Mind the Cutlery

When I was a kid, the parents had many sayings related to child rearing. Some were intended to restrain the kids just for the sake of the parents' nerves. "What would the world be like if everyone behaved like you?" was one of those. A few were actually intended to keep the kids from doing further harm to themselves; very anti-Darwinist, if one stops to ponder. Let the dumb ones kill themselves before they can reproduce. Aye, matey!! "Don't let the kids near the sharp cutlery" was one such.

In the larger venue of quants/stats/OR/foo, there is a similar need. Not as often enforced. The financial quants were given 1-2-3 (sired by VisiCalc, and sire of Excel), and the world hasn't been as safe for civilians ever since. One no longer needed to really know the maths, anymore; anyone could run 1-2-3 and anyone could write a macro. Many admin assistants did both. Fact is, though, is that it is difficult to decide which causes more harm: the use of Excel by the London Whale (and other equally inept "business users") or the blind transference of maths into finance by the likes of Li's copula (or any of the multitude of failed math/science Ph.D.s who found fortune in Wall Street)? Which is the bigger threat? Hard to say.

Now we have R threatening to displace not only SPSS and SAS and Stata and such, but also Excel. Couple this with the increasing number of books/websites/tutorials aimed at arming the ignorant ("You don't need any maths to do this. Don't worry, I'll tell you how to do it.") finance folk (the spawn of those 1980's admin assistants) with "R skills". It's beginning to look a lot like we're creating a children's army armed with Samurai knives. Would you fly in a 787 if it were calculated by admin assistants? Very much of the global financial structure is.

A couple of postings have recently appeared via r-bloggers. One guardedly cautionary, the other not so much.

Martin gets to the point:

There are too many decent but not great R books on the market already and there is no reason for me to spend time to create another one.

Now, he's referring to ggplot2, not some esoteric branch of stats, which may or may not be relevant to some particular area of endeavor. Still, he's quite right.

On the other hand, arsalvacion reviews a Packt text (yes, same publisher that Martin turned down) which says it can teach you finance quants in R in a mere 164 pages. That's got to be handing out straight razors to three year olds, for crying out loud. Fortunately, some of the reviewers over at Amazon are a tad more circumspect.

Finance quants are hobbled (or spurred on, depending upon one's point of view) by the difference between quantitative analysis in human activities and the physical sciences. In the latter venue, God makes the rules and they don't change, although it may take a very long time to figure them out. Humans can't make new ones, or change the ones we've figured out. In the former, humans make the rules, and change them to suit the whims of those with the most control. The causes of The Great Recession were humans either fiddling with the rules, or attempting to game them. Both, every now and again.

You, too, can be a finance quant; just like learning taxidermy from those matchbook cover correspondence courses.