Wednesday, May 23, 2007
The Science that doesn’t make rockets.
The Science that doesn’t make rockets.
“Finance is not rocket science!!” like a great many of his milieu proclaimed our finance professor, wearing a half mocking expression that was fully humbling.
The statement sounded like a reckoning than a requiem to my reverie, having married the greater ideal of making money over making rockets. Rockets just seem to have a way of coming back to me.
On the face of it the statement sounds incredibly innocuous; only that it took me time to figure out why those words haunted me.
For the starters the statement implies that the study of finance is much simpler than the study of rockets. To my belief it is just a way of saying that the more modern subjects are more complicated than those which are relatively, let us say ancient. You might as well be happy with the usage of “Finance is not nuclear science”.
The inferential meaning of the statement made while lecturing to a bunch of graduates undergoing a two year course that has come to be the gold standard of the first decade of the new millennium is that finance is much older and less complicated than rocket science, hence easier to do with.
Before I proceed with the very intentional and flamboyant autopsy, allow me to pull that ancient piece of metal out, it is called Occam’s Razor1, nobody talks of it much these days, like ‘Galileo’s projectiles’, we use it all the time though.
Let me struggle with the ‘older’ of the qualifications first. ‘Older subjects are easier to master and use’. It is not entirely wrong, whether or not you study thermodynamics, you know that exposure to excess heat causes pain and whether or not you know Newton’s laws, you know that excess impulse-like a slap- causes pain too. Mankind has had its way with these long before path breaking treatises of Joule and Newton.
Now lets put the razor to its purpose.
A man exchanges what he has more of to those that he has little of and money makes the exchange simpler for him (if the statement seems awkward you can blame the twenty sessions of power packed enlightenment of the second term: Economics).
This certainly is an ancient proposition, and finance per se is about ways and means of making money. ‘Making money’ I say, as I find no other reason a rational one (yes, the rational man of classical economics2) would study it.
So, shouldn’t the ancient and demonstrably simple finance make us, by default, wise enough to make money? Then why does my bank account say that I am indebted to the bank for the loan I raised to pay the fee? For the purpose of knowing that ‘finance is not rocket science’?
I am reminded of Robert Pirsig’s3 mention of the mock horror of the scientists’ when they discovered that Platypus laid eggs when zoology had clearly classified it as a mammal.
“Contradictions do not exist. Check your premises”, says the protagonist of Ayn Rand’s famed work The Atlas Shrugged. I am tempted to.
Premise: The age of an objective belief alone is a sufficient proof of its universality.
The longer a perception is tested, the stronger it becomes. The oftener it occurs it tends to become an objective belief.
It therefore proceeds that the age of an objective belief is a proof of its universality; at that the more aged beliefs are the simplest. Like the fact that regardless of one's knowledge of thermodynamics human beings know that exposure to excess heat causes pain.
A subject is a collective of objective beliefs.
Finance is an aged subject too. People across the ages regardless of qualifications like M.B.A., have made money. Therefore, it should proceed too that finance is universal and every human being, by default, knows how to make money, like the way one knows that excess momentum-like a slap-causes pain. Like how I should not be having a negative balance at the bank.
I have a feeling that I have arrived at the premise that caused me the trouble of having a negative bank balance; the age of an objective belief alone is not the criteria for its universality.
Then what is/are the other criteria?
I could safely bet my two cents on consistency. Then the obvious riposte is that finance is consistent as people have consistently made money. Only, the trouble is that they have lost it consistently too. Why else does Forbes sell, if the list of the fortune companies did not change?
Allow me to offer an equivalent of finance being consistent while people make and lose money consistently, only this time with momentum.
Universally true is the fact that impact of the excess momentum causes pain to a normal human being and as such most of us would choose to avoid it, this is consistent.
If the impact of the excess momentum, for instance getting impaled by a lance in medieval jousting, causes pain and pleasure at different times then any normal human being would wear the armor to avoid the pain from an impact and the same person would not do so at another time, to feel the pleasure. In such case the above mentioned universal truth should be incorrect, which is absurd. (reductio ad absurdum).
The second of the qualifications is that finance is less complicated than rocket science, for this I would borrow some from what academician author Emanuel Derman4, said in Oct 2005 HBR5 issue, with regards to a slightly different yet related field of Economics.
“When people build models to value securities, they make all sorts of imaginative assumptions that are then formulated mathematically. For example, quantitative strategists at investment banks or hedge funds value currently fashionable collateralized default obligations (which provide default insurance on baskets of large number of bonds) by assuming that each bond-issuing company is represented by an imaginary variable. That variable evolves randomly through time-like smoke diffusing across a room- until it crosses an imaginary default boundary in the future, at which point the company will default on all of its debt. It's an elegant mental construct and not an unreasonable way to model the random chance of a company doing badly enough to default. But it's not literally true. It’s still a model, a toy, a limited picture- despite the fancy mathematics. No wonder the picture often breaks down and causes havoc, as happened in credit markets last may.”
One might be tempted to question. Don’t rockets wreck things, then how is havoc in markets more complicated than exploding rockets?
Off course rockets do, like the faulty booster rocket of the tragic Challenger, but even in the case of Challenger there is a pattern that pins the causes of the accident to human negligence which the all venerable senate investigation called “poor quality of decisions”. Engineers do analyze certain scenarios under which a rocket can explode but rarely so ‘imaginary’.
In my limited understanding it’s the nature of the assumptions which makes finance at least equally complicated if not more.
So the next time someone tells you that something like finance is not rocket science, you need not necessarily counter him, nevertheless you could check his premises.
As for me I am waiting to see what pleasure or pain ensues.
Until an enlightened being corrects the fallacy (if any) in my autopsy, the right way to put things would be “Finance doesn’t make rockets” than “Finance is not rocket science”.
1 Occam’s razor: http://en.wikipedia.org/wiki/Occam
2 Rational Man: A man who attempts to maximize his satisfaction in all given situations with a minimal effort expended. (For more elaborate treatment http://en.wikipedia.org/wiki/Homo_economicus)
3 Robert M. Pirsig’s work “Lila: An enquiry into morals”, pg no. 116.
4 Emanuel Derman: director of financial engineering program at Columbia University.
5 Beware of Economists with Greek symbols, HRB October 2005.
“Finance is not rocket science!!” like a great many of his milieu proclaimed our finance professor, wearing a half mocking expression that was fully humbling.
The statement sounded like a reckoning than a requiem to my reverie, having married the greater ideal of making money over making rockets. Rockets just seem to have a way of coming back to me.
On the face of it the statement sounds incredibly innocuous; only that it took me time to figure out why those words haunted me.
For the starters the statement implies that the study of finance is much simpler than the study of rockets. To my belief it is just a way of saying that the more modern subjects are more complicated than those which are relatively, let us say ancient. You might as well be happy with the usage of “Finance is not nuclear science”.
The inferential meaning of the statement made while lecturing to a bunch of graduates undergoing a two year course that has come to be the gold standard of the first decade of the new millennium is that finance is much older and less complicated than rocket science, hence easier to do with.
Before I proceed with the very intentional and flamboyant autopsy, allow me to pull that ancient piece of metal out, it is called Occam’s Razor1, nobody talks of it much these days, like ‘Galileo’s projectiles’, we use it all the time though.
Let me struggle with the ‘older’ of the qualifications first. ‘Older subjects are easier to master and use’. It is not entirely wrong, whether or not you study thermodynamics, you know that exposure to excess heat causes pain and whether or not you know Newton’s laws, you know that excess impulse-like a slap- causes pain too. Mankind has had its way with these long before path breaking treatises of Joule and Newton.
Now lets put the razor to its purpose.
A man exchanges what he has more of to those that he has little of and money makes the exchange simpler for him (if the statement seems awkward you can blame the twenty sessions of power packed enlightenment of the second term: Economics).
This certainly is an ancient proposition, and finance per se is about ways and means of making money. ‘Making money’ I say, as I find no other reason a rational one (yes, the rational man of classical economics2) would study it.
So, shouldn’t the ancient and demonstrably simple finance make us, by default, wise enough to make money? Then why does my bank account say that I am indebted to the bank for the loan I raised to pay the fee? For the purpose of knowing that ‘finance is not rocket science’?
I am reminded of Robert Pirsig’s3 mention of the mock horror of the scientists’ when they discovered that Platypus laid eggs when zoology had clearly classified it as a mammal.
“Contradictions do not exist. Check your premises”, says the protagonist of Ayn Rand’s famed work The Atlas Shrugged. I am tempted to.
Premise: The age of an objective belief alone is a sufficient proof of its universality.
The longer a perception is tested, the stronger it becomes. The oftener it occurs it tends to become an objective belief.
It therefore proceeds that the age of an objective belief is a proof of its universality; at that the more aged beliefs are the simplest. Like the fact that regardless of one's knowledge of thermodynamics human beings know that exposure to excess heat causes pain.
A subject is a collective of objective beliefs.
Finance is an aged subject too. People across the ages regardless of qualifications like M.B.A., have made money. Therefore, it should proceed too that finance is universal and every human being, by default, knows how to make money, like the way one knows that excess momentum-like a slap-causes pain. Like how I should not be having a negative balance at the bank.
I have a feeling that I have arrived at the premise that caused me the trouble of having a negative bank balance; the age of an objective belief alone is not the criteria for its universality.
Then what is/are the other criteria?
I could safely bet my two cents on consistency. Then the obvious riposte is that finance is consistent as people have consistently made money. Only, the trouble is that they have lost it consistently too. Why else does Forbes sell, if the list of the fortune companies did not change?
Allow me to offer an equivalent of finance being consistent while people make and lose money consistently, only this time with momentum.
Universally true is the fact that impact of the excess momentum causes pain to a normal human being and as such most of us would choose to avoid it, this is consistent.
If the impact of the excess momentum, for instance getting impaled by a lance in medieval jousting, causes pain and pleasure at different times then any normal human being would wear the armor to avoid the pain from an impact and the same person would not do so at another time, to feel the pleasure. In such case the above mentioned universal truth should be incorrect, which is absurd. (reductio ad absurdum).
The second of the qualifications is that finance is less complicated than rocket science, for this I would borrow some from what academician author Emanuel Derman4, said in Oct 2005 HBR5 issue, with regards to a slightly different yet related field of Economics.
“When people build models to value securities, they make all sorts of imaginative assumptions that are then formulated mathematically. For example, quantitative strategists at investment banks or hedge funds value currently fashionable collateralized default obligations (which provide default insurance on baskets of large number of bonds) by assuming that each bond-issuing company is represented by an imaginary variable. That variable evolves randomly through time-like smoke diffusing across a room- until it crosses an imaginary default boundary in the future, at which point the company will default on all of its debt. It's an elegant mental construct and not an unreasonable way to model the random chance of a company doing badly enough to default. But it's not literally true. It’s still a model, a toy, a limited picture- despite the fancy mathematics. No wonder the picture often breaks down and causes havoc, as happened in credit markets last may.”
One might be tempted to question. Don’t rockets wreck things, then how is havoc in markets more complicated than exploding rockets?
Off course rockets do, like the faulty booster rocket of the tragic Challenger, but even in the case of Challenger there is a pattern that pins the causes of the accident to human negligence which the all venerable senate investigation called “poor quality of decisions”. Engineers do analyze certain scenarios under which a rocket can explode but rarely so ‘imaginary’.
In my limited understanding it’s the nature of the assumptions which makes finance at least equally complicated if not more.
So the next time someone tells you that something like finance is not rocket science, you need not necessarily counter him, nevertheless you could check his premises.
As for me I am waiting to see what pleasure or pain ensues.
Until an enlightened being corrects the fallacy (if any) in my autopsy, the right way to put things would be “Finance doesn’t make rockets” than “Finance is not rocket science”.
1 Occam’s razor: http://en.wikipedia.org/wiki/Occam
2 Rational Man: A man who attempts to maximize his satisfaction in all given situations with a minimal effort expended. (For more elaborate treatment http://en.wikipedia.org/wiki/Homo_economicus)
3 Robert M. Pirsig’s work “Lila: An enquiry into morals”, pg no. 116.
4 Emanuel Derman: director of financial engineering program at Columbia University.
5 Beware of Economists with Greek symbols, HRB October 2005.
# posted by Glob of Nueral Exudes @ 9:26 AM 
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hey, thts a very nice post.. th best of all those u posted till now, coz this was smwt in english.. thgh an over dose for non-fin guys :)
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