars.
    - formerkrogemp 4y ago
      What the fuck are you talking about? The Renaissance medallion fund isn't open to the public and is no longer generating double digit returns as of 2020 or 2021. Much of their performance can be attributed to the fact that they just didn't pay their taxes. A $6.8 billion fine just doesn't cut it in the face how much money they were making. The Medallion fund saw $11 billion in net outflows due to low returns in 2021. Their funds that are open to the public regularly offer negative and low single digit returns annually. Please do tell us more about how efficient this market. https://www.pionline.com/hedge-funds/renaissance-technologies-settles-irs-over-options-use-medallion-fund https://www.pionline.com/hedge-funds/renaissance-technologie...

pyrale 4y ago

> Most social media characterize finance as some ethical vice or organized political power structure - and those people simply don't understand finance. Just because quantitative analysis has solid grounding doesn't mean that its use is unrelated to ethics. The finance establishment is an organized power structure whose decisions are political. If you want an analogy, I'm pretty sure that you'll find plenty of people who used ballistics to achieve goals that you would find pretty unethical.

picture 4y ago
That can also be said for nearly all specializations/ventures of us humans, right? Physics (nukes), chemistry (explosives and refined sugars), electronics engineering ("engagement optimization"), biology (human experiments maybe), philosophy (started many wars), etc. There doesn't seem to be many things where we haven't corrupted in some way. Everything is about ethics and politics(?)
- kadoban 4y ago
  Everything is political, and everything has ethical considerations, yes. Refusing to take a side _is_ a side, it means you're fine with how things are going on their own. This isn't corruption, it's just recognition that life has choices, and those choices have consequences, for yourself and others.

lolscience 4y ago

> There was no politics, no opinions, no ethics involved. It really is a science. Except that there are humans involved. How do you boil arbitrary human action down to a HARD science?

Seanambers 4y ago

As a single actor you can bend, but never break the rules. So you can achieve way better returns than the market as a whole does. Over time 10 - 200 x returns is achievable, don't think it comes cheap though, you need to dedicate large chunks of your life to it, and nothing is a guarantee. However, the math approach to finance works because in its essence it is quantifying human reactions and or emotions, which in large crowds turns out to be more predictable. In the short run, still, software holds its edge with its probability approach but its not smart so that it is basically a rent seeker.

deleted 4y ago
[deleted]

323 4y ago

> It really is a science. Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds. > Recipe for Disaster: The Formula That Killed Wall Street > And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees. > Nassim Nicholas Taleb is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism." https://www.wired.com/2009/02/wp-quant/ https://www.wired.com/2009/02/wp-quant/

JumpCrisscross 4y ago
> Physics is a science. Math is. Or Biology. Finance is not. Because it deals with the madness of crowds. If you follow the scientific method, it's science. If you write an observational essay, it's not. You can build theories around falsifiable, replicable experiments pertaining to the madness of crowds. The error bars are longer. But they are not infinite.
- 323 4y ago
  You are correct. But when people say "finance is science" what they usually mean is "here is the complicated math that proves you can't lose money on this, we've modeled everything". As the joke goes, 6 sigma events happen in finance every week.
  - JumpCrisscross 4y ago
    > when people say "finance is science" what they usually mean is "here is the complicated math that proves you can't lose money on this, we've modeled everything" 100% agree. When I was an algorithmic derivatives trader, we joked that the math was there to scare up investors and scare off compliance. Little did we know...
  - Ygg2 4y ago

eternalban 4y ago

> social media ... organized political power structure It's not just social media and it is somewhat disingenuous to dismiss the idea that finance, specially specially international finance, does not have (some form of) power [that actually trumps and transcends political power]. This is a somewhat interesting film that I was watching the other day. It's mere existence addresses the first bit -- that perception is certainly not limited to "social media". And of course the film itself is about a super secret gathering of G8 ministers where they struggle with the decision to put in place some (undisclosed) policy change that they all know will have very drastic consequences for the global average joe. The Confessions (2016): https://www.imdb.com/title/tt4647784 https://www.imdb.com/title/tt4647784

deleted 4y ago

[deleted]

Ygg2 4y ago

If finance is a HARD science, where are replicated experiments? How did they account for alternative hypothesis?

arinlen 4y ago

> Anyone who has studied quantitative finance knows that it is a HARD science. I worked with a Nobel prize winner in economics, and the math dominated. There was no politics, no opinions, no ethics involved. It really is a science. Your comment makes no sense. Just because there's modeling involved that does not make it a hard science. A hard science requires stuff like the ability to perform controlled experiments and replicability, in order to arrive at a high degree of accuracy in predictions. Throwing around partial differential equations does not turn something into a hard science. You need to meet way more requirements before you're in a position to claim that.

vt85 4y ago
ramchip 4y ago
It doesn't necessarily invalidate your point, but I would say astrophysics is a hard science, and yet a ton of it is based on observation and modeling of events we can't control or reproduce.
- progrus 4y ago
  I don’t think astrophysics is a hard science anymore.
  - platz 4y ago
    what about fundamental physics
    - progrus 4y ago
      https://youtu.be/DHR-ggwafO8 https://youtu.be/DHR-ggwafO8
- Rexxar 4y ago
  Some part of physics are not hard science at the moment as long as we can't perform observations/experiments to validate or invalidate theory (for example string theory). Some part of astrophysics are clearly not hard science at the moment.

ReflectedImage 4y ago

The maths used in economics is widely known to be wrong. When informed the maths in economics is wrong, the economists don't go and fix their maths either. Economics is more like sociology with some random incorrect formulas written on the black board as set dressing. Economics might in self loathing claim they are the "dismal science", but the cold hard truth is they simply speaking are not doing their jobs properly. It's a broken research field.

pyrale 4y ago
You're not talking about the same "economics". Quantitative analysis, as the person wrote, is pretty good at predicting things.

mola 4y ago

Using math does not make something scientific. Math is a language based on logic, physics is a science using that language. Economics is Scholasticism that uses math as a language. This comment is why the humanities should be a prerequisite for all academical endeavors...

woolion 4y ago

It's really striking how in recent years the Godwin point has been replaced from "everybody who disagrees is Hitler" to "everybody who disagrees is a anti-climate flat-vax earth-denier". It's really not helping getting any point across. In a way it is self-realizing polarization: because you are casting any criticism of "modern finance" into this "bundle of badness" this is likely to reinforce their position.

gwnywg 4y ago
I think you have the point, and it makes me worried to see your comment downvoted to oblivion. It is worrying to see that people tend to just click thumbs down when they don't agree rather than to pick the towel and build a strong argument against what they don't agree with.

athrowaway3z 4y ago

its the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, not a Nobel Prize.