2011/01/24

The Financial Modellers' Manifesto

Paul Wilmott and Emanuel Derman, both quant gurus, wrote and signed what they call The Financial Modeller’s Manifesto in 2009. It is modelled after The Communist Manifesto written by Marx, which I find quite ironic.

About the authors
Before we get onto the manifesto, I want to mention some things about the people behind it. Derman started off in South Africa, studying at the university of Cape Town, just as I did (although he got a PhD in theoretical physics). In a sense, therefore, he is a role model for me.

Wilmott started the Certificate in Quantitative Finance, a six month course. He is editor-in-chief of Wilmott magazine and has a quantitative finance forum and recruitment organisation run under his name (some hubris here?).

Both warned against the risk of misusing mathematical models long before the crisis (though I know quotes have a way of being taken out of context).

What I like about the manifesto
  1. It is honest. 
  2. It is written in a colloquial style, making it more accessible and emotive. 
  3. The oath will always be relevant as it contains timeless principles. 
  4. It is a call to action.
  5. It draws the crucial distinction between physics and financial mathematics.

What I dislike
  1.   There are too many specifics. CDOs might not exist in twenty years, making the manifesto applicable mostly to the present (with the exception of the oath).
  2. There is too much jargon.
  3.  The authors claim no responsibility. They are reacting to everyone else’s mess.
  4.  It is too informal, making it harder to take seriously.
  5.  It does not advise on how to fulfil its demands.
  6.  Discussions about whether the Black-scholes model is good or not are not really relevant.
  7.  It was written after everything it says had already become obvious.

What we need
We need clear guidance for future quants and a way to hold them accountable. The manifesto points in the right direction. It gives a useful oath, and by adjusting the first line to make it more formal (perhaps, “I know the world of finance does not function according to exact mathematical laws”) it could become something quants can put on plaques and recite as they get their qualifications.
But we need more. We need a code of ethics or a code of conduct for quants. Not a one page document that reads more as an article than anything else, but something substantial with a gravity that weighs on your conscience. More than that, though, we need people to ascribe to this code. That is, we need a professional body for quants that police their behaviour and set best practices. I find myself wondering whether actuaries can do this. We already have professional conduct standards (lacking only in specifics that will apply to quants). The creation of a quantitative finance specialisation for actuaries would allow quants to practice as actuaries and thus they would be held to these standards.
The problem is actuarial training is ill-suited to providing the kind of (highly mathematical) skills that quants need (I know this from unfortunate experience). The alternative is to create a professional body for quants alone, but this may involve a lot more work and may take years to be accepted. The public would appreciate it, I think. Throughout the financial crisis they have heard only horror stories of quants and such a large step would certainly help assuage fears, and, I think, result in more responsible practices.
Some references:

Wikipedia:
  • Wikipedia, 2011a. Emanuel Derman. Wikipedia. Available at: http://en.wikipedia.org/wiki/Emanuel_Derman [Accessed January 22, 2011].
  • Wikipedia, 2011b. Financial Modelers’ Manifestor. Wikipedia. Available at: http://en.wikipedia.org/wiki/Financial_Modelers’_Manifesto [Accessed January 22, 2011].
  • Wikipedia, 2011c. Paul Wilmott. Wikipedia. Available at: http://en.wikipedia.org/wiki/Paul_Wilmott [Accessed January 22, 2011]
The actual manifesto:
  • Wilmott, P. & Derman, E., 2009. Financial Modelers’ Manifesto. Paul Wilmott’s Blog. Available at: http://www.wilmott.com/blogs/paul/index.cfm/2009/1/8/Financial-Modelers-Manifesto [Accessed January 23, 2011].
The professional conduct standards of the Institute of Actuaries in the UK:
  • Professional Affairs Board. (2007). Professional conduct standards. Retrieved from http://www.actuaries.org.uk/sites/all/files/documents/pdf/PCSV3-0.pdf.

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