Keeping heads out of textbooks

November 2, 2009 in Finance

Wall Street & Technology briefly discusses some survey results and concludes: "Wall Street's Quants Feel Misunderstood." There's the obligatory quote from Dr. Wilmott:

"These numbers are alarming," said Dr. Wilmott. "They indicate that even with the events of the past year, financial institutions are still not taking the importance of financial education seriously, especially as it pertains to improving relationships and understanding between quants and their managers."

There's some "alarming" statistics: since last year, quants feel that 86% of their managers have the same or less understanding of their quantitative roles.

But looking at the actual survey results, it's not quite so bad. In fact, there's a good deal of exaggeration, depending on how you frame the data. Only 4.5% feel that their managers have less understanding since last year - meaning a full 82% felt that the level of understanding is roughly unchanged. So this largely becomes a question of whether or not the present level of understanding is satisfactory. Most people's knee-jerk reaction (and that of the original article) will unequivocably be, "Of course it's not!" However, is that because managers haven't kept up with quantitative advances, or because quants have run far ahead of their supervisors (and of where they need to be)?

I think it's a little of both. Certainly, when Things Were OK, supervisors were less incentivized to follow the activities of the mathematicians under them. As long as the numbers danced (higher and higher), it didn't really matter what they were. Meanwhile, each quant is incentively to pursue ever-more obscure models to squeak out minute bits of alpha. In the end, we wind up with quants doing overly-complex work for managers with too-relaxed supervisory roles. The question isn't "Does your manager understand what you do?" as much as it is "Do YOU understand why you do what you do?"

The problem here is not that quants ran amuck and screwed up the system (see the replies to question #2), it's that no one even knew what they were doing in the first place. The article is putting a normative spin on the survey results, but it's silly to believe that if supervisors understood what quants were doing, everything would be fine. Just the same, if quants only worked within the limits of their supervisors' knowledge, disaster would result as well (what's the point of roles, anyway?). What is missing - and what surveys like this fail to address - is the need for proper communication of goals, objectives, methods and ideas. Yes, it might be hard for a mathematician to boil his ideas down to simple English or a supervisor to pick up some mathematical tenets, but the resulting clarity will be well worth the effort in either case.

So in the end, is it bad that quants feel like most of their managers only somewhat understand what they do? It's hard to say. If the quants are doing their job "properly", then yes. If supervisors are slacking off, then yes. But if quants are running ahead with inappropriate methods, then although the answer is still yes, the solution isn't necessarily to educate the supervisors - it's to teach them how to reign in the quants. Alternatively, it's to teach the quants a little about their real business objectives.

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